China's Natural Gas Price Reform on Track

Prices for non-residential users up 0.4 yuan/cubic meter; residential and fertilizer users unaffected. Hikes bigger than 2013, part of price reform started a year ago.

China will raise natural gas prices for bulk buyers and non-residential use from Sept. 1, putting price reform back on track to spur domestic exploration of the cleaner fuel and curb excessive use by some industry sectors.

Beijing introduced a new pricing scheme in July 2013 to bring its domestic natural gas prices closer to the cost of imports to encourage higher domestic output and greater intake of the cleaner-burning fuel by ship and pipeline.

Top energy consumer China plans to raise its annual natural gas supply capacity to 420 billion cubic metres (bcm) by the end of the decade, an amount 2.5 times that of the country's gas demand in 2013.

The government will raise the city-gate prices for so-called existing volumes by 0.4 yuan ($0.065) per cubic metre, the National Development & Reform Commission said on Tuesday, an increase of about 18 percent and larger than the average hike of 0.26 yuan per cubic metre last year.

"It's all part of a bigger plan to lift gas prices in order to stimulate more upstream activity, which then results in more gas production, which is what Beijing really wants domestically," said Simon Powell, the Hong Kong-based head of Asia oil and gas research for CLSA.

City-gate prices are levels that local distributors, or city gas firms, pay pipeline operators, mainly PetroChina (PCCYF) and Sinopec Corp . This increase, like the one last year, does not apply to residential consumers.

The hike came about two months later than expected, as demand for the fuel eased in a slowing economy. The size of increase was largely in line with analysts' forecasts.

The move is positive for PetroChina, China's largest gas producer and gas importer. Its shares rose 2.3 percent to HK$10.80 on Tuesday, outperforming an 0.18 percent gain in the benchmark Hang Seng Index.

TWO-TIER PRICING

China will need another similar increase next year to raise the prices for "existing" volumes - set at a 2012 base of 112 bcm - closer to the prices set for new or incremental consumption over that amount.

The NDRC introduced the two-tier pricing system - distinguishing existing volumes from incremental or new volumes - to discourage wasteful use of the fuel. Prices for the new gas volumes over the 112 bcm are set at higher rates based on the pricing for other fuels such as fuel oil or LPG.

The NDRC said the September price increase could support state policies aimed at eliminating outdated industrial capacity by raising production costs.

NDRC did not specify those sectors, but the government has been trying to curb high gas use and production overcapacity in industries such as cement, glassmaking and ceramics.

Fertiliser producers, already facing declining margins, will be exempt from the price rise, the NDRC said.

The launch of the new gas pricing scheme last year had a positive impact on the market, with domestic gas development and imports of overseas resources accelerating, the NDRC said.

"China's natural gas supply ability has strengthened dramatically," the NDRC said in the statement.

NDRC also said it would further implement an earlier stated policy to liberalize wholesale prices for shale gas, coal-seam gas and synthetic gas produced from coal, in order to boost total gas supplies, proving no further details.

For residential users, the government said in March all cities consuming gas would launch tiered gas pricing mechanisms by the end of 2015, a move to help reduce excess consumption and raise revenues for towngas firms.

Unlike for non-residential sectors such as factories and power plants, public consultation is required before local authorities raise prices for the general public.

China, the world's fourth-largest gas user, consumed 169.2 bcm of gas last year, an increase of nearly 13 percent from 2012. Imports - of both piped gas and liquefied natural gas (LNG) - accounted for nearly a third of the consumption.

By Judy Hua and Chen Aizhu