Market reforms and determinants of import natural gas prices in China

Abstract

We use a time series approach to investigate the determinants of import natural gas prices in China with the aim to understand the impact of its natural gas market reform and liberalisation. We pay special attention to the impacts on import liquefied natural gas (LNG) and pipeline gas prices. The liberalisation of the domestic natural gas market and the reformation of pricing mechanisms in the country have caused systemic structural changes. Our results provide clear evidence of a slow but steady departure from oil indexation, in which China’s import gas prices are increasingly affected by market fundamentals such as economic growth, climate factors, policies and other market factors. The empirical results provide supporting evidence to further market reform in China. Moreover, we can generalise the present study to the development of East Asian natural gas price benchmarks. It is important for China and the East Asian region to develop their own natural gas price benchmarks that better reflect regional market fundamentals.