The government has decided to phase out its current practice of pricing natural gas, with an aim to form a market-oriented price mechanism in the sector.

Pressured by top oil and gas producers PetroChina and Sinopec, the National Development and Reform Commission yesterday also decided to increase natural gas prices by an average of 5-15 per cent the biggest price adjustment since 1997 to make up for their production costs.

Starting next year, natural gas prices will be modified once every year, a spokesman said.

He admitted that the reform of the natural gas price has lagged behind price reforms for oil, liquefied natural gas, coal and electricity, which are more market-oriented with government supervision.

"In the long run, natural gas prices should also be decided by the market, not the government," said the spokesman. But he added that the government should introduce the reform gradually because State-owned PetroChina and Sinopec still dominate gas exploration, gas transportation and sales on the Chinese mainland.

The commission said that prices of gas used for industrial or urban utility would rise by 0.05 to 0.15 yuan (0.6-1.8 US cents) per cubic meter, while the price of gas used for fertilizer production would rise 0.05 to 0.10 yuan (0.6-1.2 US cents). The price increases were put into effect yesterday.

The spokesman ruled out the possibility of a large increase in urban family utility bills. A household that uses an average of 20 cubic meters of gas per month will pay only 3 yuan (37 US cents) more after the price lift, he said.

Since 1978 when China began its reform and opening-up drive, the government has begun decentralizing its pricing controls on commodities.

Currently, market-oriented price mechanisms exist in more than 90 per cent of commodities and services. However, the remaining 10 per cent of commodities that are essential for daily life and of national interest are priced under government guidance.

Natural gas is the only major commodity on the Chinese mainland that has its prices still partially controlled by the government.

PetroChina said last month that it plans to more than double its current gas production to 45 billion cubic meters by 2010, or 70 per cent of the country's total gas output.

The company has complained that government-set prices for natural gas have been discouraging investment in gas fields.

"The price hike is designed to encourage them to invest in natural gas exploration," said the government spokesman.

The production of natural gas is expected to rise by an average annual rate of 17 per cent between 2005 to 2010, while the annual demand growth rate is expected to increase 26 per cent during the same period.

Source: China Daily