With surging demand for natural gas and an increasing dependency on imported natural gas, China's natural gas market is faced with a potentially problematic price convergence with the international market.

Estimated by Chinese Academy of Social Sciences, natural gas demand is expected to reach 240 billion cubic meters by 2015, leaving a 50 to 60 billion cubic meter supply shortage, which would hit 90 cubic meters by 2020.

The supply shortage therefore has to be alleviated by imported natural gas. In September, liquefied natural gas (LNG) imports set record-highs of 800,000 tons, and the cost of imported natural gas held above that of domestic natural gas.

For example, the average price of natural gas transferred through Pipe I of the West-East natural gas transmission project is 0.48 yuan/cubic meter, while that of Pipe II traversing from Turkemenistan to the Chinese border has already exceeded 2 yuan/cubic meter.

One China National Petroleum Corporation (CNPC) insider disclosed that authorities have consulted China's three oil giants including CNPC, Sinopec, and China National Offshore Oil Corporation on the natural gas pricing mechanism, and are essentially determined to set the price according to the weight of domestic and imported natural gas.

Therefore, a unified natural gas price will be prevalent in the domestic market, which will also align with international prices. At present, the international oil price exceeds 70 US dollars/barrel, which imposed greater pressure in raising the price of natural gas for chemical usage.

In fact, the NDRC has up adjusted the ground price of natural gas transmitted from Sichuan to Shanghai to 1.28 yuan/cubic meter, leaving a 10 percent float range. The move has been regarded as a beacon for the natural gas price reform. Natural gas prices are expected to surge 10 to 20 percent after the reform.

Affected by the structural changes in natural gas consumption and variations in natural gas utilization, the development of the natural gas chemical industry will face restrictions in the future and natural gas-to-methane projects will be banned. As a result, the coal chemical industry will benefit from the structural change in energy consumption.

(Xinhua Economic News, October 30, 2009)