Natural gas pricing reform in China: Getting closer to a market system?

Abstract

Recent policy in China targets an increase in the contribution of natural gas to the nation's energy supply. Historically, China's natural gas prices have been highly regulated with a goal to protect consumers. The old pricing regime failed to provide enough incentives for natural gas suppliers, which often resulted in natural gas shortage. A new gas pricing reform was tested in Guangdong and Guangxi provinces in 2011, and introduced nationwide in 2013. The reform is aimed at creating a more market-based pricing mechanism. We show that a substantial progress toward a better predictability and transparency of prices has been made. The prices are now more connected with the international fuel oil and liquid petroleum gas prices. The government's approach for a temporary two-tier pricing when some volumes are still traded at old prices reduced a potential opposition during the new regime implementation. Some limitations of the natural gas pricing remain as it created biased incentives for producers and favors large natural gas suppliers. The pricing reform at its current stage falls short of establishing a complete market mechanism driven by an interaction of supply and demand of natural gas in China.