The government has moved to phase out its current practice of pricing natural gas, with an aim to form a market-oriented pricing mechanism in the sector.

Encouraged by the nation's top oil and gas producers PetroChina and Sinopec, and to compensate for production costs, the National Development and Reform Commission yesterday moved to increase natural gas prices by an average of 5-15 percent, the most substantial price adjustment since 1997.

Commencing next year, natural gas prices will be modified once each year, a spokesman said.

He acknowledged that the reform of natural gas pricing has lagged behind similar price reforms for oil, liquefied natural gas, coal and electricity, which are more market-oriented with government supervision.

"In the long run, natural gas prices should also be decided by the market, not the government," said the spokesman. But he added that the government should introduce the reform gradually because state-owned PetroChina and Sinopec still dominate gas exploration, gas transportation and sales on the Chinese mainland.

The commission said that price of gas used for industrial or urban utility would rise by 0.05 to 0.15 yuan (0.6-1.8 US cents) per cubic meter, while the price of gas used for fertilizer production would rise 0.05 to 0.10 yuan (0.6-1.2 US cents). The price increases went into effect yesterday.

The spokesman ruled out the possibility of a large increase in urban family utility bills. A household that uses an average of 20 cubic meters of gas per month will pay only 3 yuan (37 US cents) more after the price hike, he said.

Since 1978 when China began its reform and opening-up drive, the government has begun decentralizing its pricing controls on commodities.

Currently, market-oriented pricing mechanisms exist in more than 90 percent of commodities and services. However, the remaining 10 percent of commodities that are essential for daily life and of national interest are priced under government guidance.

Natural gas is a major commodity on the Chinese mainland and pricing levels are still partially controlled by the government.

PetroChina announced last month that it plans to more than double its current gas production to 45 billion cubic meters by 2010, or 70 percent of the country's total gas output.

The company has complained that government-set prices for natural gas have discouraged investment in gas fields.

"The price hike is designed to encourage them to invest in natural gas exploration," said the government spokesman.

The production of natural gas is expected to rise by an average annual rate of 17 percent from 2005 to 2010, while the annual growth in demand is expected to increase 26 percent during the same period.

(China Daily December 27, 2005)