Issues in formulating natural gas benchmark prices in China
April 26 2017
The oil indexed pricing mechanisms for natural gas and LNG in Asian markets, although successful until the 1990s, are general considered to be no longer appropriate, with a weak relationship between oil and gas market fundamentals. Since the current oil-indexed pricing system fails to reflect the natural gas market fundamentals, several East Asian countries including China are considering formulating their own natural gas benchmark prices. In view of this, this paper first analyses the impetus of formulating a natural gas benchmark price in China, interprets the basic concepts relevant to trading hubs, and proposes necessary conditions. These include a Natural Gas Exchange for buyers and sellers to trade contracts; gas trading hubs, both virtual and physical; standardised sport and futures products; a competitive market environment; and enough market participants.
On this basis, the present status of China is analysed as follows. First, far from having the necessary conditions, China is only equipped with spot markets, and lacks futures markets and clearly defined trading hubs. Therefore, establishing a trading platform should be the immediate action. Second, future benchmark hubs are expected to be established in those conjunction areas or in major producing or consuming markets with adequate pipeline capacity. Looking ahead, a competitive natural gas market should be formed through market-oriented reform, which is the prerequisite of formulating natural gas benchmark prices. Furthermore, In the context of China's not-yet-in-place reform environment, relevant departments should consolidate the foundation by coordinating relations between spot and futures exchange platforms and establishing trading hubs. The paper suggests that despite different views on the creditability of a Chinese benchmark price, it will be utilised at least for China's gas and LNG trade.
Read the article (in Chinese) online here.
Note: This article was published in Natural Gas Industry, Volume 37, Issue 4, 2017, 143-149.
Author: Dr Xunpeng Shi, Principal Research Fellow, Australia-China Relations Institute, University of Technology Sydney.