China to launch oil & gas reform

Despite that oil prices in the international market recorded a 12-year low and gas prices a 16-year low, China’s energy prices have hardly fell. Under economic downward pressure, high energy costs have become increasingly acute for Chinese enterprises as a range of problems caused poor price transmission, including the lagging adjustment of energy prices, structure distortion and highly monopoly in various links. And the problem is gradually alleviated.

High energy costs weight on enterprises

On Jan 12 London Brent oil prices closed at 30.86 U.S. dollars per barrel, the lowest level since April 2004. Oil prices in New York fell below 30 U.S. dollars per barrel during that day’s trading session. This suggests that oil prices have fell by nearly one third in only one month since early December last year, and are moving closer to the Goldman Sachs’ estimate of 20 U.S. dollars per barrel.

Nevertheless, as the second largest crude consumer, China seems not to have benefited much from it. Since December 15, 2015, China has twice deferred adjustment of its refined oil prices which should have lowered about 400 yuan a ton according to the information service company Oilchem. In fact, although international oil prices had previously fell by over 30 percent, prices of gasoline and diesel in the domestic market have only been reduced about 9 percent.

The case for natural gas prices is even more complicated. As China’s natural gas market lags far behind the international spot market in the range and frequency of price adjustment, domestic LNG (liquefied natural gas) manufacturers suffered serve losses in 2015. The overall rate of operation can hardly exceed 50 percent. Urea and glass fiber companies who spend over 70 percent costs in natural gas see their income below sales prices. Some enterprises thus suspended production. The economic efficiency of LNG vehicles and ship has also crumbled. About 120,000 LNG heavy truck and 50,000 LNG passenger vehicles across the country are facing a survival crisis.

The pipe network management system and cross-subsidies further restrict the transmission of prices. There are too many links between main gas stations and users’ end, including provincial pipe network, municipal pipe network and urban gas pipe network. With all these process, a great proportion of gas costs are for transmission fees.

It is also the same case for electricity prices. Our reporter learnt that under the downward pressure of the economy, problems like high electricity costs and distortion of electricity price structure have grown acute. Even some shut-down and partially shut-down enterprises have to pay basic electricity charges in full. As shown by data from China Electricity Council, in terms of the average retail electricity price for different enterprises in 2014, that for general industrial and commercial enterprises and others was 0.856 yuan per kilowatt-hour, the highest among others; the average electricity price for large industrial companies was 0.655 yuan per kilowatt-hour and that for residential use was 0.557 yuan per kilowatt-hour.

Price cuts save over RMB 200bln for enterprises

The problem is gradually alleviated. On January 13, domestic gasoline and diesel prices were respectively lowered by 140 yuan and 135 yuan per ton, equivalent to a 0.1 yuan reduction for standard gasoline per liter and 0.11 yuan for standard diesel per liter. According to Oilchem’s estimate, a large logistics transport vehicle will save about 40 yuan fuel cost for every 1,000 kilometers on average.

Starting from January 1, 2016, the average retail electricity prices for general industrial and commercial enterprises across the nation will be cut by about 0.03 yuan per kilowatt-hour. Meanwhile, the linkage mechanism for coal and electricity will further improve. Previously in April 2015, the average retail electricity prices for industrial and commercial enterprises reduced about 0.18 yuan per kilowatt-hour. The electricity parity for industrial and commercial enterprises has also advanced fully. Based on this, enterprises have saved about 120 billion yuan costs in electricity after the cuts. Particularly, medium, small and micro-sized enterprises have benefited much from it.

“During the economic downturn, lowering electricity price can help alleviate burdens on enterprises and slash costs of iron and steel plants, cement plants and other enterprises with more electricity consumption. The pricing of energy industry with higher monopoly should either follow international market or should not be higher than social average profits; otherwise, the enterprises with more energy consumption have to downscale or close down.” Yang Furong, head of leading group of reducing enterprises’ burdens in Jangsu Province and engaged in reducing enterprises’ burdens for more than 10 years, indicated that more detailed measures should be put forward when the policy is carried out in various local regions where local development is different.

2015 Research and Evaluation Report on Enterprises’ Burdens released by China Centre for Promotion of SME Development revealed that Xinjiang carried out the same electricity price for industrial and commercial purposes in the whole autonomous region and piloted low electricity price in industrial parks so as to tackle the problem of expensive electricity price for enterprises and further expand the coverage of low electricity price policy. Liaoning Province actively enlarged the scope of policy supporting enterprises to purchase power directly, saving costs of 620 million yuan for enterprises, and adjusted the calculation method of basic electric charge to help those firms, which had to pay the basic electric charge in spite of suspending or partially suspending production, get rid of this burden.

Besides, natural gas price at gas stations decreased by 0.7 yuan per cubic meter on Nov. 20 last year, which would directly cut costs of more than 43 billion yuan for the gas-consuming industries such as downstream industry, power generation industry, centralized heating industry, taxi, commerce and tertiary industry. “In addition to the influence of governmental pricing on market-based pricing, it is predicted to reduce costs of over 100 billion yuan.” Jing Chunmei, a researcher from China Center for International Economic Exchanges.

Energy reform measures to be launched

Li Pumin, spokesman for the National Development and Reform Commission (NDRC), indicated on Jan. 12 that the NDRC would promote reforms in electric power, petroleum, natural gas and salt industry and continue to accelerate market-oriented pricing reforms in electric power, natural gas and healthcare to reduce costs for companies and individuals.

It was learnt that the Proposal on Petroleum and Natural Gas System Reform had been submitted to the State Council, signaling a new round of reform on oil and gas system is going to kick off soon. Natural gas pricing reform and separation of oil and gas pipe network will be first promoted. As an important part of the reform, relevant departments currently are drawing up the detailed supervision methods for trading centers and detailed rules for the implementation of price reform. Refined oil pricing mechanism is also getting market-oriented and may be piloted in Guangdong and Shandong Provinces this year. At the same time, the NDRC is mulling to improve the pipeline transportation pricing mechanism and will reset the price of pipeline transportation, marking the separation of oil and gas pipe network.

In the opinion of Liu Guangbin, analyst from SCI International, under the circumstance of low crude oil price, it is difficult for natural gas price to get better but keeping low. Price of natural gas for non-residential purpose may not increase remarkably in next one to two years in China.

The electric power system reform, which was restarted after 13 years, is going to enter the key stage of overall implementation. As the basic and the most crucial step of this new round of reform, the NDRC may expand pilot in five to ten provincial power grids and one to two regional power grids this year. Facing the demand of supporting the real economy and stabilizing economic growth, the NDRC requires the pilot areas to reasonably control the power transmission and distribution price when establishing the mechanism and set a transitional period so as to ensure smooth implementation if the estimated power transmission and distribution price is higher than the actual purchase and marketing price differentials.

Chen Zongfa, director of China Energy Research Society and staff from China Huadian Corporation, believed that there will be chances for electricity price to increase and decline as well in the next three to five years. On the whole, it will decline amid stability in China and electricity users will enjoy benefits from the reform.