China should adopt a more flexible mechanism for natural gas pricing to ensure healthier profits for the industry, government officials and company leaders said yesterday.

"The pricing mechanism for natural gas in China is subject to further reform so that it can go along with its international counterparts," said Wang Jing, deputy head of the division of oil & gas of the energy bureau under the National Development and Reform Commission (NDRC). "The specific price for natural gas should be calculated on the basis of cost plus adequate income for gas suppliers."

"Only in this way can the healthy development of the segment be guaranteed," Wang said at a China Gas Summit held in Beijing yesterday. "Of course, it will be a gradual process."

Currently the price is set by the government, not the market.

Senior managers from major Chinese oil and gas makers share the view that the system should change for the good of future sales.

"A scientific pricing mechanism should be established to make the pricing of natural gas more market-oriented," said Liu Enxue, deputy manager of Sinopec Natural Gas Co Ltd. "The government should set up a guiding price just as a reference. An agile and flexible pricing mechanism should be adopted in the market, especially at the micro-level."

The "micro-level" refers to the retail segment involving end users such as families and individual enterprises using natural gas.

China's major oil and gas suppliers, PetroChina, Sinopec and China National Offshore Oil Corp, are trying to push up the price of natural gas for local end users, claiming the companies can barely profit on the current price.

"Selling natural gas on the present price barely covers the cost of exploration, production and transportation for domestic gas producers. Therefore, we suppose price hiking is necessary," said Chen Yongwu, a senior official with China National Petroleum Corp.

Chen did not say how much the hike will or should be.

Wang Zehou, deputy director of natural gas marketing at Natural Gas & Pipeline Company under PetroChina Company Ltd, commented that a balance should be figured out between buyers and suppliers regarding the pricing of natural gas.

"If the price increases too quickly, then the demand will drop. Therefore, seeking a balance between supply and demand is the key," Wang said.

Regarding the pricing issue, Stuart R. Traver, senior manager of Gaffney, Cline & Associates (Consultants) Pte Ltd, suggested Chinese authorities set up an energy price benchmark similar to that of Japan to secure gas supply and demand at a consistent price.

"The price for natural gas is set in China. But there may be demand for a higher price," Traver said.

What developing countries like China lack is a spot market where multi-buyers and sellers exist, Traver said. This is the prerequisite for a market-oriented price mechanism for natural gas and oil products.

Wang Jing of the NDRC foresees robust demand for natural gas in China in the next several years. During the country's 11th Five-Year Plan (2006-10), around 100 billion cubic metres of natural gas will be needed, according to the NDRC official.

(China Daily November 10, 2006)