Experts call for gas pricing reform to ease shortage

Energy experts are calling for reforms to the country’s natural gas pricing regime in order to offset repeats of the shortages like those that left much of Chinain the cold this month.

Central and eastern provinces have faced the worst natural gas cuts in years since early November as the government diverted fuel to meet higher demand in the north.

Most experts say the shortages were a direct result of a surge in demand after unseasonally heavy snow hit northern China, but they also blame a rigid pricing regime.

Professor Zha Daojiong, of Peking University, said unexpected heavy snow overstretched gas providers, and the government should make regulations requiring producers to build spare capacity and gas reserves.

Natural gas consumption in north China surged 56 percent this month compared with the same period last year, according to China National Petroleum Corporation (CNPC), the country’s top oil and gas producer.

In Beijing, central heating systems were turned on 15 days earlier than normal due to the unusually cold weather.

Gas producers were encouraged to pump at maximum rates. Daily gas output of PetroChina, the country’s largest oil and gas producer, reached 182 million cubic meters from Nov. 1 to 20, up 22 percent over the same time last year, according to the National Development and Reform Commission.

Zhang Guobao, head of the National Administration of Energy, said Monday Chinese producers were capable of providing 17 billion cubic meters of natural gas, leaving a shortfall of more than 1 billion cubic meters.

Natural gas accounted for less than 4 percent of China’s total energy consumption, compared with the worldwide average of 24 percent, said Feng Fei, a researcher with the Development Research Center of the State Council.

However, China’s demand was set to increase rapidly as rising wages enabled people to improve their living standards and the government’s low-carbon development strategy entailed more factories shifting to natural gas, said Lin Boqiang, director of the China Center of Energy Economics Research at Xiamen University.

Feng said increasing the proportion of gas use in total energy consumption was crucial to realizing low-carbon development, as natural gas was a relatively clean energy.

However, if the growth was too fast, producers would find themselves unable to meet demand, said Lin.

Experts attributed the unfeasibly rapid growth to the prices being too low, compared with foreign gas and other fuels such as oil.

Zhang Guobao said that as prices were low compared with oil and coal, it was inevitable that more people were shifting to natural gas.

Gas prices in China were only half of international crude oil prices while the prices in Japan, the EU and the United States were 80 to 90 percent, said Deng, a researcher with the Development Research Center of the State Council.

China adopted a rigid pricing regime and prices were perceived as lower than they should be. The country last raised gas prices in December 2005.

Price was determined by the government on the basis of production and distribution costs in addition to reasonable profits, said Deng.

Lin said the generally fixed and low prices failed to reflect the growing demand, thus fueling faster growth of gas use.

In the next 10 years, China’s demand was expected to rise 11 to 13 percent annually and the country would need 200 billion cubic meters in 2020, double the amount it would be able to produce, according to the Chinese Academy of Social Sciences.

According to U.S. Oil & Gas Journal, China’s verified natural gas deposits were just 1.28 percent of the world total, and 15th in size.

Lin and Deng said China should consider increasing imports to offset the domestic gas scarcity. Guangdong Province avoided the gas shortage that hit south China mainly because of the long-term gas import contract it signed with Australia in 2002.

However, great price gaps between domestic gas and imported gas discouraged more imports, especially by central and western provinces that were generally less well off, Lin said.

The average producer price of domestic natural gas was 0.93 yuan (13.6 U.S. cents) per cubic meter, while gas imported from central Asia cost 2 yuan per cubic meter before entering China, said Ma Xinhua, with CNPC.

As China prepared to sign more contracts with producers abroad, higher prices of imported gas would quicken pricing reforms, and the new pricing regime should close the gap to stimulate imports to avoid future shortages, said Deng.

In the meantime, closing the marked regional price gaps would also help to avoid severe gas shortages in some regions where gas prices were much lower than most regions, Deng said.

Experts want a more centralized pricing mechanism that takes into account changing seasonal demand, affordability, higher imported gas prices, and prices of other kinds of fuels.

Lin said pricing mechanism reform was long overdue and was expected to take place at the end of this year or the beginning of 2010.

However, some experts warned of possible soaring prices resulting from abrupt surges in demand and more expensive imported gas. Lin said the government could consider providing gas subsidies to residential users.

Deng and Lin both argued against calls for complete market determination of gas prices as the fuel was vital to the national economy and to maintaining living standards.

It was impossible for China to completely open up its natural gas sector, which meant letting prices fluctuate with international prices, because the government had to ensure stable and affordable gas for the people, Lin said.