China starts pilot reform on natural gas pricing

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China announced on Tuesday that it has launched pilot reforms on natural gas pricing in two regions, in its latest efforts to steer toward a more market-guided pricing mechanism.

The National Development and Reform Commission (NDRC), the country's top price regulator, said the pilot scheme has started in Guangdong Province and Guangxi Zhuang Autonomous Region from Monday.

Under the scheme, the prices of natural gas will be pegged to that of alternative energies, using the "net-back" calculation methods that include all the costs companies incur to bring products to the marketplace, the NDRC said.

The alternative energies refer to fuel oils used in factories and liquefied petroleum gas in households, it said.

Currently, China mainly links natural gas prices with production costs, which failed to factor in consumer's demands and other costs such as transportation fees.

The latest move, which has been widely adopted in Europe, will better trace and reflect market demand and resource supplies, as well as guiding reasonable distributions, the NDRC said.

"The ultimate goal of the reform is to loosen grip on the ex-factory prices and let the market take over," said Cao Changqing, director of the pricing department of the NDRC.

Price caps have been set in the two regions under the scheme, with 2,740 yuan (433.87 U.S. dollars) per cubic meters in Guangdong and 2,570 yuan in Guangxi, taking into account the ex-factory prices, and pipeline fees.

Buyers and sellers could negotiate the trading under the caps, the NDRC said.

The central government will adjust the price caps once a year before speeding up to once every six months or once a quarter, it said.

It also said the reform will not push up prices of natural gas in the two provincial areas, citing the caps were much lower than current price levels.

Experts hailed the reform, saying the current pricing system, which was set up at the time when natural gas consumption was low, lagged far behind changes in market demand.

"China's consumption on natural gas has soared very quickly. To press ahead the pricing reform is significant in terms of securing supplies and boosting appropriate use of this clean energy," said Zhou Dadi, a researcher at the Energy Research Institute under the NDRC.