Stranded between political imperative and regulatory uncertainty: China’s move towards natural gas pricing reform

Abstract

The Chinese government considers natural gas the preferred transition energy resource and is attempting to increase its proportion in China’s primary energy mix. In recent years, the reform of China’s natural gas sector has been steered towards breaking down vertical integration and developing a more market-based pricing system, the latter of which has long been subject to decisive government intervention. This article provides a comprehensive study of China’s gas pricing system through an analysis of policy and regulation. It shows that the previous reform was parochial and incremental, driven by the critical developmental conditions of China’s gas market. The gradual reform exemplifies the lack of systematic planning for the pricing reform and a relatively weak regulatory system. The latest reform has demonstrated a more systematic approach to restructuring China’s natural gas market with the improved political will to introduce competition into China’s gas market. However, the political imperative to reform natural gas pricing is challenged by the regulatory uncertainty rooted in the pre-existing conditions of China’s natural gas sector and the vested interest of industrial stakeholders. This article analyses the challenges of the latest reform to understand the limitations of the reform measures.

Keywords:

• natural gas
• price reform
• regulation
• energy transition
• China

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 Department of Petroleum and Natural Gas (National Energy Administration), Institute of Resources and Environmental Policy (Development Research Center of the State Council), Oil and Gas Resource Strategy Research Center (Ministry of Natural Resources), China Natural Gas Development Report (2020) [中国天然气发展报告 (2020)] (Petroleum Industry Press 2020)

2 Zhongyuan Wang, Dongkun Luo and Linlin Liu, ‘Natural Gas Utilization in China: Development Trends and Prospects’ (2018) 4 Energy Reports 351

3 Xiucheng Dong and others, ‘The Reform of the Natural Gas Industry in the PR of China’ (2017) 73 Renewable and Sustainable Energy Reviews 582

4 Yihua Yu, Xinye Zheng and Yi Han, ‘On the Demand for Natural Gas in Urban China’ (2014) 70 Energy Policy 57; Tiantian Wang and others, ‘Market Reforms and Determinants of Import Gas Prices in China’ (2020) 196 Energy 117105

5 British Petroleum, ‘Statistical Review of World Energy’, 69th Edition (2020) <www.bp.com/content/dam/bp/business-sites/en/global/corporate/pdfs/energy-economics/statistical-review/bp-stats-review-2020-primary-energy.pdf> (accessed 3 September 2021)

6 Dong and others (n 3); Jianliang Wang and others, ‘China’s Natural Gas: Resources, Production and Its Impacts’ (2013) 55 Energy Policy 690

7 Jiping Zhou, ‘China’s Natural Gas Demand and CNPC’s Natural Gas Business Strategy’, CNPC, 30 November 2010 <www.cnpc.com.cn/en/speeches/201407/f4c48529919d4075a7c2be142a50b22d.shtml> (accessed 3 September 2021)

8 National Development and Reform Commission (NDRC) and other relevant ministries, ‘Clean Heating Plan in Northern China in Winter (2017–2021)’ [北方地区冬季清洁取暖规划 (2017–2021年)], NDRC Order No. (2017) 2100, 5 December 2017

9 Xinhua News, ‘Investigation and Reflection on Gas Shortage This Winter and How Can the Gas Shortage Be Prevented?’ [对今冬大面积气荒的调查与思考,气荒如何不再来?] (5 February 2018) <www.xinhuanet.com/politics/2018-02/05/c_1122367788.htm> (accessed 3 September 2021)

10 Wang and others (n 2); Dong and others (n 3)

11 Dong and others (n 3); Mingye Gao and others, ‘Natural Gas Pricing Mechanism Reform and Its Impacts on Future Energy Options in China’ (2013) 24 Energy & Environment 1209; Aolin Hu and Qing Dong, ‘On Natural Gas Pricing Reform in China’ (2015) 2 Natural Gas Industry B 374; Sergey Paltsev and Danwei Zhang, ‘Natural Gas Pricing Reform in China: Getting Closer to a Market System?’ (2015) 86 Energy Policy 43; Boqiang Lin, Chang Liu and Lei Lin, ‘The Effect of China’s Natural Gas Pricing Reform’ (2015) 51 Emerging Markets Finance & Trade 812

