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China's residential natural gas price hike to ease pressure on upstream producers, LNG importers

Highlights


First residential gas price hike in eight years

Residential gas costs could rise 20% by June 2019

China's National Development and Reform Commission has announced plans to harmonize residential and industrial city-gate gas prices, as part of a push towards market liberalization that could see residential gas prices rise by as much as 20% by June 2019, according to an official statement released Friday.

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The harmonization will occur gradually, with a maximum upward price adjustment for residential city-gate prices of 0.35 Yuan/cu m in the first year.

This will be the first time the NDRC has raised residential gas prices in eight years, a move that could boost domestic upstream natural gas supply and ease pressure on state-owned LNG importers such as PetroChina and CNOOC, recently faced with growing consumption and procurement costs.

"LNG procurement costs in the international market have remained persistently high this year, which means sending imported LNG to downstream residential users is currently a loss-making business," said a gas distributor in southern China.



The Platts JKM daily benchmark price assessment averaged $8.97/MMBtu over the period January to April, a 34% rise from $6.69/MMBtu a year earlier, mainly driven by growing consumption in China.

"Downstream pipeline gas prices have remained relatively stable year-on-year; the same for trucked LNG prices. But spot LNG prices have been above $8/MMBtu this year, whereas last year they dropped to $5-$6/MMBtu after the winter peak," said a Chinese end-user.

"Residential users will now have to pay up to match price levels of industrial users, increasing price competitiveness," said a gas distributor in eastern China.

The policy presents a major reform to the residential pricing system since 2010, with an attempt to better reflect rising upstream procurement costs, while incentivizing upstream suppliers to boost both gas imports and domestic production.

NDRC attributed lack of price flexibility as another factor for the revamp. Price ceilings were previously imposed on levels paid by residential users, which poorly reflects changes in gas supply and demand fundamentals. This is especially so during winter when strong seasonal demand emerges causing severe gas shortages in the domestic market.

China has become a net gas importer since 2006, with close to 40% dependence on imported gas supply. According to data released by NDRC, average residential city-gate prices stood at around 1.4 Yuan/cu m, which is lower than both domestic and imported gas costs.

--Shi Yun Fan, shiyun.fan@spglobal.com
--Edited by Maurice Geller, maurice.geller@spglobal.com