Market reforms and dynamic price discovery in imported natural gas markets in China

Abstract

AbstractEmploying a time series approach, Vector Error Correction Model, we investigate the price discovery in imported natural gas, liquefied natural gas (LNG) and pipeline, markets in China. The liberalisation of domestic natural gas markets and China's pricing reforms have induced systematic structural breaks. The present study explores the dynamic interrelationship between imported LNG and pipeline gas prices. Empirical results show that, before the market reforms in 2014, two markets were not cointegrated implying that both prices move somewhat independently. Over the series of market reforms between 2014 and 2019, both markets have started moving together (cointegrated). From winter 2020, LNG price increased abruptly partly due to LNG supply capacities and both prices are not cointegrated. In addition, empirical results show that LNG market is leading the imported natural gas markets in China and pipeline market is the major price adjuster, that is, a lagging market.