12 Gao and others (n 11)

13 Lin and others (n 11); Paltsev and Zhang (n 11)

14 Hu and Dong (n 11); Dong and others (n 3)

15 Central Committee of the Communist Party of China (CCCPC) and State Council, ‘Several Opinions on Deepening the Reform of the Oil and Gas System’ [关于深化石油天然气体制改革的若干意见] (21 May 2017) <www.gov.cn/xinwen/2017-05/21/content_5195683.htm> (accessed 3 September 2021)

16 Ibid

17 US Energy Information Administration, China (30 September 2020) <www.eia.gov/international/analysis/country/CHN> (accessed 3 September 2021)

18 Yijun Liu, ‘Evolution and Trend of Natural Gas Pricing Mechanism in China’ [中国天然气价格形成机制演变及趋势] (2015) 35 Natural Gas Industry [天然气工业] 107

19 Xinhua News, ‘Energy Price Reform: Explaining the Reform of Ex-Factory Price Formation Mechanism of Natural Gas’ [能源价格改革:详解天然气出厂价格形成机制改革] (27 December 2005) <www.gov.cn/zwhd/2005-12/27/content_137952.htm> (accessed 3 September 2021)

20 ‘Notice on Issues Related to the Natural Gas Price in the West–East Gas Pipeline Project’ [关于西气东输天然气价格有关问题的通知] NDRC Order No. (2003) 1323, 28 September 2003

21 Ibid

22 Yijun Liu, Xiaodong Cao and Jianxin Song, ‘An Examination of Natural Gas Power Generation in the Context of China’s Power Market’ [从我国电力市场看天然气发电] (2003) 19 Journal of China University of Petroleum (Social Sciences) [石油大学学报:社科版] 14

23 ‘Approval on Issues Related to the Natural Gas Price in the Zhongxian–Wuhan Gas Pipeline Project’ [国家发展改革委关于忠县-武汉输气管道工程天然气价格等有关问题的批复] NDRC Order No. (2004) 2971, 24 December 2004

24 Liu, ‘Evolution and Trend of Natural Gas Pricing Mechanism in China’ (n 18)

25 Yijun Liu, ‘Thoughts on Improving the Pricing Mechanism for Residential Gas in China’ [对于完善中国居民用气价格机制的思考] (2018) 38 Natural Gas Industry [天然气��业] 130

26 Xinhua News, ‘Energy Price Reform’ (n 19)

27 Ying Shi and Bing Zhang, ‘Thoughts on the Pricing Regulation of Natural Gas Pipeline Transmission: From the Perspective of Long-Distance Pipelines’ [天然气管输定价规制思考 – 以长输管道为视角] (2013) 168 Research and Development [开发研究] 148

28 ‘Approval on Issues Related to the Natural Gas Price in the Zhongxian–Wuhan Gas Pipeline Project’ (n 23); ‘Notice on Issues Related to the Natural Gas Price in the Shaanxi–Beijing Gas Pipeline Project’ [关于陕京管道输气系统天然气价格有关问题的通知] NDRC Order No. (2005) 1281, 14 July 2005

29 ‘Notice on Issues Related to the Adjustment of Natural Gas Price’ [关于调整天然气价格有关问题的通知] NDRC Order No. (2007) 301, 8 November 2007

30 ‘Notice on Adjusting the Benchmark Ex-Factory Price of Onshore Natural Gas’ [关于提高国产陆上天然气出厂基准价格的通知] NDRC Order No. (2010) 211, 31 May 2010

31 ‘Notice on the Pilot Reform of Natural Gas Price Formation Mechanism in Guangdong Province and Guangxi Autonomous Region’ [关于在广东省、广西自治区开展天然气价格形成机制改革试点的通知] NDRC Order No. (2011) 3033, 26 December 2011

