Proceedings of the 2012 9th International Pipeline Conference IPC2012 September 24-28, 2012, Calgary, Alberta, Canada

IPC2012-90090
RESEARCH ON PRICING FORMULATION METHOD FOR LONG DISTANCE NATURAL GAS PIPELINE NETWORK TRANSPORTING
Xiaoyu Li PetroChina Pipeline Company Langfang, Hebei, PR China Chengwen Qian PetroChina Pipeline Company Langfang, Hebei, PR China Qiang Xu PetroChina Pipeline Company Langfang, Hebei, PR China Jing Jin PetroChina Pipeline Company Langfang, Hebei, PR China Minghua Zhao PetroChina Pipeline Company Langfang, Hebei, PR China Jingjun Xi PetroChina Pipeline Company Langfang, Hebei, PR China

ABSTRACT With the completion of the second line project of WestEast Gas Transmission in 2011, the third line of West-East Gas Transmission will be started soon and the fourth line and the fifth line will be started in recent five years. China will form one of the largest natural gas pipeline network in the world. The gas supply mode will be changed from single gas source and singlepipeline supply to multi-source and multi-pipeline supply through regulation and coordination, which will impact on existing pricing mechanism and operation mode of Chinese natural gas industry violently. Depending on the development trend of natural gas pipeline network, the regionalization management mode of natural gas pipeline will be implemented gradually. Chinese natural gas industry also needs to develop a new-type market-oriented operation mode with clear interfaces between production, transportation, distribution and customers so as to facilitate the optimal allocation of resources. By the customized scientific research of CNPC(China National Petroleum Corporation), combining with existing pricing mechanism of natural gas pipeline and economic characteristics of long-distance natural gas pipeline transportation in China, the paper studied the pricing mechanism problem of combined transportation of multi-source and mutli-pipeline gas supply in the regionalization management mechanism, presented the idea of pricing formulation method of two kinds of pipeline network transportation based on standard rates of pipeline transportation and service cost rules, formed pricing formulation system of natural gas pipeline transportation, introduced the design idea, structural construction, distribution method and key points of natural gas pipeline transportation in details, and demonstrated the methods by example calculation. The methods presented in the paper can meet the pricing requirements of natural gas pipeline network transportation, remedy the defect in existing

price accounting mechanism, solve the problem that the income and expenses among different interest bodies are not balanced, and facilitate the rapid development of natural gas pipeline business.

INTRODUCTION CNPC has already built some branch lines successively around the main lines of West-East Gas Transmission and realized the network among the four major gas zones which are Tarim, Changqing, Chuanyu and Qaidam. Because the rate of natural gas among energy sources has been increased largely in the 12th five-year plan and the nation is pushing the pipeline construction of natural gas energetically. The third line of WestEast Gas Transmission will be started soon and the fourth and the fifth line will be started in five years. When the strategic channels of natural gas are built completely and linked with internal pipeline network, China will own one of the largest natural gas networks in the world, which needs a new-type pricing system to adapt the development of natural gas industry[1]. Though the existing pricing method of natural gas transportation which is based on Minimal acceptable rate of return has its rationality, the problems accompanying with it are also very clear. The major one is one project one price. That is to say, there is the phenomenon of different prices in the same natural gas pipeline transportation network which causes a series of troubles that the price of natural gas from different gas source to the same market need be balanced and the price of natural gas from the same source to the same market also need be balanced. Such phenomenon also increased the nations supervision cost and decreased its supervision efficiency. In many cases, the government and the enterprise will spend large manpower and

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material resources on demonstration for getting real reliable cost data and price level. Meanwhile, it also increased the transaction cost between enterprises. Both sides of supply and demand will negotiate and transact such problems over and over again, which will increase the enterprises operation cost undoubtedly. Therefore, the expert of this industry points out: the most outstanding problem of existing price in natural gas industry is how to price in the network of natural gas supply system[2].

F=

(CO R
t =1 n

S v W ) t (1 + ic ) t
t t c

Q (1 + i )
t =1

1.Price management in China

Nation will adopt such price management method as old line old price, new line new price for natural gas pipeline. 1.1 Old line old price, adopting the uniform freight rate The transportation price of such pipeline that was built by state appropriation before implementing the policy of Changing appropriation to loan in 1984 was fixed by the nation. Such pipeline adopted the nations uniform freight rate. With the development of oil industry and the increase of pipeline transportation cost, the enterprise faced losses. So the transportation price was adjusted three times in 1991, 1997 and 2010 respectively. The transportation price after the adjustment in 2010 is listed in Table 1. Table1.Price of natural gas pipeline transportation adopting nations uniform transportation price
Transportation distance (km) Charge standard (Yuanm-2)

