Company officials say the reduction will not affect the 12 per cent return expected for the west-east project The mainland government has revised its pricing mechanism for the PetroChina-led west-east natural-gas pipeline, cutting the indicative average price by 1.55 per cent. State Development and Reform Commission deputy director Zhang Guobao said the revised average price of gas to be delivered by the US$5.2 billion, 3,900km pipeline was now 1.27 yuan (HK$1.18) per cubic metre, two fen lower than the previous guided price, according to Xinhua. He said the figure was based on a well-head price of 48 fen per cubic metre and an average pipeline transportation cost of 79 fen, with the actual cost varying by distance from the gas source. For residential customers, a transportation fee will also be charged by the local pipeline company on top of the city-gate price. Mr Zhang said a three-category pricing scheme would be adopted, with residential city-gate prices at between 1.16 yuan and 1.46 yuan per cubic metre, industrial prices at 1.12 yuan to 1.30 yuan and power plant charges at 1.10 to 1.20 yuan. Uncertainties on the outcome of the price negotiations and government policy with regard to the nascent gas industry are the main hurdles facing the pipeline project, which will compete against much cheaper coal as a fuel source. PetroChina is locked in negotiations with potential customers, with no final gas sales deals signed. China's largest independent power producer Huaneng Power International previously said gas prices above 90 fen would be too high for its planned gas-fired power plants. Three foreign consortia, led by Royal Dutch/Shell, ExxonMobil and Gazprom, have been bargaining with the oil and gas major for more than a year over the terms of an investment agreement. While each has agreed to take a 15 per cent stake in the project in a framework agreement, Shell reportedly said last month it would stick to its bargaining position on project returns, after PetroChina was quoted as saying it could complete the project without the foreign partners. A PetroChina spokesman said the company had not signed any final agreements, or any so-called 'take-or-pay' contracts, under which customers would have to pay for gas even if they did not take delivery. However, he added that the lower guided gas price would speed up contract conclusions. He also played down concerns that the lower price would hurt returns from the project, saying there was no change to the pipeline's 12 per cent rate of return and the 15 per cent return from the gas production segment of the project. Mr Zhang said future gas prices would be adjusted based on the five-year moving average of an energy price index. PetroChina's shares yesterday closed 2.85 per cent lower at HK$2.55.