China’s Oil-Linked Natural Gas Prices May Defy Falling Oil Prices: Analysts

china-natural-gas_300x196Platts

By Platts – Singapore

Falling global oil prices will put additional pressure on natural gas prices in China next year, but Beijing may not cut gas prices as it looks to maintain investment in the sector and to keep its nascent pricing reform efforts on track, according to analysts.

Under the gas pricing reforms introduced last year, Beijing created different tiers of pricing for the residential and non-residential sectors. The reforms are currently focused on the non-residential segment.

There are two tiers of non-residential gas pricing — one to cover base supply, and a second higher-priced tier applicable to what is known as “incremental supply” which since last year has been pegged to imported fuel oil and LPG prices.

The price for the base supply is to start tracking fuel oil and LPG prices from 2015, as per the reform plan announced last year.

Given the significant decline in oil prices this year, prices should actually be lower if the new gas price mechanism which links natural gas prices to the price of LPG and fuel oil is working, Macquarie Research said in a note last month.

A similar view was expressed by Bernstein Research.

“If the NDRC [National Development and Reform Commission] follows through on its new gas pricing formula [pegged to oil prices], we would expect gas prices to fall for the first time ever in China.”

At the very least, any prior expectation for gas prices to rise by 15% next year is now off the agenda, the bank said.

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