OREANDA-NEWS. December 28, 2011. China will test natural-gas-price reforms in select locations, in the latest in a string of moves intended to help rebalance China's economy and encourage its industries to become less energy intensive.

 The programs will take place in China's southern Guangdong province and the Guangxi Zhuang autonomous region, the National Development and Reform Commission said Tuesday. The move, effective immediately, will see prices in the two areas linked to the market rather than kept artificially low, which has been the government's way of holding down inflation.

 As they do with other fuels, Chinese officials cap natural-gas prices to keep its factories humming and protect its population from inflation. But that has led to dependence on cheap energy and bolsters inefficient manufacturers in a time when Chinese leaders are keen to shift the economy more toward the consumer sector. It has also discouraged China's domestic exploration and production of natural gas.

 But encouraged by moderating inflation this year, China has more closely pegged domestic jet-fuel prices to market prices and said it would study raising electricity prices for some residential users.

 Guangdong and Guangxi were chosen as tests because they lack land-based pipelines, which require them to import natural gas, said the NDRC, which is China's top economic body. As a result, gas prices in the region already are closer to international market prices, it said.

 China's gas pricing differs by region but averages roughly USD 5 per million British thermal units, higher than U.S. prices, which average about just above USD 3 per million BTUs due to extra supplies from the nation's shale-gas boom.

 China last raised the onshore domestic price of natural gas in June 2010. The new price mechanism, which targets the city-gate price, will be based on prices in Shanghai—considered to be a hub for gas trading and consumption. The city-gate price is the cost of gas paid to pipeline owners by local gas utilities.

 Meanwhile, the new natural gas price will be linked to the market price of fuel oil and liquefied petroleum gas imported to Shanghai, the NDRC said. Also factored in will be the cost of shipping natural gas from Shanghai, it said.

 In the first 11 months of the year, China's natural gas consumption rose to 115.9 billion cubic meters, up 20.5% from year-earlier levels, the NDRC said earlier this month. Imports of natural gas over the same period surged to 28.1 billion cubic meters, up 91.5% from a year earlier, it added.

 Rising volumes of pipelined gas from central Asia and, eventually, arrivals from Myanmar and potentially Russia will continue to increase China's dependence on foreign imports. China also has made a string of deals with Indonesia, Australia and Qatar for liquefied-natural-gas imports.

 However, Chinese firms have been importing natural gas at a loss due to the large gap between domestic and international prices, the NDRC said. In addition, cheap domestic prices have led to unreasonably high demand. If the situation continues, China's domestic supply of natural gas can't be guaranteed, the NDRC said.