China's new natural gas pricing mechanism will create two separate bands of prices across the country with an average difference of 42%, although over 90% of supply will still be priced at the lower level.
The National Development and Reform Commission had announced late Friday it will differentiate consumption into two bands: existing gas supply going into each province, using 2012 volumes of 112 billion cubic meters as the baseline; and the incremental supply added during 2013, estimated at 11 Bcm.
The NDRC concurrently announced price increases for non-residential gas users which would raise average citygate prices in China by 15.4% to Yuan 1.95/cubic meter (32 cents/cu m) or about $8.90/MMBtu.
Natural gas prices for residential users will not be hiked for now, it added.
The price hike for non-residential users in the first band of existing gas supply, which is 91% of total gas supply in China this year, will be capped at Yuan 0.4/cu m, although gas prices to fertilizer plant users will be at a lower cap of Yuan 0.25/cu m.
Gas prices for the second band, which comprises the remaining 9% of supply, will be pegged to 85% of the basket price of alternative fuels LPG and fuel oil, the NDRC said, adding that the highest price hikes for incremental demand will only affect 9% of total gas supply in the country, and can therefore still be absorbed by industry.
The NDRC said that as gas users during 2012 had already been registered and are fixed, it will be easy to separate supply into the two bands.
PRICE DIFFERENCE RANGES FROM 21% TO 62% ACROSS COUNTRY
In a circular posted on its website, the commission listed the new gas prices for 29 regions in China, with the average difference at about 42.3% between the first and second bands.
The maximum citygate price in Beijing for the first band will be Yuan 2.26/cu m, while second band prices will be some 38.9% higher at Yuan 3.14/cu m. In Shanghai, existing gas supply prices will be a maximum Yuan 2.44/ cu m while incremental supply will be priced 36% higher.
In western Qinghai province, the difference is 57.5% while in Inner Mongolia and Shaanxi province, the difference between both bands is 55%. Far western Xinjiang province will see the biggest difference of 62.4%, with existing gas supply priced at Yuan 1.41/cu m and incremental supply at Yuan 2.29/cu m.
The new system is an extension of a trial gas pricing system introduced in Guangxi and Guangzhou provinces in December 2011, using a basket of high sulfur fuel oil and LPG prices traded in Shanghai in a 60:40 ratio to calculate natural gas prices based on 90% of the market price.
In a note on Monday, Credit Suisse said that the second band of gas prices for incremental demand announced Friday are "effectively the gas price trial in Guangdong/Guangxi," linking gas prices to crude oil. Based on its calculations, it said these prices are an 85% correlation to the fuel oil and LPG prices in the second half of 2012, which is a similar system to the trial program, which pegged gas prices in the two provinces to 2010 oil prices.
In its circular, the NDRC indicated that existing supply in Guangdong will be priced at Yuan 2.74/cu m while incremental supply will cost 21.2% more, while in Guangxi, existing supply will be priced at Yuan 2.57/cu m, with added supply rising by 22.6% to Yuan 3.15/cu m.
The NDRC said its aim in rolling out the new system is to gradually peg natural gas prices against alternative energy sources, eventually resulting in the sector becoming "fully market-oriented."
Previously the government had used a cost-plus method to set gas prices, adding pipeline and other tariffs to the eventual price. But it said such a system was no longer feasible as there will increasingly be various sources of gas flowing in each pipeline to different destinations with the development of the pipeline grid.
"In this situation, not only is it difficult to differentiate between the end user and the gas sources, it is also not feasible to [set prices] on the basis of wellhead and pipeline transport costs," the NDRC said.
In the transport sector, the price of gas used by natural gas-fueled taxis will only reach about 60% of the price of gasoline following the increase, it said.
Chinese state-owned oil companies had been lobbying hard for price increases and a new mechanism as they have been losing money on gas pipeline and LNG imports, which cost more than domestic gas.
Credit Suisse said the new announcement will help stem losses at PetroChina's pipeline segment. The company is the largest importer of gas at the moment. "The new price formula links to crude, as does the imported gas purchased by PetroChina in the form of LNG, and pipeline gas from Turkmenistan, Kazakhstan and Burma," the bank said.
The new development also paves the way for the company to possibly commit to further term gas supplies, particularly as it is now deep in negotiations with Russia's Gazprom for some 68 billion cu m of Russian pipeline gas to flow to China, Credit Suisse added.
China's central government last raised domestic onshore wellhead prices by 25% in June 2010 although many local governments have since introduced local gas price hikes for residential users since then.