32 Ibid; translated by authors based on the offical document

33 Ibid

34 Liu, ‘Evolution and Trend of Natural Gas Pricing Mechanism in China’ (n 18)

35 ‘Provincial Plan of Construction and Operation of Guangdong’s Natural Gas Pipeline Network’ [广东省天然气主干管网建设运营模式方案] Guangdong Provincial Government Order No. (2011) 312, 29 November 2011

36 ‘Administrative Measures on Pipeline Gas Price (for Trial Implementation)’ [关于管道燃气价格的管理办法(试行)] Guangdong Provincial Price Bureau Order No. (2012) 266, 3 December 2012

37 ‘Notice on Adjusting Natural Gas Price’ [关于调整天然气价格的通知] NDRC Order No. (2013) 1246, 28 June 2013

38 Ibid

39 Hu and Dong (n 11)

40 Liu, ‘Evolution and Trend of Natural Gas Pricing Mechanism in China’ (n 18)

41 ‘Notice on Rationalizing the Price of Natural Gas for Non-Residential Use’ [关于理顺非居民用天然气价格的通知] NDRC Order No. (2015) 351, 26 February 2015

42 ‘Notice on Reducing the Gate Prices of Natural Gas for Non-Residential Use and Further Promoting the Reform of Price Marketization’ [关于降低非居民用天然气门站价格并进一步推进价格市场化改革的通知] NDRC Order No. (2015) 2688, 18 November 2015

43 Ibid; ‘Notice on Reducing the Gate Prices of Natural Gas for Non-Residential Use’ [关于降低非居民用天然气基准门站价格的通知] NDRC Order No. (2017) 1582, 29 August 2017

44 This has led to a slight reduction in the gate price of non-residential gas, by 0.01–0.02 RMB/m³

45 ‘Notice on Rationalizing the Gate Price of Natural Gas for Residential Use’ [关于理顺居民用气门站价格的通知] NDRC Order No. (2018) 794, 25 May 2018

46 ‘Several Opinions on Deepening the Reform of the Oil and Gas System’ (n 15)

47 CCCPC and State Council; ‘Several Opinions on Promoting the Reform of the Pricing Mechanism’ [关于推进价格机制改革的若干意见] 15 October 2015 <www.gov.cn/xinwen/2015-10/15/content_2947548.htm> (accessed 3 September 2021)

48 Lianzeng Zhao, Min Du and Xutao Rui, ‘Interpretation of China’s New Gas Pipeline Transportation Pricing Mechanism – Analysis of Natural Gas Pipeline Transportation Price Management Approach (Trial) (I)’ [中国天然气管道运输价格管理新机制解读 –《天然气管道运输价格管理办法 (试行)》剖析之一] (2017) 2 International Petroleum Economics [国际石油经济] 11; Xutao Rui and others, ‘Impacts of a New Pricing Mechanism on Gas Pipeline Transmission Companies’ [天然气管输定价新机制对管输企业的影响] (2018) 38 Natural Gas Industry [天然气工业] 121

49 Zhao and others, ‘Interpretation of China’s New Gas Pipeline Transportation Pricing Mechanism’ (n 48)

50 Rui and others (n 48)

51 ‘Measures for Administration of Natural Gas Pipeline Transportation Prices (for Trial Implementation)’ [天然气管道运输价格管理办法 (试行)] NDRC Order No. (2016) 2142, 9 October 2016

52 ‘Measures for Cost Supervision of Natural Gas Pipeline Transportation Prices (for Trial Implementation)’ [天然气管道运输定价成本监审办法 (试行)] NDRC Order No. (2016) 2142, 9 October 2016

53 ‘Measures for Administration of Natural Gas Pipeline Transportation Prices’ (n 51), art 7

54 Ibid, art 4

55 Ibid, art 11

56 Ibid, art 9

57 Ibid, art 13

58 Ibid, art 6

59 Ibid, art 6

60 Ibid, art 20–21

61 ‘NDRC Answers Questions on Reforming the Price Mechanism of Natural Gas Pipeline Transportation and Strengthening Price Supervision’ [改委就改革天然气管道运输价格机制、加强价格监管答问] People’s Daily, 12 October 2016 <http://politics.people.com.cn/n1/2016/1012/c1001-28773259.html> (accessed 3 September 2021)