In which: F: pipeline transportation price of the project; CO: cash flow; Rb: subsidy income; Sv: reclaimed residue value of fixed assets; W: reclaimed current funds; Qt: quantity of pipeline transportation at the t year; ic: basic return rate of the project (=IRR); n: calculation period of the project; t: year. According to the nations requirements, the pipeline transportation price is calculated by adopting the agreed condition that the after-tax internal return rate (before financing) is 12%. If the transportation quantity or cost changes during operation, the level of pipeline transportation price will also change to certain extent. The biggest problem of project economy evaluation method is that the method is only suitable to price the single pipeline project, not to the whole pipeline network. Because all pipelines composing the whole pipeline network were produced in different years, the time of each pipeline project to discard and withdraw operation was also different. If the project economy evaluation method is adopted to adjust the price of pipeline transportation, it is difficult to confirm the beginning, the ending, and the calculation period of discounted cash flow of the pipeline network. Such mode of different prices with different pipelines in the same pipeline network confused the pricing mechanism of pipeline network. According to the life cycle theory of natural gas pipeline industry development, the existing mechanism cannot meet the requirements of developing the industry. Comparing the two transportation price level, if both the old lines and the new lines obey the principle of cost compensation, rational return, benefit for market sales and giving attention to customers bearing ability, the price of old lines should be higher than the new lines. Otherwise the enterprise operating the old lines cannot be out of the loop cost increasing----enterprise losing----applying for adjusting the price----cost increasing again----enterprise losing again---applying for adjusting the price again. Therefore, such status of new and old coexisting is the result of economic system reform which should be a kind of transition policy not long-term policy[3].

under 50 0.116 0.121 51100 0.127 101200 0.138 201250 0.143 251300 0.148 301350 0.154 351400 0.159 401450 0.165 451500 From the table we can find out the natural gas charge standard which adopts nations uniform transportation price presents the feature of railway transportation price: the transportation price increases with transportation distance, but the freight rate decreases with transportation distance. 1.2New line new price, one line one price After 1984, the pipeline of new line new price adopted project economy evaluation method to measure the level of pipeline transportation price. The method is confirmed by the analysis of discounted cash flow and calculated by compiling the chart of cash flow for all project funds on the basis of the project market study and technological research. The pipeline transportation price is taken the assured after-tax internal return rate before project financing obtained by the project as goal to calculate. During the evaluation, the pipeline transportation price will not change basically. The formula is:

2.Basic principle of solving pricing problem of natural gas pipeline network

One of obvious features of gas supply of natural gas

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pipeline network is that the interest body in the pipeline network commonly thinks the price owning the basic function of compensating the cost. The common understanding is that transportation cost is the important basis of deciding transportation price. In order to meet the demand of business development, it should take efficiency, income, justness, society and stability as goal to set pipeline network price. There are some principles for realizing such goal: 1. The freight rate is calculated with distance. The farther, the more is fair. There are two major elements of influencing pipeline transportation cost by the distance: (1)The construction investment of natural gas pipeline is proportional to the length of the pipeline. The investment estimate of pipeline with same caliber always depends on the construction investment quota per kilometer. The total investment of each pipeline will increase with the increase of pipeline length. The longer the transportation distance is, the more investment on such infrastructures as pipelines, compressor stations and construction is, and the larger base used for price calculation is. (2)The operation cost of natural gas pipeline transportation will increase with the increase of pipeline length. It is adopted historical data to deduce a formula for explaining the relationship between pipeline transportation cost and pipeline length, investment and transportation capacity. According to the formula, the management cost of pipeline transportation will increase with the increase of transportation distance in the cases of same pipe caliber and same transportation quantity. With large span of dispensing natural gas resources in China, for the nations transportation pipeline network, the cross subsidization between customers is only applied in the region taken the province as a unit so as to realize the relative justice. In order to realize the optimization of resource distribution, the pipeline transportation rate is rational according to the division of distance. 2. It is unfair for the different investment main bodies with same function to obtain different profit only because of operating different pipeline. The natural gas pipeline network is an integrated pressure system. The services provided by different pipeline companies for the pipeline network are also different. So, there is the access service similar to railway network between pipeline companies in the pipeline network, such as the upper providing gas pressure for the lower and the lower providing storage capability for the upper. Especially in pushing regionalization management, it is more obvious in the partition management of the whole pipeline network. Therefore, as a collective of cooperation and profit distribution, the pipeline transportation pricing must compensate the function service. 3.The index has no change between customers with

balanced gas and customers with unbalanced gas, which is unfair to pay according to a same rate. The gas demand has obvious change seasonally. In order to discharge pipeline transportation capacity, improve the utilization rate of the pipelines, mitigate the pressure of seasonal peak-load regulation of natural gas, and reduce the investment risk of pipeline companies, customers with balanced gas must be separated from the customers with unbalanced gas by different rate according to the idea of foreign two-part system[4][5].

