Sweeping reform in the pricing of China's natural gas industry is needed to achieve Beijing's goal of doubling the share of gas in China's total energy supply in 10 years, according to the International Energy Agency (IEA). It called on Beijing to gradually abandon uniform gas pricing and its strategy of using administrative means to develop the market, saying they were unlikely to produce a critical mass in gas demand. The comments were contained in a 370-page report recently released by the IEA. Gas accounts for about 3 per cent of China's total energy supply, compared with 70 per cent for coal and about 25 per cent for crude oil. As part of its effort to diversify the country's energy sources to enhance national energy security and increase the usage of cleaner fuels, Beijing has initiated large-scale natural gas delivery infrastructure projects, including the 4,000km West-to-East pipeline and re-gasification terminals receiving imported liquefied natural gas (LNG). To stimulate demand, Beijing has banned the use of coal in some areas and forced provincial authorities to buy gas from the West-to-East pipeline project. 'Such an administratively stimulated demand may be needed to give an initial push, but it is unlikely to produce a critical mass in gas demand,' the IEA said. Xavier Chen Xinhua, the IEA's China Programme manager and one of the report's authors, said: 'The current use of government quota allocation system for a major part of the gas market does not reflect changing market situations.' Beijing's adoption of the 'cost-plus' gas pricing policy (production cost plus a fixed profit margin) since 1997 to encourage production was not suitable for China, where gas reserves were limited and expensive, he added. China's proven gas reserves of about 1.5 trillion cubic metres account for less than 1 per cent of the world's total. China's state-stipulated well-head price of about US$12 per barrel of oil equivalent of gas (processing costs inclusive) was roughly equivalent to the destination price of Russian gas imported to Western Europe, Mr Chen said, adding it was partly due to Chinese gas fields' less favourable geological conditions. Beijing had set a guided selling price of 1.35 yuan (about HK$1.26) per cubic metre for gas to be piped to Shanghai via the US$18 billion PetroChina-led West-to-East pipeline project, some 50 per cent more expensive than European destination prices, officials of chemical giant BASF have said. 'The risk is that gas could be priced out of the market compared to alternative fuels,' Mr Chen said. He said Beijing should consider a 'net-back market-value' pricing approach for new gas projects, which starts with the replacement value of gas - using alternative fuels as benchmarks, and deduces the well-head price by deducting distribution costs from the replacement value. The approach would ensure competitiveness of gas and allow more competitive gas fields to be developed first.