62 Yong Zhang and Chunlei He, ‘Pipeline Network Reform: An Opportunity to Harmonize Natural Gas Industrial Chain Prices’ [以管网改革为契机理顺天然气产业链价格] (2019) 13 Natural Gas Technology and Economics [天然气技术与经济] 1

63 Rui and others (n 48); People’s Daily (n 61)

64 Zhang and He (n 62)

65 Zhao and others, ‘Interpretation of China’s New Gas Pipeline Transportation Pricing Mechanism’ (n 48); Lianzeng Zhao, Min Du and Xutao Rui, ‘Pricing and Benefits Analysis of Newly-Built Gas Pipeline under the New Mechanism: Analysis of Natural Gas Pipeline Transportation Price Management Approach (Trial) (II)’ [新机制下新建天然气管道运价和效益分析 –《天然气管道运输价格管理办法 (试行)》剖析之二] (2017) 25 International Petroleum Economics [国际石油经济] 34

66 ‘Cost Supervision and Review for Long-Distance Natural Gas Pipelines Completed, Pipeline Transmission Tariffs Reduced by 15%’ [天然气长输管道成本监审完成 管输费降15%] (Caixin News, 31 August 2017) <https://other.caixin.com/2017-08-31/101139419.html> (accessed 3 September 2021); Yong Deng and Junjun Zhu, ‘Natural Gas Pricing System in China’ [我国天然气价格各个环节全梳理] Haitong Securities Research Institute, January 2019 <http://pdf.dfcfw.com/pdf/H3_AP201902011291085504_1.pdf> (accessed 3 September 2021)

67 ‘Notice on Adjusting Natural Gas Inter-Provincial Pipeline Transportation Price’ [关于调整天然气跨省管道运输价格的通知] NDRC Order No. (2019) 561, 27 March 2019

68 Measures for Administration of Natural Gas Pipeline Transportation Prices (n 51), art 11

69 Liu, ‘Evolution and Trend of Natural Gas Pricing Mechanism in China’ (n 18); Manping Liu, ‘The Establishment of PipeChina Is a Vital Step in the Oil and Gas Institutional Reform’ [成立国家油气管网公司是油气体制改革的关键一步] (2019) 8 China Petroleum [中国石化] 35

70 Ibid

71 Shuhui Zhou, ‘Impact of Trunk Pipeline Network Independence on China’s Natural Gas Industry and Relevant Suggestions’ [干线管网独立对中国天然气行业的影响及相关建议] (2019) 27 International Petroleum Economics [国际石油经济] 1; Erica Downs and Sheng Yan, ‘Reform Is in the Pipelines: PipeChina and the Restructuring of China’s Natural Gas Market’ (Center on Global Energy Policy, Columbia University, 16 September 2020) <https://www.energypolicy.columbia.edu/research/commentary/reform-pipelines-pipechina-and-restructuring-china-s-natural-gas-market> (accessed 3 September 2021)

72 CCCPC and State Council, ‘Several Opinions on Deepening the Reform of the Oil and Gas System’ (n 15)

73 Ibid

74 NDRC and other relevant ministries, ‘Measures for the Supervision and Administration of Fair Opening of Oil and Gas Pipeline Facilities’ [油气管网设施公平开放监管办法] 24 May 2019

75 NEA, ‘Officials from the Market Supervision Department of the NEA Answered Reporters’ Questions on the “Measures for the Supervision and Administration of Fair Opening of Oil and Gas Pipelines Network Facilities”' [国家能源局市场监管司有关负责人就《油气管网设施公平开放监管办法》有关问题答记者问] 4 June 2019 <www.nea.gov.cn/2019-06/04/c_138116127.htm> (accessed 3 September 2021)

