In China, natural gas pipeline supplies delivered to the City Gate market and to petrochemical industries are subject to provincial price caps. Other segments of the market such as some large industrial consumers, unconventional gas supplies and LNG deliveries operate under a competitive pricing scheme. China’s large National Oil and gas Companies (NOC) are subject to contractual obligations to supply regulated market segments at prices not exceeding the caps set in each province. As rational profit maximizing agents, both the NOC’s and independent suppliers may be incentivized by the pricing policy to alter their strategies and supply decisions beyond the government enforced obligations. These may include switching pipeline deliveries with unregulated alternatives, such as LNG or unconventional gas, as a ways to reduce exposure to the price caps and lost revenues. They may also attempt to cross-subsidize market segments and rely on subsidies from the government. Such policy response mechanisms can have undesirable consequences, such as substantial price gaps between market segments, suboptimal supply logistics of the national gas market and increased total supply costs. Cross-subsidization schemes and price gaps have been identified as a major policy issue and reform objective for China (Aolin 2015, OES 2014, NDRC 2015, SIA 2015). Restricted Third Party Access (TPA) to midstream natural gas infrastructure can further exacerbate natural gas logistics. The TPA reform is also an ongoing topic of interest (Interfax 2017, Trusted Sources 2016), with a recent study investigating the value of an independent pipeline operator model versus TPA (Xu 2017). We analyse how price controls and restricted TPA impact the economics of natural gas supply and assess the potential benefits from their reform.
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