Research On The Welfare Impact Of The Netback Pricing Method In The Domestic Natural Gas Market

Natural gas has been more and more widely used in China in recent years. But thenatural gas industry has some inherent economic characteristics, such as sinking cost,economies of scale and economies of scope. Given these characteristics, China uses thecost-plus pricing method as the main way to ensure reasonable profit of themanufacturers and avoid their access to monopoly high prices. However, with theexpansion of the domestic gas market, the existing pricing mechanism is difficult toadapt to the natural gas market. December2011, the National Development and ReformCommission proposed to carry out natural gas price reform in Guangdong and Guangxiprovinces, put forward to using netback pricing method to making natural gas price inthese two provinces. This proposition has aroused a wide attention and discussion aboutthe domestic gas price reform. This paper studies the domestic gas market pricingmechanism, and explores the use of netback pricing method in China’s natural gasmarket, which hopes to have an intuitive understanding of the pricing problem ofdomestic natural gas market.This study combines qualitative and quantitative analysis. Firstly, it analyses thedevelopment of the domestic natural gas industry, which includes domestic gasconsumption, domestic natural gas resources exploitation, the import of foreign naturalgas resources and the infrastructure facilities and so on. Secondly, on the basis ofstudying the domestic and foreign natural gas pricing mechanism, it analyses the currentsituation of domestic natural gas prices, including the domestic natural gas priceformation mechanism, the price compared with the domestic alternative energy and theforeign natural gas and whether the regulated price can significantly affect the demand.Then, it discusses the pricing methods between netback pricing method and cost-pluspricing method, analyses the social welfare in natural gas markets in Guangdong whererelies on imports mainly, and then consider to the import gas and domestic gas, analysesthe social welfare in domestic natural gas market.Through this study, it shows that: Firstly, the domestic natural gas industry isundergoing a rapid development, supply and demand structure is more complex anddiversified, the cost-plus pricing method can’t suitable for the current development ofdomestic natural gas market, also it is against to the international standards, so it isurgency to introduce a new pricing mechanism. Secondly, according to the Guangdong gas market’s actual situation which use import gas mainly, it carries that netback pricingmethod will reduce the total welfare compared to the cost-plus pricing method, and thesocial welfare of the consumers, the midstream and the downstream of the natural gasindustry chain will increase, while the upstream will loss more welfare. Thirdly,according to the entire country’s gas market which uses both of domestic gas and importgas, it carries that netback pricing method will reduce the total welfare and the gasdemand compared to the cost-plus pricing method, the consumers will lose morewelfare while the upstream manufacturers will increase more welfare.Finally, according to the actual situation, this paper put forward some policysuggestions from the aspects of setting the price reasonably, establish the social securitysystems and so on.