What is the price of natural gas in China - What this week's auctions tell us.

China's natural gas consumption is up over 17% this year. Domestic production is only up slightly and pipeline imports have not increased dramatically. So, this translates to almost 40% increases in LNG imports. The dramatic increases in demand lead by a government determined to make positive changes in the environment are coming at the same time that China has decided to liberalize the gas market.

This week marked the first natural gas auctions on the Shanghai Energy Exchange. The auctions were for CNPC volumes. CNPC announced that they would auction 1 day of service last week and Tuesday's auction saw active participation for Wednesday volume.

The end price was capped at, and hit, 2.50 RMB per SCM, Shanghai basis. This price is above the recently mandated citygate price of 2.08 RMB per SCM.

So, what does this mean? Well, that is not so clear.

The rules of the auction almost guaranteed the result. CNPC established certain limits and conditions for volumes not purchased through the auction to drive customer demand.

There will be no gas shortages for any of the customers, but the auction opened a very interesting question. What is the real price of gas?

If we look at the international price for spot LNG, about USD 6.27 per MMBTU, then we can estimate a truck delivered price of approximately 2.20 RMB/SCM for these utilities. Of course, getting product from offshore to a truck to the utility would take 30 days or more. This suggests that the pricing was based more on panic and lack of planning than a true market.

The very exciting news is that the exchange, and the SOEs are moving toward a market based solution. Over the next couple of years (months/weeks????) we will witness the same market transformation that occurred in the US and Europe.