Reform talk lifts shares of oil giants

PUBLISHED : Wednesday, 04 January, 2012, 12:00am
UPDATED : Wednesday, 04 January, 2012, 12:00am

Shares of the mainland's state-owned oil and gas producers rose yesterday on speculation that Beijing would launch a long-awaited reform of the domestic petrol pricing mechanism and that a trial gas-pricing reform in two southern provinces would be expanded.

While the reforms are expected to be gradual, analysts say they would represent key steps towards Beijing's eventual goal of letting energy prices be determined by market forces.

PetroChina rose 4.4 per cent to HK$10.1, while China Petroleum & Chemical (Sinopec) gained 5.5 per cent to HK$8.62.

The website of China National Radio on Sunday quoted an unnamed source as saying that Beijing is 'basically' set on a formula for fuel price reform, pending an opportune time to launch.

This would involve the shortening of the minimum number of days between price changes to 10 working days from the current 22 days, the report said. It would allow more timely adjustment and better reflect international market prices. The reform would also give oil refiners the freedom to price their products, subject to a maximum level calculated under the formula.

'We think it will be launched very soon, possibly before Chinese New Year,' said Simon Powell, head of regional oil and gas research for CLSA Asia-Pacific Markets.

If PetroChina and Sinopec, which provide over 80 per cent of the nation's motor fuel, are allowed to align the prices of their products to international levels, it would wipe tens of billions of yuan of annual refining losses off their books.

Sanford Bernstein analysts Neil Beveridge and Lou Ying forecast Sinopec, the world's third-largest oil refiner, would be able to make US$5 of refining profit per barrel should such a price reform go through.

The China National Radio report comes on the heels of an announcement by the National Development and Reform Commission last week that it would start a pilot gas price reform programme in Guangdong province and Guangxi Zhuang Autonomous Region to better peg domestic prices to international levels.

A maximum price of 2.74 yuan (HK$3.34) per cubic metre has been set as Guangdong's provincial-level wholesale price, and 2.57 yuan for Guangxi, which the commission said is slightly higher than the price of liquefied natural gas imported from Australia into Guangdong.

Mirae Assets Securities head of energy research Gordon Kwan expects the reform to spread to other coastal areas from June.

Pricing domestic selling prices at levels comparable to import prices is key to averting losses for importers. Domestic gas prices have for many years been set at substantial discounts to imports. With imports forecast to account for around a third of the nation's consumption by 2015, according to the Bernstein analysts, domestic prices have to go up to stem losses suffered by importers.

Previously, no provincial-level gate prices would be set. Instead, prices were set for cities along a major gas pipeline by calculating the sum of production and transmission costs plus return rate, as most cities are only served by one gas source.

15b yuan

PetroChina's losses, in yuan, on gas last year due to high import prices and low domestic prices, according to Sanford Bernstein estimates



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