When Belarus reluctantly accepted a sharp rise in the price of Russian gas in the dying minutes of 2006, China started preparing for higher natural gas prices in the middle and long term.

Experts from China Petro Chemical Corporation (Sinopec) said that China's increasing dependence on natural gas imported from Russia means that domestic gas prices may rise.

A report by the Shanghai Securities Journal said that talks between China National Petroleum Corporation (CNPC) and Russia about importing natural gas from Sakhalin I had foundered on price issues.

The top oil producer of China signed a gas import framework agreement in 2006 with Sakhalin Energy Investment, the company that operates the Sakhalin projects and which is a major Russian liquefied natural gas (LNG) exporter.

When attending an industrial forum held last November, Koert Vonkeman, Vice President for Marketing of Sakhalin Energy Investment, said that China will have to pay international prices for LNG imports sooner or later.

The international gas price has surged to new levels owing to the soaring international oil price, but China's natural gas price-- which is controlled by the government -- remains at a comparatively low level.

China began to import LNG from Australia last year for its first LNG project in south China's Guangdong Province.

Jointly operated by China National Offshore Oil Corporation (CNOOC) and BP, the country's first LNG project absorbs 3.7 million tons of LNG annually from the Northwest Shelf Australia LNG venture project under a 25-year contract.

The agreement was signed at a price considerably lower than current international prices.

The government plans to build 10 or 11 LNG terminals by 2010, increasing imports to 30 million tons per year.

Price has become a major obstacle to China's LNG plans.

According to National Development and Reform Commission (NDRC) statistics, the current ratio for domestic oil and natural gas prices is 1 to 0.24, while the international equivalent level is 1 to 0.6.

A new round of gas price hikes is in the pipeline. Beijing is planning to raise the price of household natural gas price by nearly eight percent -- up 0.15 yuan (US$0.019) to 2.05 yuan (US$0.26) per cubic meter.

Haikou, capital of southernmost Hainan Province, saw the price of household natural gas rise from 2.10 yuan per cubic meter to 2.60 yuan at the end of last year.

The price adjustment is based on the NDRC natural gas pricing mechanism launched at the end of 2005, according to which the benchmark factory prices of natural gas will change each year in line with the prices of other resources like petroleum, with a maximum year-on-year adjustment of eight percent.

The NDRC said a long-term goal in China's price reform in the natural gas sector is to have a complete market-oriented price mechanism.

NDRC sources said a draft for resource pricing reform has been passed.

The new pricing mechanism for resources such as oil, natural gas, coal, power, water and land should reflect two factors -- resource rarity and the cost of environmental pollution, accordingto the NDRC.

Local suggestions are being solicited for the draft which will soon be submitted to the State Council.

NDRC estimates show that China's demand for natural gas will rise to 100 billion cubic meters in 2010. The country's natural gas output was 50 billion cubic meters in 2005.

(Xinhua News Agency January 6, 2007)