China's NDRC proposes changes to pipeline tariffs to boost market-based pricing

Singapore — China's top policy planner the National Development and Reform Commission, or NDRC, has proposed changes to how natural gas pipeline tariffs will be calculated, especially under newly established China Oil & Gas Piping Network Corp., or PipeChina, in a move aimed at optimizing the allocation of pipeline infrastructure and market based pricing in the country.

The draft proposals circulated for public consultation are part of wider gas market reforms undertaken by the central government. They will help streamline the management of pipeline tariffs under state-owned infrastructure giant PipeChina that has taken over pipeline assets from national oil companies.

One of the key changes is that under the previous system, pipeline tariffs were based on the distance over which the natural gas is transported.

Under the new proposal, pipeline tariffs will be based on both the distance covered and the prevailing tariff rates within a certain region, to take into account infrastructure availability, connectivity and market conditions within a certain area, all of which feed into regional prices, NDRC said.

Pipelines operated by PipeChina will be divided to four pricing zones -- northwest, southwest, northeast and central-eastern -- based on the market structure under the new system. Tariffs for each zone will reflect local conditions such as pipeline construction and operation costs, future investment needs and regional economic development, NDRC said.

For example, the tariff for transporting Russian gas to the Yangtze River Delta could consist of two parts -- the tariff multiplied by the length of the pipeline in the northeast zone, and the central-eastern zone, as it cuts through both regions, said an analyst in eastern China.

Other market participants said the new proposals seem more reasonable than the previous ones, as they would improve the allocation of infrastructure resources and pipeline transmission efficiency.

However, it remained unclear whether the new policy will result in lower transportation fees as the actual zone-based tariffs have not been released yet.

China's pipeline networks

The zone-based tariffs will reflect how the current pipeline network in China is designed.

China's gas pipeline network primarily comprises of trunk lines that carry domestically-produced natural gas and imported pipeline gas from the northwest, southwest and northeast regions, and imported LNG from coastal regions, connections to smaller provincial networks for downstream distribution.

These networks intersect in key hubs to create price discovery and local markets liquidity. The main hubs currently are Zhongwei in the northwestern province of Ningxia, Yongqing in the northern province of Hebei, Hubei in central China and the eastern and southern hubs of Shanghai and Guangdong, respectively.

While the northwestern and northern hubs bring in pipeline gas from Central Asia and Russia, and hence command relevant pipeline natural gas prices, the eastern and southern coastal hubs tend to be closer to LNG import terminals that are priced relative to global seaborne LNG markets.

For instance, the Zhongwei hub helps move Central Asian gas towards the east and connects with the Xinjiang coal methane pipeline, the Shaanxi–Beijing pipeline, the Zhongwei–Jingbian pipeline and the Zhongwei–Guizhou pipeline.

Yongqing is the northern hub which connects to the Shaanxi–Beijing Pipeline, the Russia–China Power of Siberia pipeline, and the Tianjin–Hebei pipeline. Shanghai and Guangdong hubs are supplied with heavy volumes of LNG, and connected with trucked LNG and storage terminals.

Draft proposals

The two draft proposals, namely "Measures for the price administration of natural gas pipeline transportation (Interim)" and "Measures for the supervision and examination of the pricing cost of natural gas pipeline transportation (Interim)" were published on late March 22.

They are open for public comments until April 21, NDRC's website showed. The new tariffs will be applicable to both pipelines between provinces operated by PipeChina, and provincial gas pipelines run by other market entities, NDRC said.

China's pipeline tariffs are typically approved before the start of each regulatory cycle, which lasts for three years, NDRC said.

It said PipeChina should separate the pipeline transportation business from other businesses and establish separate accounts as per relevant auditing standards.

PipeChina will be required to publish pipeline tariffs on its official website or designated platforms, and disclose relevant information such as the revenue and cost of pipeline transportation to the public before June 1 of each year, NDRC added.

NDRC had last published similar measures in October 2016 for all operators, mainly the three NOCs -- PetroChina, Sinopec and CNOOC.

PipeChina, China's largest energy infrastructure company, was created in 2020 under the country's largest gas market reform in decades, designed to break the hold of NOCs over its energy infrastructure and liberalize China's natural gas market.

Recent measures have allowed more market participants, such as second and third tier Chinese gas and energy companies, to access natural gas infrastructure facilities that they would otherwise not be able to access.