China has unveiled a pilot scheme to link city-gate natural gas prices with prices of imported fuel oil and liquefied petroleum gas (LPG), scrapping previous systems mostly based on domestic gas production costs.
With this step, China moves forward in giving more consideration to market forces in pricing natural gas, making it easier for major gas firms such as PetroChina to pass on expensive imports from Central Asia to end-users.
The scheme will be applied first in south China's Guangdong province and Guangxi region, effective from December 26, the National Development and Reform Commission said on Tuesday.
The government used imported fuel oil and LPG prices in Shanghai as a starting point to derive city-gate prices for Guangdong and Guangxi.
It gave a 60 percent weight to fuel oil and 40 percent weight to LPG to calculate an alternative price for natural gas with equivalent calorific value and discounted the outcome by 10 percent. The final result was the benchmark price in Shanghai.
City-gate prices in Guangdong and Guangxi were then set based on the benchmark, giving additional consideration to China's main gas flows, pipeline charges and local economic conditions.
Based on prices for imported fuel oil and LPG prices in 2010, which corresponded to crude oil prices of $80 a barrel, the city-gate ceiling price in Guangdong was set at 2.74 yuan ($0.43) per cubic metre and 2.57 yuan in Guangxi, the commission said.
Local gas users and suppliers were allowed to set their specific supply rates as long as these prices did not exceed the city-gate ceilings. The city-gate prices will be adjusted annually, and prices will later be adjusted once in six months and once in a quarter, according to the commission.