The economic impact of price controls on China's natural gas supply chain

Despite significant progress made by China in liberalizing its natural gas market, certain key areas such as market access and pricing mechanisms remain controlled by the government. To assess how such distortions impact the market, we have developed a Mixed Complementarity Problem model of China's natural gas industry, with a novel representation of price caps associated with supply obligations. The model is used to assess how government pricing policies and restricted third party access to midstream infrastructure impacted the supply logistics of China's profit maximizing natural gas firms in the year 2015. We find that lifting the price caps for regulated natural gas demand sectors could yield a 4.7% (1.4 billion USD) reduction in total system cost and reduce the national average of marginal supply costs by 14%. Improving third party access to the pipeline and regasification infrastructure would result in an additive total cost saving of 7.6% (2.2 billion USD) and a 16% reduction in average prices, due to replacing domestic and imported LNG with pipeline imports. The LNG industry would be negatively affected by the reforms investigated in this study, as market players would gain more flexibility in their logistics and would utilize lower cost supply pathways. •We develop a Mixed Complementarity Problem model to assess how price caps impact China's natural gas supply industry.•Price caps on pipelines incentivize suppliers to sell unregulated LNG, raising average marginal supply costs by 14% in 2015.•Lifting price caps reduces system costs by 4.7% in 2015 driven by a reduction in LNG production, imports and transportation.•China could benefit from a more integrated gas market, including better third party access to midstream infrastructure.•Lifting price caps on pipelines could have a negative impact on domestic liquefaction, LNG imports and transportation.