Energy Price Reform in China

The Chinese government has big plans for the nation's natural gas sector. Beijing looks to the fuel to help wean the Chinese economy off its longtime reliance on dirty-burning coal-fired power generation. But as China's leaders are learning, developing robust natural gas markets will be difficult without deeper economic reforms -- and in particular, continued reform of the way energy is priced in China. In September, PetroChina's Changqing Oil and Natural Gas Field Co., which oversees one of the biggest energy plays in China, said it would raise its storage rates by 26 percent to the highest level allowed by the central government. It also announced what critics have called a pipeline surcharge hike, which would increase "incremental" prices by another 34 percent. In October, Shaanxi Green Gas and eight other middleman companies in Shaanxi province refused to pay the surcharge, since they are stationed at the origin of natural gas flows and do not rely on the national pipeline grid. In response, PetroChina reduced supplies to the companies, most of which have since been relying on stockpiles. The Shaanxi provincial government and the energy giant are in talks to resolve the issue, with the National Development and Reform Commission likely to be the final arbiter.

With peak demand season and winter shortages nearing in China, the natural gas middlemen will receive little sympathy if they cause cut-offs amid pricing disputes with producers. Some may face bankruptcy or require subsidies or bailouts from Beijing or provincial governments. However, PetroChina, which is under pressure from the Party's anti-corruption campaign, also faces scrutiny over its monopolistic behavior. In addition to allowing prices to rise, top officials have contemplated breaking up the natural gas production and transmission industries. In the case of the Shaanxi dispute, this kind of structural reform would prevent PetroChina from increasing pipeline fees at will. For now, however, China's energy oligopoly remains intact, and any antitrust campaign would take years to implement, even if it had the Party's full approval. And while it may be desirable to restructure some natural gas storage companies, doing so extensively would upset local governments concerned with their own economic and social stability -- and it could, in the short term, hinder China's efforts to increase its internal storage capacity.

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