OREANDA-NEWS. December 03, 2014. Experts are sceptical about the prospects for a new spot trading platform for pipeline gas in northeast China, warning it could be undermined by a problem that has afflicted other ventures – a lack of sellers and liquidity.

The Dongbei Commodity Exchange said last week it had teamed up with China National Petroleum Corp. (CNPC) to launch a pilot platform for the area, the country’s latest effort to introduce market mechanisms for gas pricing.

The platform will be solely led by CNPC, which has agreed to sell some pipeline gas allocated for Heilongjiang, Jilin and Liaoning provinces to buyers on it.

The exchange will start a special session for local gas companies and industry users to buy pipeline gas, and hopes to offer LNG products in the future.

The exchange did not say when the platform would be launched or how much gas CNPC will put up for trade, but up to 50-60 billion cubic metres could be available, according to Xu Bo, senior economist at CNPC’s Economics & Technology Research Institute.

Higher prices have dampened gas sales growth in a number of provinces this year – including Heilongjiang and Jilin – meaning CNPC is likely to run a supply surplus this year and next, Xu told Interfax. The platform will enable CNPC to sell some of that excess.

“We don’t expect the market to be able to absorb another price increase next year, but imports and domestic production will certainly rise, so we can fetch a better price by selling on this platform,” Xu said. “So long as supply for public services is guaranteed, the rest can be traded.”

The National Development and Reform Commission (NDRC) raised citygate prices for non-residential consumers by an average of 15.4% across China in 2013.

It lifted prices again in September by nearly 19%, and is widely expected to raise them next summer too (see China’s gas price reforms march on with new rise, 12 August 2014).

The platform has already drawn interest from downstream gas users, but will not improve price discovery because citygate prices for pipeline gas are still regulated, Shen Yanfu, general manager at the Dongbei Commodity Exchange, told state media.

The fact CNPC is the only seller puts the platform’s longevity in doubt, said Dong Xiucheng, director of the China Oil & Gas Centre at the China University of Petroleum.

“A viable market needs to have many buyers and sellers, but there’s only one seller here. In the long term, the buyers may not be able to secure what they need, so a fair and just market cannot form,” Dong told Interfax.

“It shouldn’t be called trading, but rather bidding. Many other exchanges have tried similar strategies, but all ended in failure.”

Success will hinge on how much gas CNPC supplies. “Pipeline gas is still a planned commodity, so if the supply cannot satisfy demand and there are many regulations, it will probably not work,” said Ji Wenjie, operations director at the Ningbo Commodity Exchange, which launched China’s first LNG forward contracts in December 2013.

The platform could end up resembling the one on the Shanghai Petroleum Exchange, where only local firm Shenergy sells surplus imported LNG.

“The volumes are tiny and the price is almost the same every day. Such an exchange is totally pointless,” said Ji.

Trades amounting to just 215,000 tons have been concluded on the Shanghai exchange since it piloted spot LNG trading nearly four years ago (see Shanghai fuel exchange debuts gas spot trading platform, 3 July 2012).

But Shanghai is also planning to establish an international gas trading platform in its free-trade zone, which will be wholly owned by SPEX, according to Xu. That would be competition for the Dongbei platform.