Market reforms and dynamic price discovery in imported natural gas markets in China

Abstract

A series of policies has been implemented in China to liberalise natural gas markets which is known as the market reforms. The goals of the market reforms are basically to establish competitive natural gas markets with its gas hubs and increase natural gas consumption in the energy mix (NEA, 2014; Paltsev & Zhang, 2015). It is believed that natural gas markets have experienced multiple structural breaks with a series of the market reforms in the last decade, especially, in imported liquefied natural gas (LNG) and pipeline markets. Understanding gas market structure and identifying structural breaks in these markets provide stakeholders and policymakers with insights of the markets. This paper investigates these changes focusing on the dynamic interrelationship between imported LNG and pipeline prices using the price discovery framework.The pricing reforms encourage third parties to make use of infrastructure more efficiently and disintegrate major energy monopolies of the three National Oil Companies (Cornot-Gandolphe, 2019). The primary reason for the pricing reforms is to use more natural gas instead of oil and coal in order to mitigate air pollution and carbon emissions in China 1 (Zaretskaya, 2017). According to the 13th Five-Year Plan of China and the latest Energy Production and Consumption Revolution Strategy (2016-2030), Chinese administration wants to increase the share of natural gas consumption to 10% of energy mix by 2020 and 15% by 2030 from 6% in 2015 (Zaretskaya, 2017). As a result, natural gas demand in China has grown rapidly. China currently accounts for almost 40% of global growth of natural gas consumption (Dewar,