Pricing and market reforms in regulated environments

SHPGX was registered and established in the Shanghai Free Trade Zone in March 2015. It began trial operation in July 2015 and was officially operational in November 2016. The shareholders of SHPGX include Xinhua News Agency, China National Petroleum Corporation (CNPC), Sinopec, China National Offshore Oil Corporation (CNOOC), Shenergy, Beiran, ENN Energy, China Gas, Towngas and China Huaneng. In September 2017 SHPGX carried out the first competitive price transaction of pipeline gas in China. According to SHPGX, by the end of 2018 some 60.5 bcm (bilateral) of natural gas had been transacted through its system. Of this total, the bilateral volume of pipeline natural gas was 55.5 bcm (mainly concentrated in East and North China) and that of LNG was almost 4.5 bcm, mainly in East and South China. SHPGX membership is rising fast, with 2 242 members at the end of 2018 – an increase of 40% on the 1 592 members at the end of 2017 – and with more than 500 active trading participants.

Chongqing Petroleum and Gas Exchange was established in July 2017, with its shareholders including national oil and gas companies such as CNPC, Sinopec, China Resources Gas, ENN Energy and China Gas, the regional energy and chemical enterprises such as Chongqing Energy, Chongqing Chemical & Pharmaceutical, Yanchang Petroleum, Hubei Energy, and FinTech innovation enterprises such as Citic Global and BORN Technology. It completed its first pipeline natural gas transaction on 26 April 2018, and its first LNG transaction on 17 May 2018. By the end of 2018, Chongqing Petroleum and Gas Exchange had over 1 400 trading members.

Figure 4.8. Evolution of city gate prices in China, 2013, 2015 and 2019

Note: The conversion from the original prices expressed in CNY (Chinese yuan renminbi )/1 000 cubic metres (m3) uses the following conversion factors: 1 000 m3 is equivalent to 37.9 MBtu (Natural Gas Information Statistics 2017), and USD 1 = CNY 6.89 (2017 average rate from World Bank).

Sources: NDRC (2013), Notice of the NDRC on Adjusting Natural Gas Prices, 2013 adjustment, http://zfxxgk.ndrc.gov.cn/web/iteminfo.jsp?id=1719; NDRC (2015), Notice of the NDRC on Adjusting Natural Gas Prices, 2015 adjustment, www.ndrc.gov.cn/zcfb/zcfbtz/201502/t20150228_665694.html; NDRC (2018), Notice on Adjustment of Residential City Gate Gas Prices, www.ndrc.gov.cn/fzgggz/jggl/zcfg/201805/t20180525_887252.html.

Since 2013 natural gas pricing in China has been moving from netback prices to internal market-led price formation.

In May 2018, the NDRC promulgated the Notice on Rationalising Residential Gas Gate Station Prices, introducing the convergence of residential and non-residential city gate gas prices (effective in June 2018) as well as the possibility of an increase in residential prices of up to 20% from June 2019 (NDRC, 2018). This increase in residential prices – the first in eight years

– could incentivise further investment in domestic production. LNG import prices have been high throughout 2018, especially compared to residential city gate prices, resulting in reported financial losses for the national oil companies (NOCs) in charge of natural gas supply (Platts, 2018). According to the NDRC, the May 2018 reform will help to establish an elastic mechanism that reflects changes in supply and demand, foster development of storage capacity in response to the development of seasonal price differentials, and guide the setting of prices for end users by local governments. City gate prices decreased marginally in April 2019 following value-added tax reductions (from 10% to 9%).

End-user prices

End users do not pay the city gate prices – local gas distributors buy natural gas from NOCs at the city gate price, then transport it through their local distribution pipelines. Local pricing bureaux set end-user prices across China, which include the distribution costs and allowed return on investment. Direct sales between NOCs and large industrial users and sales of offshore gas produced by CNOOC are not regulated.

The residential sector pricing system introduced by 2015 consists of three categories. The first applies to 80% of the average monthly household volume, the second to the next 15%, and the third to any volumes above 95% of the monthly average (Hua and Stanway, 2014). Under this system, customers incurring the third-tier tariff pay around 50% more than the base price for that gas, with the second tier at around 15% more. The increase in the non-residential end-user price in 2014 reportedly reduced demand growth from a 10% growth rate in 2014 to 4% in 2015. The subsequent city gate price decrease at the end of 2015 (down 30%) fed into end-user prices in 2016, leading to 8% consumption growth.

From 2017, gas conversion objectives from the “Blue Skies” policy took the lead in driving residential consumption growth: in 2017, the coal-to-gas conversion target was set at 3 million households and ended with 4 million making the conversion. The plan continued in 2018, targeting another 4 million homes, and reaching 4.8 million. Upon its June 2018 announcement of city gas price deregulation, the NDRC reported that a household using 20 m3 of gas a month would see its bill rise by around USD 1/month.

Industrial prices are higher than average residential prices – although tiers 2 and 3 of residential prices may be higher than industrial prices in some cities. Industrial end-user prices have shown more variation than residential, with some correlation to international markets. Coal to gas pricing is a key driver in industrial fuel choices; in 2014 the price of gas was around 2.5 times that of coal, a differential that had narrowed only slightly by 2018. Even if industrial consumption reacted to prices (with lower growth in 2015 and a rebound in 2016), it is also the policy push from coal-to-gas switching objectives that has driven industrial gas consumption since 2017. Some industrial consumers reportedly halted production in late 2018 as they could not cope with the rise in natural gas prices (Reuters, 2018).