True win-win situations are rare, so Chief Executive Donald Tsang Yam-kuen and Hong Kong and China Gas chairman Lee Shau-kee probably should savour the moment when they meet today at the Towngas Tai Po plant to toast the company's partial conversion to natural gas. Mr Tsang will doubtless point to the company's move towards cleaner burning fuel as proof that Hong Kong is coming to grips with air pollution. As for Mr Lee, he already may be the best-loved tycoon in town, having just given 1.6 million gas subscribers an average 10 per cent reduction in their bi-monthly bills. What's more, he could be generous without putting his company's bottom line at risk. It got a good price when it signed a gas supply contract in 2002 - eons ago in terms of the evolution of energy prices - and because natural gas requires less costly processing than the naphtha that previously constituted 100 per cent of its feedstock. Unlike local electrical utilities, Towngas is not subject to regulation of its profits and tariffs; it can pass on its higher costs to customers at will. Its latest gas bills reflect a 57 per cent reduction in the surcharge that has shielded the company against two years of sharp increases in the price of naphtha, a refined petroleum product. The company gets its gas from the Dapeng liquefied natural gas terminal in Shenzhen under a 25-year contract. It can take up to 330,000 tonnes of LNG a year, 10 per cent of the terminal's capacity. Towngas holds a 3 per cent stake in the terminal whose main owner is China National Offshore Oil Corp. Towngas has not revealed the price range of the gas supply contract it signed in 2002 but by today's standards it was bound to be a bargain. Crude oil prices at the time were hovering in a range of US$15 to US$25 per barrel. Crude prices have since gone as high as US$78 while the price of naphtha has jumped 46 per cent since 2004. The company's feedstock ratio is now a 50-50 split between natural gas and naphtha. The proportion of natural gas in use at the Tai Po plant is scheduled to hit 60 per cent by the end of 2010, reducing its emissions of carbon dioxide by 26 per cent, nitrogen oxide by 42 per cent and sulphur dioxide by 40 per cent. However, the utility has ruled out relying entirely on natural gas until it can secure more supply. Besides a greener reputation, analysts say the company will benefit from accelerated sales growth and reduced costs of manufacturing piped gas. Citigroup's Pierre Lau estimated that by the time natural gas represents 60 per cent of the feedstock, the company will be saving HK$174 million a year by 'cracking' less naphtha. He said cracking, a key process in making piped gas, cost Towngas HK$290 million last year, 30 per cent of total manufacturing costs. For every 10 per cent replacement of naphtha with natural gas, operating costs will decline HK$29 million per year. The HK$174 million saving accounts for 3 per cent of the HK$4 billion profit before exceptional gains projected by Mr Lau for 2008. In the first six months of this year, the utility's profit on gas supply in Hong Kong rose 2.19 per cent to HK$1.8 billion, though its net profit fell 19.7 per cent due to lower property earnings and higher interest expenses. Deutsche Bank analyst David Clark thinks Towngas has earned a 12 per cent return on its HK$1.2 billion investment in fuel conversion. It had to build both a 34-kilometre pipeline from the Dapeng terminal to the Tai Po plant and a gas off-take station at Tai Po. Mr Lau believes cheaper gas will spur demand; he forecasts 3 per cent growth in sales volume in the next two years, compared with less than 1 per cent in the past three years. Towngas prices are increasingly competitive with electricity prices, especially on Hong Kong and Lamma islands, where Hongkong Electric last month began using natural gas to produce power, reducing its reliance on cheaper but dirtier coal. Bill Barron, a senior research fellow with think-tank Civic Exchange and a visiting professor at the Institute for the Environment of the University of Science and Technology, said there exist viable supply alternatives that would allow Towngas to raise its natural gas quotient above 60 per cent. For example, it might want to invest in, or at least source gas from, power supplier CLP Holdings' proposed HK$8 billion LNG processing plant in the Soko islands, south of Lantau. 'Although it is a commercial decision between CLP and Towngas, the government should take a proactive role in defining Hong Kong's fuel policy,' he said.