OREANDA-NEWS. December 28, 2011. China has unveiled a pilot scheme, to link city-gate natural gas prices with prices of imported fuel oil and liquefied petroleum gas, or LPG. The government has scrapped the previous price calculation method, which was mainly based on domestic gas production costs.

 The scheme has already been rolled out in southern China’s Guangdong Province and Guangxi Zhuang Autonomous Region, as of December 26th.

 Based on 2010 prices for imported fuel oil and LPG, which correspond to crude oil prices of 80 dollars a barrel, the city-gate ceiling price in Guangdong was set at 2.74 yuan per cubic metre, and 2.57 yuan in Guangxi. These prices are below those from other domestic LPG providers. Analysts say this won’t push up average gas prices in the area.

 According to China’s top economic planner, local suppliers are allowed to set their specific supply rates, as long as these prices do not exceed the city-gate ceilings. The prices will be adjusted annually, and later quarterly.

 Cao Changqing, director of Price Department of NDRC said: "The old price calculation method is based on domestic production costs. When there are many gas providers and a high dependence on imported resources, it’s getting harder and harder to know how much those costs are. Under the new scheme, which is determined by market demand, the prices are not going to go up with costs. The new scheme can force gas providers to reduce costs, improve management, and hence become more competitive in the market."