The dilemma of China's natural gas price mechanism



1 International liquefied natural gas (LNG) prices have risen, and the domestic natural gas industry price mechanism has been highlighted again.

The China LNG comprehensive import CIF Price index jointly released by the Global Trade Monitoring and Analysis Center of the General Administration of Customs and the Shanghai Oil and Gas Trading Center shows that the China LNG comprehensive import CIF price index was 257.07 from December 6 to 12, up 223.2% year-on-year.

The problem of difficult digestion of high gas prices in imports has been repeated once again.

At the third quarter results conference, petrochina (601857.SH) said it lost 6.4 billion yuan in imported gas in the third quarter; The cumulative loss in the first three quarters was 3.2 billion yuan.

Li Yalan, chairman of Beijing Gas Group, said at the 2021 China Gas Development Forum that high gas prices are difficult to remove and are having a serious impact on the normal operation of urban fuel enterprises. Urban fuel enterprise price inversion phenomenon is serious, the cost burden brought by the price increase can only be borne by the gas supply enterprises themselves.

An industry insider who did not want to be named told the interface news that the price risk faced by enterprises cannot be digested within the spot system, and if you want to reduce your own risk, you can only achieve it through upward or downward transfer, which is the core of the contradiction between upstream and downstream enterprises in the natural gas market for a long time. In the stable state of the market, the contradiction is not prominent, and once the price fluctuates greatly, the upstream and downstream contradiction will be intensified.

From the point of view of the gas price mechanism, the current gate price of natural gas in China presents the characteristics of "dual track system" of government control and market-oriented pricing.

The 2020 "Central Pricing Catalogue" shows that the prices of domestic onshore gas and imported pipeline valve stations put into operation at the end of 2014 are controlled by the government; The gate prices of offshore gas, shale gas, LNG, direct supply to users, and imported pipeline gas put into operation in 2015 are formed by the market.

In the urban gas terminal sales link, the "dual track system" of non-residential gas and residential gas prices is also obvious. Although the National Development and Reform Commission issued a document in 2018 requiring that the gate prices of residential gas and non-residential gas be rationalized, it is difficult to implement in actual operation.

Industry insiders interviewed by interface news generally said that the reform of the gas price mechanism is a systematic project, and the key to rationalizing is whether the full marketization of the natural gas industry chain can be achieved.

From the perspective of the whole natural gas industry production chain, China's natural gas market reform has entered the deep water zone.

According to the reform idea of "letting go of both ends and controlling the middle", there are hundreds of enterprises in the upstream field, but more than 80% of the resources are still concentrated in the hands of "three barrels of oil"; With the establishment of the National pipeline network Group, the long-distance pipeline is independent from the "three barrels of oil", but there is still a long way to go to give full play to its intensive transportation and fair service. Downstream city fuel enterprises are fully competitive, but lack the right to speak and bargaining power in the whole industry chain.

Under the goal of "double carbon", the development of natural gas industry has entered a critical stage. How to clear obstacles for its full marketization in the reform of the gas price mechanism and the whole industrial chain is more urgent.

Upstream and downstream pressure

The price of imported gas has been losing money for a long time. Two years ago, the relevant leaders of China Petroleum publicly said that due to the upside down of the cost of imported resources and the price of gate stations, from 2011 to 2019, the loss of imported gas has exceeded 230 billion yuan.

Sinopec (600028.SH) is under similar pressure. Sinopec said in the third quarter of this year's earnings conference that in the face of rising LNG spot prices during the heating season, it will seek to control procurement costs, and hopes to raise natural gas prices by no less than 20% in the fourth quarter.

According to the interface news, since April this year, China Petroleum's natural gas gate station price has been floating twice, and the floating range has accumulated 10%.

Guo Jiaofeng, a researcher at the Institute of Resources and Environmental Policy of the Development Research Center of The State Council, told Jiemian News that the high price of imported gas that cannot be adjusted at present is mainly concentrated in two parts: First, imported LNG spot, accounting for about 10% of the total consumption of natural gas; The second is some high-priced imported pipeline gas signed by CNPC a decade ago, accounting for about 5% of total natural gas consumption.

Imported gas is divided into imported pipeline gas and imported LNG. Imported LNG is divided into imported LNG long and LNG spot.

Among them, the vast majority of the "long-term agreement" signed by the import pipeline gas and imported LNG long-term association, that is, the buyer and seller sign a supply and demand agreement for about 20 years according to the principle of "pay or not". Such an agreement uses a price formula linked to international oil prices, i.e., gas price = slope x oil price + constant.

The trading price mechanism of imported LNG spot mainly refers to the world's three major natural gas benchmark prices and goes with the market.

Although the "Central Pricing Catalog" shows that the upstream gate station price is relatively liberalized, and the LNG price is formed by the market, this is not the case in actual operation.

A senior energy expert told interface news that a large part of the LNG spot imported by oil companies enters the long-distance pipeline network, which is still subject to the basic gate price + up to 20% and unlimited floating.

According to the provincial (autonomous region and city) benchmark gate station price table released in March 2019, the domestic benchmark gate station price is the highest in Guangdong and Shanghai, both of which are 2.04 yuan/cubic meter. If the price rises 20%, the gate station price is 2.45 yuan.

