Developing a natural gas trading hub in China

Abstract

Natural gas demand is expected to grow rapidly in China in the coming decade with the policy target of increasing the natural gas contribution to the energy supply from less than 6% in 2014 to 10% in 2020. Ensuing the 2013 national pricing reform, China started to launch more fundamental market reform in the natural gas industry and proposed to set up a gas hub in Shanghai. At the same time, there are also heated discussions for Asia to set up a benchmark gas hub with the growing needs for gas-to-gas pricing. This study discusses how China can successfully develop the Shanghai benchmark hub with deep analysis of both the unique features of the China's gas market and the development of the successful hubs in the US and Europe. By identifying the critical physical and market conditions of a successful hub such as sufficient infrastructures, the open access to the network and a more competitive market structure, the study summarizes the key takeaways of the international experiences that are most relevant to China's current situation. Then the author proposes the detailed pathway for the development of the Shanghai gas hub. The preliminary proposal argues that the reform should first start from LNG by distributing the costs of the large take-or-pay contracts which were signed at high prices. Then more substantial reform should be implemented with setting up an Independent System Operator (ISO) in charge of the operation and the investment of pipelines, LNG terminals and other infrastructures, yet still leaving the ownership of the assets to the three big oil companies. Such unbundling should start from the national level with the conditions that big consumers should be permitted direct connection to the trunk pipelines. Additionally, a new mechanism incentivized the ISO to efficiently expand and connect the network should be designed.