* China to liberalise well-head price of unconventional gas
* Unveils new gas pricing in Guangdong and Guangxi
* City-gate prices linked to imported fuel oil and LPG
* Announcement comes as inflation eases
(Adds NDRC, analyst comment; unconventional gas)
By Jim Bai and Chen Aizhu
BEIJING, Dec 27 China will liberalise
wholesale prices for unconventional gas and has unveiled a pilot
scheme to link domestic natural gas pricing to imported fuels,
steps that could boost imports as well as output of the
Demand for natural gas to power the world's second-largest
economy is growing fast, with annual consumption set to triple
to 300 billion cubic metres (bcm) by 2020 from a decade earlier.
Gas is one of the preferred fuels in China as it looks to curb
use of dirtier coal.
China will liberalise well-head prices for shale gas,
coal-bed methane and coal gas, its National Development and
Reform Commission (NDRC) said on Tuesday.
"This is quite a significant step, a change that domestic
gas producers have been waiting to see," said Yan Kefeng of
Cambridge Energy Research Associates.
"It sends a broad signal that the Chinese government wants
to liberalise gas prices, which by itself is an incentive to
The United States estimates China's shale gas reserves could
be bigger than its own. A revolution in production techniques is
overturning U.S. dependence on imported gas. China has yet to
begin commercial production, in part because existing pricing
mechanisms made doing so unprofitable.
The NDRC said on its website www.ndrc.gov.cn, "The eventual
goal of China's gas price reform is to liberalise well-head
prices and let the market decide the prices. The government only
manages the prices of pipeline transmissions."
While well-head prices are freed, sales would still be
subject to set prices for gas pumped to local pipeline
companies, town gas firms and direct bulk users such as
petrochemical firms and power plants to turn a profit.
Those prices are known as city-gate prices and for now are
subject to reform only under a pilot scheme in two areas.
To make profits, gas producers such as PetroChina,
Sinopec and China United CBM would need to
cap production costs for unconventional resources below
With reforms to encourage production in place, analysts
expect unconventional gas to supply a significant portion of
Chinese demand beyond 2020.
A more market-based system for pricing shale gas was widely
expected as China starts its hunt for the trapped gas, which
requires hydraulic fracturing to release it. The technology is
new to Chinese companies and initially more costly than
China has set an ambitious target to pump 6.5 bcm of shale
gas by 2015 and 80 bcm in 2020, or a quarter of China's total
IMPORTED FUEL LINK
New city-gate prices will be linked to the import cost of
fuel oil, used in power generation, and liquefied petroleum gas
(LPG), used for cooking, the National Development and Reform
Commission said on Tuesday. Natural gas is increasingly
replacing both fuels.
The new pricing mechanism replaces one based on production
costs and applies to domestically produced gas from onshore
fields as well as imported pipeline gas.
Such a change will help top energy firm PetroChina pass on
to consumers the costs of more expensive gas piped in from
central Asian producers.
Gas imports are likely to account for a third of supply by
2020. China is rapidly expanding the capacity of liquefied
natural gas (LNG) terminals to meet that need as well as
bringing in gas by pipeline. Imports currently account for 24
percent of demand.
The scheme will be effective from Dec. 26 and applied first
in south China's Guangdong province and Guangxi region, the NDRC
said. Both rely heavily on imported gas.
NDRC said the scheme would be expanded nationwide if the
pilot is successful.
The pilot scheme was announced as China's November inflation
tumbled to a rate of 4.2 percent, the lowest in over a year.
That may have given the government leeway to risk the potential
inflationary impact of a rise in gas prices.
The government used prices of imported fuel oil and LPG in
Shanghai as a starting point to derive the 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
City-gate prices in Guangdong and Guangxi were then set
based on the benchmark, giving additional consideration to
China's main gas flow directions, pipeline charges and local
Based on prices for imported fuel oil and LPG 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 metres and 2.57 yuan in Guangxi, the NDRC said.
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.
(Editing by Simon Webb and Jane Baird)