News Analysis: China boosts pricing reforms in natural gas sector

China cut the wholesale price of natural gas for non-residential users on Friday, a move widely expected to boost price reforms and make the gas sector more transparent.

The National Development and Reform Commission (NDRC) on Wednesday announced it would slash non-residential gas prices by an average of 0.7 yuan (0.11 U.S. dollar) per cubic meter from Friday. The equivalent to an average reduction of approximately 28 percent.

The move will result in 43 billion yuan of operating cost savings for industrial users, power generation companies, concentrated heating suppliers, taxi drivers, commercial entities, service providers and others in the downstream, said the NDRC in a release.

The cut follows a reduction in gas procurement costs following the drop in global oil and gas prices, as well as lower coal and oil prices, which makes gas in China uncompetitive, according to a Fitch report.

The latest price adjustment is more significant than a previous cut in April this year, when the regulator lowered the wholesale gas price by 0.44 yuan per cubic meter for incremental natural gas volumes and increased the price by 0.44 yuan per cubic meter for existing volumes.

The price cut will promote the use of compressed natural gas (CNG) and liquefied natural gas (LNG) as the preferred fuels for vehicles, because there will be a greater price incentive for diesel/gasoline-fueled vehicles to be converted into CNG/LNG, given the smaller price difference between CNG/LNG and diesel/gasoline, said a Moody's report.

In addition, the NDRC also announced it will reform the pricing mechanism of natural gas by introducing "benchmark city station gate prices" of non-residential natural gas, which would replace the rigid "ceiling city station gate prices."

The benchmark prices could move up as much as 20 percent and drop to whatever level decided by suppliers and purchasers.

As a great step forward in marketization, the introduction of benchmark city station gate price is more meaningful than price cut itself, said Zhou Dadi, a senior researcher with Energy Research Institute under the National Development and Reform Commission (NDRC).

The NDRC urged industrial players to sell and purchase non-residential natural gas via the Shanghai Petroleum and Natural Gas Exchange (SHPGX), which was launched in July this year to boost oil and gas reforms and enhance gas pricing transparency.

Natural gas pricing will be increasingly liberalized, especially when the newly operational SHPGX is able to establish a natural gas price reference that is relevant to the Chinese market, the Fitch report said.

The growth of China's natural gas consumption has slowed from double-digit to single-digit rates in 2014 and 2015, mainly due to the economic rebalancing and the slowdown in industrial activities, Moody's report said.

Facing environmental pressure, China needs to boost clean energy use, such as natural gas, Zhou said.

In the next step, the NDRC will work to fully liberalize pricing of non-residential natural gas prices as early as possible, gradually smooth prices of residential natural gas prices, optimize the pricing mechanism of transmission fees and step up regulation on distribution costs, according to the release. Endi