IEA Study Highlights Challenges Facing Chinas Developing Gas Market; Calls for a Coherent National Energy Policy

(Beijing) — 9 December 2002

China must enact strong policy drivers to achieve its goals for gas market development, according to a major new study by the International Energy Agency, "Developing China's Gas Market: The Energy Policy Challenges" released in Beijing today. "The challenges of developing a gas market in China are not confined to the gas sector. They concern a much larger number of actors and require policies that affect the national energy economy as a whole," said Ambassador William Ramsay, Deputy Executive Director of the IEA who launched the study.

During the second half of 2002, China signed three multi-billion dollar deals to build the 4,000 km "West-East Gas Pipeline" and to source the liquefied natural gas (LNG) supply for both Guangdong and Fujian provinces in the south east. Despite these impressive deals, which clearly demonstrate China's desire to develop its natural gas market, significant challenges lie ahead.

The report portrays China's economic, energy and environmental context and examines key issues related to its gas market development. Based on a thorough evaluation of the current situation and drawing on international precedents, it formulates a set of policy recommendations for consideration by the Chinese government. "The IEA report is very timely," said Mr. Xu Dingming, Director-General of the Industrial Development Department of China's State Development Planning Commission (SDPC), the IEA's counterpart in its co-operative activities with China. "This year is symbolic of our determination to develop China's natural gas market. The IEA report draws our attention to a large number of issues and provides some really insightful recommendations", added Mr. Xu, who is also the Office Director of the Leading Group of the country's West-East Gas Pipeline project.

According to the IEA, the major challenges that face the Chinese government and all gas market participants are the timely development of a downstream gas market, the improvement of local gas distribution, reform of gas pricing policies and the timely introduction of competition, coupled with a considered degree of investment protection. The potentially conflicting interests of gas and non-gas fuels, among gas-market players, and within the energy sector as a whole need to be reconciled. The report calls upon the Chinese government to meet these complex challenges by developing a strong and coherent national energy policy for natural gas market development. It also suggests the establishment of a specialist energy department within China's central administration in recognition of the country's need for a co-ordinated energy policy.

The report qualifies China's strategy in developing its gas market as "supply-push" and draws attention to the need for development of the downstream gas market. "The key success factor is to secure paying consumers, otherwise you run the risk of transporting the gas a long way for nothing", cautioned Ambassador Ramsay. According to the IEA, reform of gas pricing and taxation policy is the best starting point.

The report identifies cheap and abundant domestic coal, as the main competitor to natural gas and calls for the increased use of economic instruments to internalise the benefits of gas. It regards local gas distribution as the weakest sector and points out the urgent need to upgrade the existing network for manufactured gas, improve the financial health of local gas distribution companies and introduce commercial marketing and management practices. The study suggests that the premium market for gas in China will be as a substitute for fuels that are responsible for localised pollution, and recommends the development of decentralised gas-fired power generation in Chinese cities.

The report recommends that China should encourage the development of a modern gas industry by establishing a number of indispensable elements such as technical and safety standards, by diversifying sources of finance - especially domestically - for gas infrastructure projects, and by increasing the scope for foreign investment in the gas distribution sector. It should also develop an enabling legal and regulatory framework for the gas industry and go beyond the current "project-by-project" approach to gas policy practices.

The IEA report was prepared under the terms of the 1996 Memorandum of Policy Understanding in the Field of Energy between the Agency and the Chinese government. It is the result of the collective efforts of IEA Secretariat staff, Member country experts, Chinese officials, companies and experts, and international oil and gas companies operating in China. "This is a milestone in our co-operation with China, as it demonstrates the level of maturity in the IEA's relationship with this growing international energy market player", said Robert Priddle, Executive Director of the IEA. "This is our independent assessment, not a joint report, but we are confident that the Chinese authorities will regard its recommendations as a useful contribution to the realisation of their commitment to develop China's gas market", Mr. Priddle added.

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