Nov. 10 (Bloomberg) -- China, the world’s second-largest energy user, must increase domestic natural gas prices to accommodate higher-priced supplies from Qatar and Central Asia, an analyst said.

Liquefied natural gas supplies from Qatar on multiyear contracts may cost 3.95 yuan per cubic meter, or about $16 per million British thermal units after regasification, at the city gate, about 58 percent higher than what households and businesses pay for the fuel in Shanghai, said Tony Regan, a consultant at Tri-Zen International Ltd.

“China will have to raise domestic prices shortly to make imports of Turkmenistan gas and LNG commercially viable,” Regan said in an interview in Singapore. “Such a move is very significant as it signals China is able to move closer to market pricing and in doing so it will stimulate the development of future supplies.”

The Asian nation raised gasoline, diesel and jet fuel prices for the first time in more than two months by as much as 8 percent today. The government, which controls fuel prices to keep inflation in check, hasn’t increased gas prices for about two years and any further delay will slow investments and profits at oil companies, Regan said.

China boosted the price of gas sold to industrial users by 33 percent in November 2007, increasing costs for Shanghai Gas Group Co., the city’s biggest distributor. The country last raised gas prices in December 2005. The government said then it will revise gas prices annually, within an 8 percent band, from the previous year’s level.

Gas Demand

Natural gas demand in China has grown at a compounded average annual rate of 20 percent over the past five years and the country has discovered more than 100 trillion cubic feet of gas deposits over the past decade, Bernstein Research said in a report in August. The country plans to double supplies by 2015, according to Liu Xiaoli, a researcher at the National Development and Reform Commission, in September.

“They may provide for more frequent price changes in future,” Regan said. City gas prices are typically adjusted once a year in most cities in China.

China may opt for a weighted average natural gas price, pooling cheaper existing domestic supplies and imported fuel, which will reduce the amount of increases for users, he said.

Xinjiang Gas

Supplies from the Xinjiang province through the first West- East pipeline cost about 1.82 yuan a cubic meter at the Shanghai city gate, excluding marketing margins and local transport costs, compared with the 2.5 yuan residential users pay in the city, Regan said.

The cleaner-burning fuel from Turkmenistan, which may start flowing by the end of this year through China’s second West-East gas pipeline, may cost about 3.75 yuan a cubic meter for Shanghai’s bulk users such as power plants, said Regan, who had worked for Royal Dutch Shell Plc’s gas business. Residential users may have to pay about 4.63 yuan per cubic meter for Qatari supplies to be profitable, he said.

The average “well head” price of gas excluding transport and other charges in China is $3.50 per million cubic feet, compared with imports of pipeline gas from Central Asia at $7.60 at the Chinese border and as high as $15 at oil parity for LNG supplies, Bernstein said in a report last month. Prices will increase by as much as 6 percent compounded annually over the next five years, it said.

Chinese companies have invested $30 billion over the past five years in developing pipeline infrastructure, including the two West-East pipelines, and Ordos-to-Beijing pipeline, Bernstein said in the August report. The Ordos Basin straddles China’s northern Shaanxi and Inner Mongolia provinces.

To contact the reporter on this story: Dinakar Sethuraman in Singapore at dinakar@bloomberg.net

Last Updated: November 10, 2009 02:40 EST