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China braces for rising gas prices

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When Belarus reluctantly accepted a sharp rise in the price of Russian gas in the dying minutes of 2006, China started preparing for higher natural-gas prices in the middle and long terms.

A last-minute natural-gas pricing deal between Russia and Belarus was inked on December 31 under which Belarus would have to buy Russian gas at a much higher price of US$100 per 1,000 cubic meters in 2007.

Such aggressive action taken by Russia indicates that it is unlikely that China will be able to import natural gas from Russia at a low price in the future, though negotiations between Beijing and Moscow over the construction of a Sino-Russia gas pipeline are still in progress.

Experts with China Petrochemical Corp (Sinopec) said China's increasing dependence on natural gas imported from Russia means that domestic gas prices may go up.

A report by the Shanghai Securities News said talks between China National Petroleum Corp (CNPC) and Russia about importing natural gas from Sakhalin-I had foundered on price issues. China's top oil producer signed a gas-import framework agreement in 2006 with Sakhalin Energy Investment, the company that operates the Sakhalin projects and which is a major Russian exporter of liquefied natural gas (LNG).

When attending an industrial forum in November, Koert Vonkeman, vice president for marketing at Sakhalin Energy Investment, said China will have to pay international prices for LNG imports sooner or later.

The international gas price has surged to new levels because of the soaring international oil price, but China's natural-gas price - which is controlled by the government - remains comparatively low.

China began to import LNG from Australia last year for its first LNG project in the southern province of Guangdong.

Jointly operated by China National Offshore Oil Corp (CNOOC) and British Petroleum, the country's first LNG project absorbs 3.7 million tons of LNG annually from the Northwest Shelf Australia LNG project under a 25-year contract. The agreed price is considerably lower than current international prices.

The government plans to build 10 or 11 LNG terminals by 2010, increasing imports to 30 million tons per year.

Price has become a major obstacle to China's LNG plans. According to National Development and Reform Commission (NDRC) statistics, the current ratio for domestic oil and natural-gas prices is 1:0.24, while the international equivalent level is 1:0.6.

A new round of gas-price hikes is in the pipeline. Beijing is planning to raise the price of household natural gas by nearly 8% - up 0.15 yuan to 2.05 yuan (26 US cents) per cubic meter.

Haikou, capital of southernmost Hainan province, saw the price of household natural gas rise from 2.10 yuan per cubic meter to 2.60 yuan at the end of last year.

The price adjustment is based on the NDRC natural-gas pricing mechanism launched at the end of 2005, according to which the benchmark factory prices of gas will change each year in line with the prices of other resources such as petroleum, with a maximum year-on-year adjustment of 8%.

The NDRC said a long-term goal in China's price reform in the natural-gas sector is to have a complete market-oriented price mechanism. NDRC sources said a draft for resource-pricing reform has been passed.

The new pricing mechanism for resources such as oil, natural gas, coal, electricity, water and land should reflect two factors - resource rarity and the cost of environmental pollution, according to the NDRC.

Local suggestions are being solicited for the draft, which will soon be submitted to the State Council, China's cabinet.

NDRC estimates show that China's demand for natural gas will rise to 100 billion cubic meters in 2010. The country's gas output was 50 billion cubic meters in 2005.

Although there are still some problems concerning the Sino-Russian gas pipeline still to be resolved, the Chinese and Russian sides are pushing hard for mutual energy cooperation. CNPC is conducting negotiations with the owners of the Sakhalin-I and Sakhalin-II projects over the issue of gas purchasing. The parties involved have so far failed to reach an agreement over the price of gas, which will not be cheap if it is transported to China. Experts say it will be impossible for an agreement to be inked this year.

Russia will become a World Trade Organization member this year and the country has promised to remove energy subsidies, which means residents in neighboring countries and even Russians themselves will have to pay a much higher price for natural gas.

© Asia Times

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