A Theoretical And Empirical Study On China's Gas Market-oriented Reform

With the rapid development of China's economy and major breakthroughs innatural gas exploration and development, China's natural gas industry has entered arapid development period. The scale of the natural gas market expands rapidly, hasbecome Asia's largest and the world's fourth largest consumer. The gas supply patternhas transformed from a single gas source and a single pipeline into a multi-source andmulti-path network. The gap between natural gas supply and demand continues toincrease, which results in a growing foreign dependence. According to the “TwelfthFive-Year Plan” of natural gas development, China's natural gas consumption willreach260billion cubic meters by2015, which is twice the level of natural gasconsumption in2011. And the proportion of natural gas in primary energyconsumption will double during the Twelfth Five-Year. The development goals arechallenging not only in terms of gas supply and infrastructure construction, but also interms of pricing.With the rapid growth of natural gas consumption and imports, China has becomeincreasingly closer with the international natural gas market. The "cost plus" pricingmechanism based on domestic natural gas production costs has become increasinglyunsuited to the new situation, which mainly display in the following areas: increasingdifficulty of the implementation of the current pricing mechanism, irrational naturalgas price structure, unreasonable price relationship between different departments,distorted price relationship between natural gas and its alternative energy, increasinggap between imported and domestic gas prices, excessive consumption developmentdue to the long-term low gas price policy, inadequate incentive of the existing pricingmechanism for manufacturers, etc.Market-oriented reform is an inevitable choice of China's natural gas market atcurrent stage. Internatiaonal experience shows that market-oriented reform is a longprocess. Market-oriented reform in China's natural gas industry can not be achievedovernight. Based on regulation theory and the latest developments, firstly this paperspecifies the theoretical basis for natural gas government regulation andmarket-oriented reform. Secondly, this paper summarizes international experienceapplicable to China's natural gas market-oriented reform. Finally, this paper proposesfuture objective and implementation paths of China's gas market-oriented reform. Acombination research method of normative and empirical analysis and a combinationof qualitative and quantitative analysis are adopted in this paper. The main work andinnovations of this paper are as follows:(1) Specifying the status and goals of China's gas market-oriented reform throughanalyzing the market structure and the challenges faced by China's gas pricingmechanism. Firstly, we analyze the status and future trends of China's natural gas industry from four aspects, namely, resources and production, infrastructure, marketdemand, supply and demand situation. Secondly, we analyze market structurecharacteristics of China's natural gas industry from market concentration, productdifference and entry barriers. Comprehensive analysis shows that upstream andmidstream sectors of China's natural gas industry are still highly oligopolistic, whilethe downstream sector is competitive. With the increasing consolidation in thedownstream sector, there is a tendency towards monopoly which deserves vigilance.Thirdly, we introduce the evolution and recent advances of China's natural gas pricingmechanism and analyze the outstanding challenges faced by the existing pricingmechanism.(2) Providing theoretical basis for government regulation and market-orientedreform in China's gas industry through analyzing the latest developments of regulationtheory and features of gas industry. Government regulation and market mechanismsplay a complementary role in promote the healthy development of the natural gasindustry. Therefore, it is necessary to introduce competition mechanism in thecompetitive sectors and seek a reasonable regulatory approach the natural monopolysectors. Features of gas industry include economies of scale, economies of scope,sub-additivity of cost and etc. Overall, the natural gas industry is a natural monopolyindustry which needs government regulation to improve the efficiency of resourceallocation. With the development of production technology and market scale, the scopeand extent of natural monopoly will gradually weaken. Therefore, it is necessary todevelop different regulation polices for different business sectors dynamically.(3) Summarizing international experience applicable to China's gasmarket-oriented reform through analyzing the experience and effects of gasmarket-oriented reforms in Europe and America. Firstly, we summarize conditions ofestablishing gas market mechanisms by analyzing market reform process and the latestdevelopments in the U.S., UK and continental Europe. As China's gas marketsituations are different from the United States and Europe, there are no experience canbe directly applied to China's market without considering the adaptability. Therefore,it's highly necessary to compare China's current market situations with the situationswhen American and European countries started to liberalize the gas market. Secondly,we run empirical analysis of the reform effect taking example of the United States.Empirical studies show that gas prices fluctuate significantly after the U.S.deregulation of natural gas prices. Gas prices reflect shocks in market supply side anddemand side and pass nicely between upstream and downstream prices. Pricerelationships between different gas sectors also reflect the market structure. Finally, werun empirical analysis of the evolution of the world gas market integration. From theperspective of price level, the U.S. Henry Hub gas price is the lowest, while JapanLNG price is the highest. From the perspective of price volatility, the market liquidityof Henry Hub is the smallest, while Japan's LNG import price is the largest. This reflects the advantages of market pricing mechanism. From the perspective ofintegration degree, the integration degree of the world gas market is growing since2000. But after the2008financial crisis, the integration degree is falling instead ofrising. Whether from the point of price risk management or from the perspective ofmarket integration, it's highly urgent to establish a natural gas trading center in theAsia-Pacific region.(4) Providing reference for China's gas market planning through assessing themarket value of natural gas and exploring the feasibility and prospects of establishinggas trading center in China. China's gas demand will keep growing fast in the next fewyears. As gas prices increase, the affordability of gas price will be a key issue. Weadopt three methods, namely spending limit law, replacement cost method and netreturn value method, to assess the market value of natural gas. To explore thefeasibility and prospects of establishing gas trading center in China, firstly we sum upthe necessary conditions to establish a natural gas trading center. Secondly, wecompare market conditions and development prospects of China, Japan, South Koreaand Singapore. As traditional regional gas consuming countries, Japan and SouthKorea has a strong market influence. But subject to the shortage of resources, Japanand South Korea has not established modern gas market mechanisms. Singapore hasthe most mature conditions to establish a gas trading center, but future ability todevelop into a regional trading center is of concern due to its limited market size.China has the largest development potentiality of gas market. The government shows astrong will to establish market-oriented reforms and a strong interest in establishing atrading center. Overall, Asia-Pacific countries have a large gap compared with the U.S.and UK market conditions in the1990s. It is difficult to establish an influencingtrading center in the short-term in Asia-Pacific. Finally, we run SWOT analysis andfind that China has more strengths than weaknesses, and opportunities outweighchallenges in establishing a gas trading center.(5) Providing policy recommendations for China's gas market-oriented reformthrough specifying basic principles and implementation paths. The basic principle ofgovernment regulation policy is adopting incentive regulation methods in naturalmonopoly business and deregulation methods in competitive busines in order toachieve economies of scale and competitive vitality in the entire gas industry. Theimplementation paths are "four in one" model, namely system construction as the basis,market cultivation as the premise, price reform as the core and trading center as thefocus. Only by adopting the “four in one” model, it's possible to establish acompetitive, orderly and vibrant gas market.