76 Jianwen Liu, Jianhong Yang and Chao Wang, ‘Natural Gas Development Pattern in China after the Independence Pipeline Network’ [管网独立后的中国天然气发展格局] (2020) 40 Natural Gas Industry [天然气工业] 132

77 NEA, ‘Officials from the Market Supervision Department of the NEA Answered Reporters’ Questions’ (n 75)

78 ‘Measures for the Supervision and Administration of Fair Opening of Oil and Gas Pipeline Network Facilities (for Trial Implementation)’ [油⽓管⽹设施公平开放监管办法 (试⾏)] NEA Order No. (2014) 84, 13 February 2014

79 Ibid

80 NEA, ‘Officials from the Market Supervision Department of the NEA Answered Reporters’ Questions’ (n 75)

81 NEA, ‘Principles and Processes of Calculating Surplus Capacity of Oil and Gas Pipelines and Related Facilities (Opinion Solicitation Draft)’ [关于做好油气管网设施剩余能力测算相关工作的通知(征求意见稿)] 14 April 2020 <www.nea.gov.cn/138974500_15868336803601n.docx> (accessed 3 September 2021)

82 China Oil & Gas Pipeline Network Corporation (PipeChina), ‘PipeChina Fully Takes over Gas Pipeline Operation’ [国家管网集团全面接管运营] 30 September 2020 <www.pipechina.com.cn/xwdt/jtyw/1120.html> (accessed 3 September 2021)

83 S Zhou (n 71)

84 Ibid; Xinhua News, ‘Promote the High-Quality Development of the Oil and Gas Industry: An Interview with the Relevant Managing Personnel in Charge of PipeChina’ [促进油气行业高质量发展 – 专访国家管网公司有关负责人] 9 December 2019 <www.xinhuanet.com/fortune/2019-12/09/c_1125324497.htm> (accessed 3 September 2021)

85 Hao Zhang, ‘China’s Natural Gas Sector Regulation in the Context of Pipeline Restructuring: Towards Independent Gas Pipeline Operation?’ (2021) 14(6) Journal of World Energy Law & Business 447

86 NEA, ‘Central Environmental Inspection Group’s Feedback to the NEA on the Inspection Results’ [中央第六生态环境保护督察组向国家能源局反馈督察情况] 29 January 2021 <www.nea.gov.cn/2021-01/29/c_139707466.htm> (accessed 3 September 2021)

87 Haitao Guo and others, ‘Conform to the Trend of Reform and Promote Fairness and Openness: An Interpretation of “Measures for the Supervision and Administration of Fair Opening of Oil and Gas Pipeline Facilities”' [顺应改革趋势,促进公平开放 – 新版《油气管网设施公平开放监管办法》解读] (2019) 39 Natural Gas Industry [天然气工业] 137

88 NDRC and other relevant ministries, ‘Management Measures on Infrastructure and Public Utility Concessions’ [基础设施和公用事业特许经营管理办法] Order No. (2015) 25, 25 April 2015

89 National Oil and Gas Information Platform (NOGIP), ‘Repeated Order by the State: Increased Production by the Three NOCs and Yanchang Petroleum Is a Long-term Undertaking’ [国家再作批示:三桶油、延长石油加大勘探开发是长期事业] 4 August 2020, http://nogsrc.cnpc.com.cn/nogsrc/Exploration/202008/02b07205e1af4bf39ea7f5b403d9d956.shtml> (accessed 3 September 2021)

90 Downs and Yan (n 71); Liu, Yang and Wang, ‘Natural Gas Development Pattern in China' (n 76)

91 Ling Li, ‘Profits Narrowed, M&A Accelerated, the Urban Gas Industry Entering the Stage of Large-Scale Development’ [利润收窄,并购加速,城燃行业迈入规模化发展阶段] China Energy Newspaper, 14 September 2020 <http://paper.people.com.cn/zgnyb/html/2020-09/14/content_2009119.htm> (accessed 3 September 2021)

92 Central Pricing Catalogue [中央定价目录] NDRC Order No. (2020) 31, 13 March 2020