3.Method of solving the problem of natural gas pipeline network pricing

In order to solve the problem of pricing pipeline network, the pipeline transportation price of every gas source must be set according to the distance from the gas source to all available market. Customers should pay the pipeline transportation price of the gas source they choose in their market, and then the transportation price list of pipeline network comes into being. The transportation price cannot be set according to the principle of one line one price in the project economy evaluation. The following introduces two calculation methods. 3.1 No 1: Standard pipeline transportation rate according to pipeline caliber The whole pipeline network adopts uniform standard freight rate, that is, what the freight rate will be of transporting one-thousand-cubic-meter gas 1km by pipeline. The pricing mode in the transportation system of Russian Gazprom for charging the pipeline transportation fee from independent producers is also similar. When the standard transportation rate is set, even in the complicated pipeline network, it is easy to calculate the pipeline transportation price for every gas source in every available market. The larger the pipeline caliber is, the lower transportation cost will be occurred for transporting onethousand-cubic-meter gas 1km in the pipeline. So the pipeline transportation rate standard can be set according to the pipelines caliber which need not be divided too minute but several pipeline caliber ranges. In concrete operation, combining with our countrys real condition, the standard transportation rate can be set according to the approved pipeline transportation price for the pipelines with one line one price, new line new price so as to obtain the standard transportation rate for the pipeline with different calibers. Taken the existing main pipeline network as the example to calculate, the existing transportation price for single line is listed in table 2 and the transportation price with standard transportation rate is listed in table 3.

Table 2. Freights per one hundred kilometers and correlative average values for the pipelines in West-East Gas Transmission, Zhong-Wu Line and Shan-Jing Line
Pipeline Design Approved average Annual receivable Turnover volume Freight per one

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transportation capacity (108m3)

transportation price in China (Yuan/m3) 0.79 0.45 0.42

pipeline transportation income (108Yuan 94.8 13.5 65.52 173.82

(108m3km)

hundred kilometers (/m3) 0.021 0.061 0.054 0.029

West-East Gas Transmission Zhong-Wu Line Shan-Jing Line

Total/average

120 30 156 306

447374 22314 120744 590432

Table 3. Freight to customer calculated by the standard freight rate (taken Lunnan Gas Station as example)
Pipeline Start and end points Transportation distance(km) 3009 3579 3654 3894 865 719 857 Freight per one hundred kilometers (Yuan/m3) 0.029 0.029 0.029 0.029 0.029 0.029 0.029 Freight according to the uniform standard freight rate (Yuan/m3) 0.89 1.05 1.08 1.15 0.25 0.21 0.25 Existing price (Yuan/m3) 0.66 0.75 0.79 0.84 0.45 0.40 0.49

Lunnan-Zhengzhou

West-East Gas Transmission

Lunnan-Hefei Lunnan-Nanjing Lunnan-Shanghai

Zhong-Wu Line Shan-Jing Line

Jingbian-Beijing Zhongxian-Wuhan Zhongxian-Changsha

At this period, there will be some problems for adopting the uniform standard pricing mode: 1) The price for short-distance customers is too low and for long-distance ones too high, which is a very normal phenomenon in transportation industry that can meet the pipeline network pricing principle 1 but not the inherent idea and custom in the society. 2) There will be such phenomenon that different interest bodies obtain different incomes for owning different pipeline segments. The standard freight rate takes the transportation distance as the only principle for judging freight, that is, all pipeline segments are indiscrimination in the pipeline network, which will make the profits of some operation units too high and some too low. So the payments of companies in different regions will not be balanced. It is noteworthy that the income difference can be regulated in the interior when all pipelines are belonged to one parent company. But the investment parties of Chinese (and many other countries) natural gas pipeline network are diversified, for example, the investment parties of Shan-Jing Line include China Petrol (60% of shares) and Beijing City (40% of shares), which will influence on the enterprises incomes and joint relationship directly[6]. 3.2 Basic freight rate of natural gas pipeline network based on service cost principle, and regional rate mode of one region, one price

3.2.1 Confirm the annual total cost of the whole pipeline network It needs the service cost principle as the basic method for charging pipeline transportation rate to confirm the cost demand of the pipeline network. The structure of total service cost of pipeline is listed in figure 1, including cost of operation and maintenance, depreciation, cost of loss and amortization, income tax and rate-paying, and rational return for investors.

