Natural Gas Price Rises

As was projected in the third-quarter monetary policy
implementation report published by the People's Bank of China
on November 15th, 2006, the residents' consumption price index
in China would reach 1.5% in 2006. Prices of consumer commodities
such as water, power and natural gas would rise and the pressure
of inflation would persist in the future.
　"The time for using low-price clean energies has gone forever,
"said an expert from the Oil/Gas Division of NDRC (the National
Development and Reform Commission) Energy Bureau." China will
speed up the linkage of the resource price to the international
market. NDRC is researching natural gas price policies and
natural gas utilization policies. The price of natural gas will
be increased according to a revised plan, and the linkage to the
international market will be made more quickly."
   It was reported that at the end of October 2006 the three oil
giants (Sinopec, CNPC and CNOOC) jointly submitted an
application to NDRC, requesting to increase the ex-factory price
of natural gas in the domestic market.
   Signs suggest that the price increase of natural gas can be
made without much effort. NDRC, however, points out that "the
price of natural gas is a very sensitive issue and it cannot be
easily made."
   Is China ready for the price rise of natural gas or are there
still some problems? The answer is still not quite certain.

Background

As a matter of fact, the price rise of natural gas was already
started at the end of 2005.
   In May 2005, NDRC launched the reform of the natural gas
pricing criterion and the relatively low price of clean energies
started to be linked to the international price.
   In December 2005, NDRC issued a document to increase the
ex-factory price of natural gas by RMB0.05 - 0.15 per cubic meter.
This was the biggest price increase in recent years.
   Officials from NDRC emphasized that the current pricing
criterion for ex-factory natural gas could no longer meet the
needs in the development of the natural gas industry. Reform to
the natural pricing policy was inevitable and an important
aspect of the reform was to gradually increase the price of
natural gas to link the price to the international market.

The Beginning

Nearly one year after the ex-factory price rise, the retail sale
price of natural gas in various areas also started to increase
in the second half of 2006.
   On August 31st, 2006 the Beijing Municipal Government
announced that starting from September 1st, 2006, the price of
natural gas for non-domestic uses in Beijing would be increased
by RMB0.15 per m3. The move was intended to correct the price
of natural gas for non-domestic uses and establish a pricing
criterion that reflects market supply and demand.
    The price of natural gas in Urumqi already started to
increase by RMB0.026 per m3 from August 1st, 2006. The price of
natural gas for domestic uses was up from RMB1.34 per m3 to
RMB1.366 per m3.
   Sichuan province increased the price of natural gas for
industrial uses by 10% from July 2006.
   "The relationship between the price of natural gas and the
price of other energies is not rational. The well-head price of
natural gas in China is only slightly higher than the price of
coal and much lower than the price of crude oil and LPG (liquefied
petroleum gas) with the same heat value, "said an associate
professor from the Capital University of Economics and
Business." The low price of natural gas compared with the price
of other energies has led to a drastic increase in the demand
for natural gas. Besides, some small and unsafe wells have been
shut down for the sake of protecting the environment, resources
and safety. Due to the output reduction and the demand increase,
the price of natural gas will naturally increase."

Import pressure

As a matter of fact, NDRC already planned several years ago to
increase the price of natural gas by 5% - 8% a year in 3 to 5
years and achieve an approximate linkage to the international
price.
   The price of LNG (liquefied natural gas) in the international
market has increased constantly in recent years with the price
rise of crude oil. The domestic market's difficulty in accepting
a higher natural gas price has however reduced the influence of
domestic oil companies in negotiations on the import of LNG. "An
unduly high price of natural gas would inhibit the domestic
demand and directly affect the construction and development of
LNG projects in China," said natural gas experts from China
International Engineering Consulting Corporation.
    There has always been a considerable difference between the
domestic utilization price and the import price of natural gas.
According to experts from CNPC, after the first price rise, made
at the end of 2005, the ex-factory price of LNG in China was only
RMB0.8 per m3 in 2006. In 2003 when the import price of LNG was
lower than today, however, the CIF price of LNG from Australia
had already reached RMB1.6 per m3, twice the 2006 domestic price.
   A series of purchase agreements recently signed in China have
also helped raise expectations of international LNG suppliers
for price acceptance in China.
   In spite of constant increases in the import price, China has
to accept what comes. The projection made by NDRC shows that in
the next 5-10 years the natural gas demand in the eastern regions
alone will reach 50 billion - 100 billion m3 a year. The amount
of LNG that could be sold in China was however only 50 billion
m3 in 2005.
   "The price of natural gas in China is indeed on the low side.
The growth in the domestic natural gas demand is however rapid.
It is only natural that China is now in a weaker negotiating
position," said a professor from the Beijing Petroleum Managers
Training Institute.
   "Other buyers will likely appear in Asia," said Vice
President of the Market Department of Sakhalin Energy Invest Ltd.
at the Second China Natural Gas International Summit. "We would
like to remind China to pay attention to competition. We would
also like to remind China to pay attention to the integration
between the domestic price and the international price. It is
therefore necessary for China to formulate relevant energy
policies."

Pros and cons

Almost all the experts interviewed emphasize that the price rise
of natural gas is inevitable. However, they agreed almost
unanimously that this is a hard problem to solve.
   "The price rise is inevitable, but it cannot be made offhand.
We have to weigh every aspect of the entire industrial chain,"
said experts from the Economic Projection Department of the
National Information Center.
    Based on the current CIF price of LNG plus the cost in storage,
re-gasification and pipeline transmission, the purchase price
of natural gas in cities is expected to reach RMB2.8 per m3. The
purchase price of natural gas in major cities is only RMB1.0 -
2.0 per m3 today. This means that the final utilization price
of imported natural gas is likely to be 50% - 70% higher.
   Residents who are accustomed to a price of a little over
RMB1.0 per m3 can