(EnergyAsia, January 28 2013, Monday) — China faces four major challenges in reforming its natural gas sector to help meet a targeted doubling in consumption to 260 billion cubic metres by 2015 from 2011 levels, said the International Energy Agency (IEA).

Planners will face their most important challenge in aligning domestic gas prices with the international markets as it becomes more dependent on import of liquefied natural gas (LNG), said the IEA in a special report entitled, “Gas Pricing and Regulation: China’s Challenges and the IEA Experience”.

The issue of pricing will be intimately tied to the other three challenges of attracting investments along the entire gas supply chain covering production, import, transportation and storage within the country, allowing new players to dilute the oligopolistic nature of the industry that is now dominated by three companies, and restructuring the role of various government agencies who now have overlapping and sometimes conflicting powers over the sector.

“China has an overall regulated approach based on cost-plus for the production and pipeline tariffs, similar to what existed in the US in the pre-liberalisation period. Many issues have therefore appeared as new (and potentially more expensive) unconventional gas resources need to be produced and more expensive imports enter the Chinese gas market,” said the IEA.

“With growing LNG imports, China is increasingly exposed to global gas dynamics and the spread between cheaper domestic gas production and expensive spot LNG cargoes is growing wider.”

In its current 12th five-year plan from 2011 to 2015, the Chinese government plans to double the share of natural gas in the country’s primary energy mix to reach consumption levels of up to 260 billion cubic metres (bcm), and possibly to 350 bcm by 2020.

Since 2000, China’s gas demand has risen fourfold to 130 bcm in 2011 to become the world’s fourth largest, said the IEA.

Describing the government’s latest targets as ambitious, the IEA said it implies that China will be able to secure all the supplies it needs from domestic production as well as imported LNG and pipeline gas. Suppliers, especially those signed on for long-term contracts, will have to fully deliver the targeted volumes on schedule. They will be hard pressed to keep up with China’s surging demand amid the level of supply security required along with on-going restructuring of the country’s natural gas industry.

The emergence of the unconventional gas sector is another consideration for Chinese planners as the country is now thought to hold the world’s largest reserves of shale and hydrocarbons trapped deep in rock formations.

For China, technology, pricing and infrastructure to commercialise these reserves are the main issues, said the IEA.

The IEA has also advised China to clarify the roles of the numerous state agencies overseeing the country’s energy sector.

“China needs to clearly define the responsibilities between the different governmental entities, rather than just splitting the responsibility for the gas sector among different ministries and agencies,” said the IEA.

Furthermore, the government should also limit the influence from the state energy giants CNPC, Sinopec and CNOOC in setting policy directions. Specifically, the IEA said the “Big Three” should not be allowed to interfere with the work of national regulators or government agencies in charge of upstream and/or downstream activities.

“Key people in charge should have no position or financial interest in Chinese companies. All interested players, and not only the Big Three, should be consulted in the process of developing new regulations,” said the IEA.

China must bring clarity to the distinction between the central and the local levels. Many conflicts exist, such as contradictory rights on coalbed methane (CBM) and coal production. This issue goes well beyond energy, and there is no particular relevant lesson to draw from any OECD country’s experience. Nonetheless, this issue should be recognised and addressed for it has a significant impact on energy developments.

The IEA report was co-written by Anne-Sophie Corbeau, Dennis Volk, Jonathan Sinton, Julie Jiang, Jiang Ping, Tammy Teng, Li Boshu and Yue Fen.