Far East Energy Welcomes Gas Pricing Reform in China

Far East Energy Corporation, the U.S. listed coalbed methane company operating the Shouyang PSC in Shanxi Province, People’s Republic of China, welcomes the long-awaited reforms to China’s gas pricing structure.

The National Development and Reform Commission (“NDRC”), China’s top policy-making body, has announced that, effective July 10, 2013, city gate gas prices will increase by an average of 15% across the country. These increases will be borne by the industrial and other sectors and will flow to upstream producers such as Far East, with analysts projecting that this will translate into an increase of approximately 25% at the wellhead.

Importantly, the NDRC is introducing a two-tier pricing structure that will base new, incremental, gas supply on the pricing formula that has already been tested in provinces such as Guangdong. The formula links domestic China gas prices to LPG and fuel oil prices, which has resulted in gas prices of approximately $14/Mscf in the provinces where the formula is in operation.

Commenting, CEO Mike McElwrath said, “Far East is currently receiving $6.50/Mscf for gas sales, from our Shouyang Block for the first 10.6 MMscf produced (inclusive of subsidies). We expect volumes going forward to be sold at increasingly higher prices as the new pricing formula takes effect.”

These reforms apply to city gate pricing, but analysis in the market indicate that the 15% increase in city gate prices should equate to a near 25% increase in well-head prices. This should provide a clear incentive for increased exploration and production of China’s domestic gas resources, as opposed to the more expensive options of importing LNG and/or piping gas into China.

McElwrath continued, “The changes to China’s gas price policy underline the determination by the country’s leadership that gas play a major role in the country’s energy mix moving forward. Higher gas prices are needed to stimulate more domestic production and compensate for high LNG import prices and the move to link gas prices to oil based fuels recognizes that gas is a clean alternative to LPG and fuel oil.”

Note that CBM prices are not regulated by the NDRC and are subject to independent negotiation between producers and buyers. However, recent history has shown that CBM price levels reflect national trends and management expects that future gas sales contracts would be made at prices above current realizations.