That is well below current spot CIF prices for imported LNG. Data from the Shanghai Petroleum and Natural Gas Trading Center show that on December 15, the CIF price of imported spot LNG in China was 38.66 US dollars per million BTU, or about 8.1 yuan per cubic meter.

"Although after several rounds of price mechanism reform, the sale price of most natural gas is no longer subject to the prescribed gate price control, but oil companies will still be summoned by the relevant authorities if the sale price is too much higher than the gate price." The senior energy experts said that only a small part of the imported LNG spot through the tank truck nearby sales, or as a contract gas sales to the city fuel company, in accordance with the "high into high" principle of sales.

"When the international oil price is below $60 per barrel, upstream companies generally import gas at a profit; When oil prices go above 60 dollars, we lose money on imported gas. The senior energy expert said.

The upstream "two barrels of oil" can not fully realize the price, the downstream city burning enterprises are also the same.

Urban gas prices are divided into non-resident gas prices and residential gas prices, which are regulated by local governments.

According to the relevant documents of the National Development and Reform Commission, non-resident gas use is based on the benchmark gate station price, and the specific gate station price is determined through negotiation within the unlimited range of 20% upward float and downward float; For residential gas use, the supply and demand parties may, on the basis of the benchmark gate price, negotiate to determine the specific gate price within the unlimited range of 20% upward or downward, and realize the connection with the non-residential gas price mechanism.

In practice, it is difficult for non-residents and residents to really link up, and the price adjustment range of the former is often higher than that of the latter, forming cross-subsidies.

According to China Energy News, a number of gas companies in Hengshui, Hebei province, said the incremental gas prices from June to August have reached 3.5 yuan per square meter, 4 yuan per square meter and 4.5 yuan per square meter. According to the forecast of the upstream gas source, the incremental gas price in the peak month of the heating season this year will exceed 5 yuan/square, and the LNG price will exceed 6 yuan/square. The comprehensive gas purchase cost of each city fuel company is estimated to far exceed the resident sales price, and the loss is serious.

Interface news reporters checked the price of pipeline natural gas for Hengshui residents in Hebei province and found that at the end of October, the city's first step sales price was raised from 2.66 yuan/cubic meter to 2.78 yuan/cubic meter, an increase of 0.12 yuan/cubic meter.

More than 30 cities have raised the price of natural gas for residential use from January to early November this year, China Economic Weekly reported. However, the increase is not large, at about 0.1 yuan/cubic meter.

Yang Changxin, general manager of Shenzhen Boyi Consulting Co., LTD., told the interface news that although the gas source of each city fuel enterprise is not the same, the terminal sales structure is not the same, but during the winter guarantee period, the gas price will be inverted, of which the civil gas price is the most inverted.

In his view, the resident gas price increase of about 0.1 yuan in the above cities is better than nothing for the rescue of urban burning enterprises, but it has symbolic significance. "This shows that the government has taken note of the price adjustment issue. This is of great significance for strengthening the price linkage between residents and non-residents, and promoting the healthy development of the industry."

The consequences of bad gas prices

In the view of Liu Yijun, a professor at the China University of Petroleum, the gas price is not smooth, not only affects the enthusiasm of domestic natural gas production, but also makes up the international market.

At present, domestic gas prices are much lower than imported gas. Interface news learned from a large domestic natural gas production enterprise that the average price of natural gas is about 1.2 yuan/cubic meter; The average annual cost of domestic natural gas is less than 1.5 yuan/cubic meter.

Domestic LNG prices are also much lower than imported LNG. In particular, recent domestic LNG prices have fallen due to downstream demand, and the price gap with imported LNG has increased.

Data from the Shanghai Petroleum and Natural Gas Trading Center show that the national LNG ex-factory price index on December 15 was 4,933 yuan/ton, about 3.5 yuan/cubic meter, which was 56.8% lower than the CIF price of 8.1 yuan/cubic meter of imported LNG spot in the same period.

The relevant staff of Guangdong Songfa Ceramic shares told the interface news that its ceramic kilns all use natural gas, and the gas source is mainly from Chaozhou local, and the products are for the international market. At the beginning of the year, the plant's LNG purchase price was 3000-4000 yuan/ton, and the current purchase price is about 6000 yuan/ton, which is far lower than the increase in the spot price of imported LNG this year.

With the increasing dependence of China's natural gas on foreign countries, if domestic and international natural gas prices can not be linked, resulting in domestic prices upside down, it will seriously hurt the entire natural gas industry chain.

At present, China's dependence on foreign natural gas is about 43%, and it is expected to further increase in the future. The China Natural Gas Development Report 2021 estimates that domestic natural gas consumption will reach 430 billion to 450 billion cubic meters in 2025 and 550 billion to 600 billion cubic meters in 2030.

"If both domestic and imported gas can be marketized, it will not only stimulate the enthusiasm of domestic gas production and reduce natural gas costs, but also reduce natural gas imports and suppress natural gas prices in the international market." The senior energy expert said.

