Natural Gas Price Reforms and Technology Revolution

Just after the National Development and Reform Commission (NDRC) denying rumors that “China would increase natural gas prices significantly”, cities of Changchun and Handan have raised the natural gas price. As is reported, the public hearings on natural gas price will be held in cities of Suzhou and Tianjin etc. According to the law that “there will be a rise in prices whenever there is a public hearing”, there are great natural gas price hikes expectation in the two cities.

Why should the price of natural gas go up? The official explanation is that the retail price for end users is even lower than the ex-factory price. As an example, in the first three quarters of 2012, the average CIF Helgas Port(in Xinjiang province) price was 2.48 yuan/cubic meter, but the domestic ex-factory price of natural gas was only 1.1 yuan/cubic meter, and for each cubic meter, the loss was over 1 yuan.

In such situation, the more gas production, the more losses. If the natural gas price is not adjusted, then at last it would lead to no gas production any more. However, that's not the whole story. Only part of natural gases is imported from Central Asia, and more are produced in China. So even under the current gas price, there is no loss of natural gas companies listed on Shanghai Stock Exchange.

Besides the excuse of companies’ suffering loss under current price, there are still other statements calling for natural gas price hikes. Some experts urged the government to make the natural gas pricing mechanism more market-driven. Therefore, it is necessary to adjust the price.

But when natural gas prices rise in China, at the same time, we find that the natural gas price in the U.S. is much lower than China. Up to March 22, the Nymex natural gas futures price that is delivered in April has reached to $4 per MMBtu (million British thermal unit), creating a new peak for 18 months. This price is about 0.83 yuan per cubic meter at the exchange rates of 6.21(one dollar exchanging 6.21 yuan). Even the natural gas price in China remains the same of 2.5 yuan per cubic meter, it is still three times that of in U.S.

Why the natural gas in U.S. is so cheap? Is it because that the U.S. has changed the type of pricing of natural gas? No, the going down of natural gas price is a matter of the recent two or three years, and the important reason lies in the technical progress —— it is the fracking technology that makes the shale gas in the U.S. been developed on a large scale. In 2009, the U.S. even surpassed Russia and became the largest natural gas producing country in the world. In 2000, the output of the shale gas in the U.S. was almost zero, and now the natural gas production extracted from shale has occupied to around thirty percent of the total quantity of natural gas. The abundant shale gas supply has made the gas price of the U.S. sharply drop from $9 per MMBtu in 2005 to the current $4.

What is more interesting is, Mitchell Energy & Development Corp. that develops the shale gas is not the tycoon but a new recruit in this energy industry ——Michelle, the founder of the company, changes his profession from real estate industry. Just because of the insistence of the little known company for nearly twenty years, the large-scale development of the shale gas has been realized. What is more interesting, according to the media report, in the 1980s when Michelle began to develop the shale gas, there was a Chinese institution that paid attention paid to it —— experts from Daqing Petroleum Administration Bureau once visited the company.

However, it seems that Daqing Petroleum has no interests in shale gas after the visit, why? In my view, Daqing Petroleum as a petroleum enterprise has no motive to produce cheaper energy products—— who is willing to dig his own grave? From this sense, we may understand why the shale gas was not exploited by traditional energy tycoons.

In fact, any invention of a new technology is not generated by traditional tycoons. Taking the transportation industry as an example, a train is not invented by a cart driver, a car is not invented by a railway company, and an air plane is not invented by a car company. An inventor of a new technology is always from someone outside of an industry. They are just like bulls in a china shop, breaking the old game rules, and producing products with better price/performance ratio for consumers to use.

In this sense, for solving China’s natural gas supply problem, I’m afraid we can’t rely on the reform of price mechanism, but need the technical revolution from the outsider like Mitchell Energy & Development Corp.

Originally published on Southern Metropolis Daily | 2013-4-11