(EnergyAsia, July 12 2013, Friday) — China’s recently announced reform of its natural gas pricing system has won the approval of at least one US company, the Houston, Texas-based Far East Energy Corporation which is exploring and developing coalbed methane (CBM) resources in Shanxi province.
The National Development and Reform Commission (NDRC), China’s top policy-making body, has announced that from July 10, 2013, city-gate gas prices will increase by an average of 15% across the country. These price increases will be borne by industrial and other consumers to the benefit of upstream producers such as Far East Energy.

Importantly, the NDRC is introducing a two-tier pricing structure that will base new incremental gas supply on the new pricing formula that has already been tested in provinces such as Guangdong, said Far East Energy, which has a production-sharing contract in the Shouyang block.

The company said that domestic gas prices have risen to US$14 per million standard cubic feet (scf) in provinces where the formula, linked to the more freely-traded liquefied petroleum gas (LPG) and fuel oil markets, is applied.

Praising this as a “long-awaited” reform, CEO Mike McElwrath said:

“Far East Energy is currently receiving $6.50 per million scf for gas sales from our Shouyang block for the first 10.6 million scf produced, inclusive of subsidies. We expect volumes going forward to be sold at increasingly higher prices as the new pricing formula takes effect.”

While these reforms apply to city gate pricing, the company said its analysis show that the 15% increase equates to a near 25% increase in well-head prices, giving “a clear incentive” for increased exploration and production of China’s domestic gas resources while making it less attractive for the more expensive options of importing liquefied natural gas (LNG) or piping gas into the country.
“The changes to China’s gas price policy underline the determination by the country’s leadership that gas play a major role in the country’s energy mix moving forward,” McElwrath said.

“Higher gas prices are needed to stimulate more domestic production and compensate for high LNG import prices and the move to link gas prices to oil based fuels recognises that gas is a clean alternative to LPG and fuel oil.”

As a result of the reform, Far East Energy, which has offices in Beijing and Taiyuan cities, said it expects CBM prices to rise above current levels as they are not regulated and are derived from independent negotiation between producers and buyers.