Deep cut beats expectations
The NDRC Wednesday cut ceiling city station gate prices of non-residential natural gas by 0.7 yuan per cubic meter effective from Friday. The cut of non-residential natural gas prices beat market expectation of 0.4 yuan to 0.6 yuan per cubic meter. The deep cut of non-residential natural gas prices would directly reduce 43 billion yuan of operating costs with industrial users, power generation companies, concentrated heating suppliers, taxi drivers, commercial entities, service providers and others in the downstream, said the NDRC in a release.
Ceiling city station gate price of non-residential natural gas dropped 24 percent to 2.18 yuan per cubic meter in east China's Shanghai municipality. The fully-liberalized prices of coalbed methane, shale gas, LNG and others also could decrease on governmental adjustment of non-residential natural gas prices, added the NDRC. It's estimated that overall effect of the price cut would reduce over 100 billion yuan of costs with downstream players. The fuel costs with glasses would decrease by around 111 yuan each tonne, according to Qi Jing, an analyst with market information supplier www.chem99.com.
Annual profits with domestic players in the upstream would drop by over 10 billion yuan and looses with imported LNG would worsen, said Jing Chunmei, a researcher with Chin Center for International Economic Exchange. Chinese state-owned oil giants need to recalculate return rate of some projects and would face materials pressures in investment in the upstream and purchasing of overseas resources, said Zhou Dadi, a senior researcher with Energy Research Institute under the National Development and Reform Commission.
In total, downward adjustment of natural gas would result in expansion of market size in the first place, which is a significant booster to the whole natural gas industry, added Zhou. Cut of nonresidential natural gas would have no significant effect in prompting consumption in the downstream due to weak macroeconomic performance and little consumption elasticity, noted Guo Peng, an analyst with GF Securities. The NDRC unified prices of incremental and historical non-residential natural gas prices on April 1, 2015 and liberalized pricing of natural gas under direct supply, which stays at around 30 billion cubic meters or 15 percent of total natural gas consumption.
--Benchmark price introduced
Moreover, the NDRC also reformed the pricing mechanism of natural gas by introducing benchmark city station gate prices of non-residential natural gas, which would replace existing rigid ceiling city station gate prices. New ceiling city station gate prices would exactly be treated as benchmark city station gate prices. The benchmark prices could move up as much as 20 percent and drop to whatever level decided by suppliers and purchasers.
Still, existing benchmark city station gate prices of non-residential natural gas shall not increase within the first year of new pricing mechanism. As a great step forward in marketization, the introduction of benchmark city station gate prices of natural gas is more meaningful than price cut itself, said Zhou. The mechanism of benchmark city station gate prices lifted role of market forces and industrial players have more maneuvering room, said Jiang Runyu, a researcher with Academy of Macroeconomics Research of the NDRC.
The NDRC encourages pilot liberalization of non-residential natural gas prices by local governments. In the next step, the NDRC would work to fully liberalize pricing of non-residential natural gas prices as early as possible, gradually smooth prices of residential natural gas prices at proper time, optimize pricing mechanism of transmission fees and step up regulation on distribution costs, according to the release.
The NDRC urged industrial players to sell and purchase non-residential natural gas via Shanghai Petroleum and Natural Gas Exchange (SHPGX), a platform to prompt oil and gas reform and enhance China's gas pricing power. The government aims to realize open and transparent trading of non-residential gas within two to three years. "The SHPGX has made sufficient preparations. The sound operation of trading rules, technical system and management rules since trial operation on July 1 paved road for jump of trading volumes following relaxed price control, " said an official with the SHPGX.
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