New hopes of pricing reform for oil and gas (2)

Removing threshold

The current pricing mechanism, introduced in late 2008, allows the government to adjust fuel prices when the 22-day moving average of a basket of global crude benchmarks moves more than 4 percent. A new mechanism is expected to remove the 4 percent threshold and shorten the 22-working day adjustment period to 10 working days, according to analysts and industry officials.

For PetroChina, 2012 started off with promise. An increase in the windfall tax threshold and a gas pricing pilot project implemented in two southern provinces gave it a boost in the first week.

But the pace of reform, which tried to link gas prices to crude derivatives, turned out to be slower than the market anticipated because of widespread repercussions for the economy.

At the same time, domestic demand for imported gas kept rising and losses at energy companies kept mounting.

Imports may account for 35 percent of China's natural gas supplies by 2015, up from 15 percent in 2010, the National Energy Administration said earlier this month. The government is encouraging the use of gas as part of a campaign to reduce pollution from coal burning and ease reliance on oil imports.

Under the pilot pricing project launched in Guangdong and Guangxi provinces, gas prices are linked to those of imported fuel oil used for power generation and liquefied petroleum gas used for cooking. Natural gas is increasingly replacing both fuels in China.

The reforms aim to phase out a pricing system largely based on domestic production costs. The old system doesn't reflect increasingly diversified gas supply sources and the commissioning of new pipelines. More importantly, it makes importing gas a losing proposition.

Price reforms will have major implications not only for gas importers, led by PetroChina, but also for the affordability and industrial competitiveness of related sectors.

Neil Beveridge, an analyst at Sanford C. Bernstein & Co, said change will take longer and be more gradual than the market expects but it should occur this year.

Credit Suisse said it's a race between additional provinces being added to the gas price trial formula and the increasing volume of imports by PetroChina, which is set to take new supplies from Myanmar via a pipeline.