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Fig1.Structure of total pipeline service cost and educement According to the cost attribute, the most part of the operation and maintenance cost can be taken as variable cost, and such outlay as common management in operation and maintenance cost can be divided as fixed cost which is not related to the transportation distance. Except the operation and maintenance cost in the total service cost, other costs can be divided as fixed cost related to transportation distance which is calculated on the basis of fixed asset investment. 3.2.2 Confirm the transportation service turnover and network turnover provide for all market regions by pipeline network The first is to calculate the transportation distance from every gas source to every market region, and then to calculate the ratio of every gas source received by every market region to its total demand, at last to calculate the weighted average distance from the market region to every gas source which is the average transportation distance in this market region. The turnover of every market region is divided as demand turnover and commodity turnover. The demand turnover of every market region is equal to multiply its daily largest demand by its average transportation distance. And the commodity turnover is equal to multiply the average actual consumption by its average transportation distance. The total demand turnover and commodity turnover of the whole pipeline network can be obtained by add the above up. 3.2.3 Distribute the annual total service cost of the pipeline network to every market region 1Determine the cost distribution coefficient related to transportation distance of every market region. Only the cost related to transportation distance can be distributed by the turnover calculation method. Demand cost distribution coefficient related to transportation distance of every market region = demand turnover of the market region/total demand turnover. Commodity cost distribution coefficient related to transportation distance of every market region = commodity turnover of the market region/total demand turnover. 2 Determine the cost undertaken by every market region related to transportation distance. Demand cost related to transportation distance of every market region = demand cost distribution coefficient related to transportation distance of the market region total demand cost related to transportation distance. Demand cost of every market region = commodity cost distribution coefficient of every market region total commodity cost. 3Determine the demand cost which is not related to transportation distance undertaken by every market region.

Demand cost with no relationship with transportation distance undertaken by every market region = demand cost distribution coefficient with no relationship with transportation distance of every market region total demand cost with no relationship with transportation distance. In which, the demand cost distribution coefficient with no relationship with transportation distance of every market region = the largest daily demand of the market region/the sum of all market regions largest daily demands. 4Determine the total cost undertaken by every market region. Total cost undertaken by every market region = demand cost undertaken by every market region + commodity cost. In which, the demand cost undertaken by every market region = demand cost with no relationship with transportation distance + demand cost related to transportation distance 3.2.4 Cost distribution of every market region between different service types The demand cost and commodity cost distributed to every market region will be distributed between different service types of the market region. In order to meet the demand of different customers, the pipeline company should design different service types for choosing by customers with different demand. The fixed transportation service and the interruptible service are two basic kinds of transportation service. According to the largest demand stated in contracts and the daily actual consumption, the demand rate will be distributed between the former and the latter, and the commodity rate will be divided according to the annual actual consumption. At last: The single price of pipeline transportation from one gas source to the designated market region = every single rate of the market region distribution coefficient of gas source. In which: distribution coefficient of gas source = the pipeline transportation distance of the gas source to this market region/ (the gas supply ratio of the source in the market region the sum of pipeline transportation distance of the gas source to this market region).

4.Examples for calculating pipeline transportation price of natural gas pipeline network
Figure2 is the transportation system chart of one natural gas pipeline network which owns two pipeline companies and three gas sources of A, B, and C. According to the resources allocation plan, the gas supply ratios of gas source A and B in market region a are 40% and 60% separately, and the gas supply ratios of gas source A, Band C in market region b and c are 30%, 45%, and 25% separately.

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Fig2. Transportation system of one pipeline network Now according to the service cost principle, the belongs to commodity cost. The total service information of transportation price can be determined by adopting peak supposed pipeline network is displayed in Table 4. The daily responsibility method in the pipeline network. All fixed cost consumption and the actual consumption are listed in table 5. belongs to demand cost completely. Only the variable cost Table 4. Information for total service cost of pipeline network
Pipeline companies Demand cost (104Yuan) Fixed cost with relationship Fixed cost with no with distance relationship with distance Product cost (104 Yuan)

Pipeline Company Pipeline Company

46013 32121

5032 4669

2307 2066

Table 5.Gas demand and consumption in all markets of the pipeline network
Largest daily demand /m3 Market regions Fixed service Interruptible service Actual annual consumption /m3 Fixed service Interruptible service Total

Total

Market region a Market region b Market region c

245 163 408

28 15 15

273 178 423

68985 48545 137970

10220 5536 5536

79205 54081 143506

According to the steps in 3.2.3 and 3.2.4, the total annual service cost of the pipeline network is distributed to every market region, so the cost of every demand is the cost
Distribution coefficient of demand cost (%) With With no transportation transportation distance distance 31.24 20.37 48.40 21.54 20.15 58.31

distributed in every market, and the results are listed in Table6 and Table 7.

