and non-residential city-gate gas prices to eliminate cross-subsidies, the residential gas price is
still lower than the cost of gas supply. Furthermore, cross-subsidies have still not been completely eradicated. In some regions, price
adjustment lags behind the city-gate price, so
changes in the upstream market are not reflected
in price in a timely fashion.
Second, the gas price system needs to be
improved. On the supply side, the construction of
gas storage in China has lagged far behind
market development for some time. This is due to
the high investment cost of underground gas
storage, a shortage of options for recovering
investment in cushion gas, the absence of a
peak-shaving gas price, and the failure to establish a market-oriented pricing mechanism for gas
storage services and peak-shaving gas capacity.
As indicated in the Report on the Oil and Gas
Industry in and Outside China 2017, up to the
end of 2017, China had constructed 12 gas
storage facilities (clusters), the peak-shaving
capacity of which stood at 10 billion cubic
metres. The working gas capacity of 8 billion
cubic metres accounted for 3.4% of China’s gas
consumption that year, much lower than the
global average of 12%. In developed countries,
the working capacity of gas storage accounts for
20–30% of their total gas consumption. The
severe shortage of gas storage peak-shaving
capacity was an important cause of the national
gas shortage at the end of 2017. On the demand
side, the absence of interruptible and peak and
off-peak gas prices dampens the motivation to
expand the interruptible user base.
Third, natural gas exchanges help push market
reform of the gas pricing mechanism and restore
the commodity attributes of gas. Although the
Shanghai Petroleum & Gas Exchange has started
operations and the Chongqing Oil and Gas
Exchange will start soon, China’s natural gas
exchanges are still in their infancy. Spot trading
has begun with small quantities, but futures
trading has yet to start. The gas trading volume
of the Shanghai Petroleum & Gas Exchange
exceeded 15 billion cubic metres in 2017, about
6.3% of China’s total gas consumption. There is
a large gap between China and the USA and
Europe. Only a small volume of gas is traded via
competitive bidding. At the Shanghai Petroleum
& Gas Exchange, pipeline gas is traded mainly
by reference to the provincial city-gate price set
by the NDRC. Competitive bidding is limited to
low-volume LNG trading. Deals are mainly
concluded by negotiation, with trading models
still being explored. The services offered by the
exchanges need to be diversified and the trading
system needs to be improved. The following
challenges remain: gas pricing policy factors that
restrict trading, the absence of a competitive
upstream market, and pipeline networks and
infrastructure that do not provide fair access to
third parties. This means that the natural gas
exchanges can only trade in volume; they cannot
determine benchmark prices. As such, it is difficult for them to replace government-set benchmark prices in the short term.
5.2.3 Poor Government Administration
and Supervision
China has made great progress in reforming oil
and gas management, but administration and
supervision still need to be improved.
As regards resource development and use, oil
and gas supply security and environmental protection, too much attention is paid to reviewing
and managing market access qualifications, and
not enough to overseeing project implementation
and effects. Public services for information
management and modernisation technologies are
not in place. Important information is sometimes
not disclosed in advance or on time. The government intervenes too much in the market.
Government management is too low-level and
specific, such as focusing on investment
approval, price setting and output control. The
power, duties and interests of central and local
government are not balanced. The central government has strong power and limited duties, and
local government has little power and unlimited
duties, leading to inefficient administration and
poor outcomes.
Oil and gas strategies have been missing for a
long time. Industry plans and arrangements
(major projects), policies, standards and specifications, and laws and regulations are not aligned
462
S. Yaodong and A. Gillespie
still lower than the cost of gas supply. Furthermore, cross-subsidies have still not been completely eradicated. In some regions, price
adjustment lags behind the city-gate price, so
changes in the upstream market are not reflected
in price in a timely fashion.
Second, the gas price system needs to be
improved. On the supply side, the construction of
gas storage in China has lagged far behind
market development for some time. This is due to
the high investment cost of underground gas
storage, a shortage of options for recovering
investment in cushion gas, the absence of a
peak-shaving gas price, and the failure to establish a market-oriented pricing mechanism for gas
storage services and peak-shaving gas capacity.
As indicated in the Report on the Oil and Gas
Industry in and Outside China 2017, up to the
end of 2017, China had constructed 12 gas
storage facilities (clusters), the peak-shaving
capacity of which stood at 10 billion cubic
metres. The working gas capacity of 8 billion
cubic metres accounted for 3.4% of China’s gas
consumption that year, much lower than the
global average of 12%. In developed countries,
the working capacity of gas storage accounts for
20–30% of their total gas consumption. The
severe shortage of gas storage peak-shaving
capacity was an important cause of the national
gas shortage at the end of 2017. On the demand
side, the absence of interruptible and peak and
off-peak gas prices dampens the motivation to
expand the interruptible user base.
Third, natural gas exchanges help push market
reform of the gas pricing mechanism and restore
the commodity attributes of gas. Although the
Shanghai Petroleum & Gas Exchange has started
operations and the Chongqing Oil and Gas
Exchange will start soon, China’s natural gas
exchanges are still in their infancy. Spot trading
has begun with small quantities, but futures
trading has yet to start. The gas trading volume
of the Shanghai Petroleum & Gas Exchange
exceeded 15 billion cubic metres in 2017, about
6.3% of China’s total gas consumption. There is
a large gap between China and the USA and
Europe. Only a small volume of gas is traded via
competitive bidding. At the Shanghai Petroleum
& Gas Exchange, pipeline gas is traded mainly
by reference to the provincial city-gate price set
by the NDRC. Competitive bidding is limited to
low-volume LNG trading. Deals are mainly
concluded by negotiation, with trading models
still being explored. The services offered by the
exchanges need to be diversified and the trading
system needs to be improved. The following
challenges remain: gas pricing policy factors that
restrict trading, the absence of a competitive
upstream market, and pipeline networks and
infrastructure that do not provide fair access to
third parties. This means that the natural gas
exchanges can only trade in volume; they cannot
determine benchmark prices. As such, it is difficult for them to replace government-set benchmark prices in the short term.
5.2.3 Poor Government Administration
and Supervision
China has made great progress in reforming oil
and gas management, but administration and
supervision still need to be improved.
As regards resource development and use, oil
and gas supply security and environmental protection, too much attention is paid to reviewing
and managing market access qualifications, and
not enough to overseeing project implementation
and effects. Public services for information
management and modernisation technologies are
not in place. Important information is sometimes
not disclosed in advance or on time. The government intervenes too much in the market.
Government management is too low-level and
specific, such as focusing on investment
approval, price setting and output control. The
power, duties and interests of central and local
government are not balanced. The central government has strong power and limited duties, and
local government has little power and unlimited
duties, leading to inefficient administration and
poor outcomes.
Oil and gas strategies have been missing for a
long time. Industry plans and arrangements
(major projects), policies, standards and specifications, and laws and regulations are not aligned
462
S. Yaodong and A. Gillespie