In addition, the poor price of natural gas will cause the price signal to fail to correctly reflect the domestic supply and demand relationship of natural gas.

Liu Yijun believes that from the perspective of the development of the natural gas industry chain, the price of residential gas should be raised, but the government considers the reform from the perspective of social stability and people's livelihood.

Liu Yijun told the interface news that if the linkage mechanism between residents and non-residents can not be effectively implemented, and the pricing mechanism of the city fuel link can not be straightening out, it will further aggravate the contradiction of cross-subsidies, making the gas price mechanism more distorted.

Government departments are clearly more optimistic about the progress of natural gas marketization.

According to the "China Natural Gas Development Report 2021" released in August this year, as of last year, 80% of the consumption gas price was formed by supply and demand parties through negotiation and market leadership. The proportion of resources with fully market-based pricing will increase from less than 10% in 2015 to 45% in 2020.

The report was jointly released by the Oil and Gas Department of the National Energy Administration, the Institute of Resources and Environmental Policy of the Development Research Center of The State Council and the Oil and Gas Resource Strategy Research Center of the Ministry of Natural Resources.

"From the point of view of consumption, only 20 percent of gas prices are set by the government." Guo Jiaofeng believes that, and this part of the natural gas in the city gas link has been regulated by the local government, so the upstream link can be fully released.

The "Central Pricing Catalog" issued in 2020 removed the items in which the price of natural gas gate station is priced by the price authority of The State Council, and proposed the gate station price of natural gas in provinces with competitive conditions to be formed by the market. The industry believes that this means that the price of natural gas gate station will be completely cancelled.

Full marketization is urgently needed

Experts interviewed by interface news generally said that the crux of the price difficulty is that the natural gas industry has not been fully market-oriented, but is in the transition stage from government control to marketization.

Guo Jiaofeng pointed out that at present, the full marketization of the natural gas industry has the foundation and conditions, and the listing of LNG futures will become a landmark event in the full marketization.

According to the general reform idea of "controlling the middle and opening up the two ends", the marketization of natural gas needs to meet three conditions, that is, fully liberalizing the price of natural gas, diversifying the main body of natural gas supply, and establishing a benchmark price system with national guidance.

Guo Jiaofeng believes that the current marketization has entered the third step, that is, the establishment of a benchmark price system, the first to establish LNG futures market, supporting the spot market, so as to form a national market price and regional market, and finally the formation of a benchmark price system that can reflect the relationship between China's natural gas supply and demand.

At the 10th China International Petroleum Trade Conference held on November 8, Wang Fenghai, general manager of the Shanghai Futures Exchange, introduced that in the face of the increasingly strong demand for risk management in the natural gas industry, the exchange continued to promote the research and development of natural gas futures. In August this year, LNG futures officially received the approval of the CSRC project and are speeding up the listing work.

Industry insiders interviewed by interface news said that through the futures market, enterprises can hedge and hedge risks; Help to form more transparent market prices.

However, some industry experts believe that although the domestic natural gas industry chain has formed an "X+1+X" pattern, the actual effect is not ideal.

In terms of resource suppliers, about 80% of natural gas resources are still supplied by "three barrels of oil", and private and foreign enterprises have a weak sense of participation; Due to the lack of effective incentives and supervision, the national pipe network group, which is expected to have high expectations, is not ideal in the fair and open service. Downstream urban fuel enterprises have a higher degree of marketization and fierce competition, but their right to speak in the whole production chain is weak.

The senior energy expert, who declined to be named, said that although the upper, middle and lower reaches are not satisfactory, market reforms cannot be stopped. The most realistic way is that the natural gas market can learn from the reform experience of the domestic refined oil market.

Until 1998, the country enjoyed low oil prices. In 1998, the foreign dependence of domestic crude oil was about 18%.

With the continuous increase of crude oil dependence on foreign countries, the price of refined oil products has initially begun to meet the international standards, and the impact on the domestic refined oil market is also increasing, and the price mechanism of refined oil products has gradually improved.

Until 2013, the domestic refined oil pricing mechanism was basically finalized, the refined oil pricing and price adjustment cycle was shortened from the current 22 working days to 10 working days, the upper and lower 4% range limit was canceled, and the "ceiling price" and "floor price" were set. The problem of the price mechanism of refined oil products, which has been puzzling for many years, has been basically solved.

"Now the domestic natural gas dependence has exceeded 40%, and the domestic gate station price has not been in line with international standards, which is not conducive to the development of the domestic natural gas industry." The energy experts said.

The person believes that the international natural gas market has changed from the regional development in the past to the current global market, and the three major natural gas markets are more connected and interactive. This provides conditions for domestic natural gas to connect with the international market.

However, there are also industry insiders close to the market told the interface news that the natural gas price mechanism should reasonably reflect China's own supply and demand situation, and establish a price signal reflecting the domestic supply and demand relationship, rather than simply "outside the set".

"If, in line with international standards, domestic prices are determined by a weighted average of the world's three major natural gas markets, this cannot reflect the real supply and demand of domestic resources." The industry insiders said that China should establish its own natural gas futures market as soon as possible, and cooperate with the spot market to form an influential natural gas benchmark price system, so as to influence the international gas price.