Figure 6.Service cost undertaken by every market region

Market regions Distribution sum of demand cost (104 Yuan) With With no transportation transportation distance distance 3030 1976 4695 14742 13788 39903 Total demand cost (104 Yuan) 17772.53 15763.27 44598.20 Distribution coefficient in the demand cost. (%) 19.44 19.04 61.52 Distribution number of commodity cost (104Yuan) 850.05 832.52 2690.43

Market region a Market region b Market regions c

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Tabel 7. Cost of different service types in every market service

Market regions Distribution coefficient of demand cost (%) Fixed Interruptible service service FTS ITS Distribution sum of demand cost (104 Yuan) Fixed Interruptible service service FTS ITS Distribution coefficient of commodity cost (%) Fixed Interruptible service service FTS ITS Distribution sum of commodity cost (104 Yuan) Fixed Interruptible service service FTS ITS

Market region a Market region b Market regions c

89.74 91.57 96.45

10.26 8.43 3.55

15950 14435 43017

1823 1328 1581

87.10 89.76 96.14

12.90 10.24 9.00

740 747 2587

110 85 104

According to the data in table 7 and table 5, the service every gas source can be obtained in approved market region. charge of every market region can be calculated. And with With the above, the transportation price list of pipeline network calculating the distribution coefficient of every gas source in can be summed (Table 8 and Table 9). different market region, the pipeline transportation price of Table 8. Price list of fixed transportation service (FTS) in pipeline network
Charge for daily demand Market regions Market region a Market region b Market regions c Gas A source (Yuanm ) Gas source B 0.155 0.207 0.250 0.212 0.286
-3

Charge for commodity source Gas A source (Yuanm-3) Gas source B 0.009 0.013 0.016 0.013 0.018 Gas C source

Gas C

0.168 0.254 0.317

0.010 0.016 0.020

Table 9. Price list of interruptible transportation service (ITS) in pipeline network

Maximum rate Market regions Market region a Market region b Market regions c Gas source A 0.198 0.292 0.346 (Yuanm ) Gas source B 0.183 0.238 0.273
-3

Minimum rate Gas source C 0.244 0.312 Gas source A 0.011 0.018 0.021 (Yuanm-3) Gas source B 0.010 0.014 0.017 Gas source C 0.015 0.019

5.Conclusion
The pricing of natural gas pipeline network is more complicated than refined oil. There are many problems to be solved. So we must consider enterprises product cost of and customers demand and bearing capacity on the whole. The research is based on the existing pricing mechanism of natural gas pipeline in our country to develop. Referring to international experience and ideology, basing on the features of Chinese natural gas pipeline industry development at the present stage,

taking the pricing principle of efficiency, income, equity, society and stability as the goal, the research can meet the requirements of rational resources distribution and determine the transportation pricing of natural gas pipeline network according to the principle of changing one line, one price to one region, one price (provinces or regions), which can adapt to the development tendency of gas supply in natural gas pipeline network better and ensure to obtain rational investment return of natural gas pipeline construction project so as to accelerate the construction and development of natural gas pipeline.
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ACKNOWLEDGMENTS The acknowledgement is extended to China National Petroleum Corporation for funding support.Funding number is Kexin Zhuan 2011-2. REFERENCES: [1] Guoliang Wang. Research and practice of natural gas pricing [M]. Beijing, Petroleum Industry Press, 2007300-301. [2] Xiucheng Dong, Jinhui Tong, Junchen Li. Brief analysis of Chinese natural gas price reform [J]. Sino Global Energy, 2010(15)6-10. [3] Qi Zhang. Research on transportation price of oil and gas pipelines [M]. Beijing, Chinese Market Press, 2010:48-98. [4] Research group of West-East Gas Transmission. Transportation pricing method of natural gas pipeline in U.S.[M]. Beijing, Petroleum Industry Press, 2002: 8-11; [5] Xiaoyu Li, Shuqing Yu, et al. Study on Predition Method of Energy Consumption in Crude Oil Pipelines [J]. Oil & gas storage and transportation. 2009, 28 (6):64-68. [6] Dinghao, He Songbiao. Research on pricing of natural gas pipeline transportation [J], Oil and gas storage and transportation, 2005,24(1):15-17;

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