China's central government will likely postpone a plan to reform the pricing mechanism for natural gas, following the announcement of value-added tax rebates for gas imports, analysts said Tuesday.
On Monday, the Ministry of Finance announced that the government will grant VAT rebates for natural gas and LNG imported between January 1, 2011, and December 31, 2020, when average import costs over a quarter are higher than domestic wholesale prices, Platts reported earlier.
The VAT rebates will apply to imports via the Central-Asia pipeline and LNG terminal projects in Jiangsu, Guangdong, Fujian and Shanghai, and other state-approved projects. The tax rebate will also cover natural gas imported via the Central Asia pipeline before 2011, the ministry said in a statement on its website.
Imported gas is exempt from customs duty, but it attracts a VAT of 13%.
The VAT rebate that was announced on Monday will be calculated as a percentage of the difference between import and domestic prices over import prices.
"We expect the impact of the rebate to cover only a fraction of import costs ... Natural gas prices in China will need to be raised significantly to offset losses from gas imports," analysts from Bernstein Research said in a research note published late Monday.
China's natural gas imports and consumption are expected to climb, with the completion and startup in late June of the eastern section of the second West-to-East gas pipeline, which has enabled Central Asia gas to reach the southern province of Guangdong for the first time.
Natural gas demand in China is expected to grow by about 10% a year, compared with a growth of 5-6% forecast for oil consumption.
Chinese enterprises, in particular PetroChina, have suffered heavy losses due to the high price for pipeline gas and LNG imports.
INFLATION A BIG CONCERN
For PetroChina -- which is the biggest player in the domestic gas market -- the rebate could reduce its losses from gas imported from Turkmenistan by Yuan 2 billion ($312 million) this year, which is equivalent to 13% of its estimated total gas import losses, Bernstein said.
PetroChina is losing Yuan 1 ($0.16)/cu m on imports, which is almost equivalent to the wellhead price of domestic gas, the analysts said.
Bernstein said a 25% increase in wellhead gas prices is required to offset losses.
"We believe that the government will only adjust gas prices higher, once inflation (CPI) is brought back under 5%," the analysts said.
The Chinese government has not been able to contain inflation, which rose to its highest level in more than three years at 6.5% in July, with Beijing struggling to rein in soaring food costs.
And even though some economists have said that inflation is now close to a peak and expect it to fall later in the year as Beijing's efforts to rein in prices start to pay off, the VAT rebate granted by the central government is believed to be an olive branch offered in place of a price reform, which would boost domestic prices.
"The timing is very interesting," Zhang Liutong, an analyst with Facts Global Energy in Singapore, said Tuesday.
The central government was said to be studying a proposal to speed up reforms in pricing mechanisms for oil, natural gas, water and electricity, and new pricing systems were initially expected to be implemented this year.
In its proposal, the country's economic planning agency, the National Development and Reform Commission, had urged the State Council to act quickly to reform oil product prices and establish a pricing mechanism for natural gas that reflects supply and demand, as well as the scarcity of commodities, local media had reported earlier.
For oil products, the NDRC has implemented from August a new pricing system for jet fuel, under which the ex-refinery price for the product will be based monthly on a principle of not exceeding the post-tax import costs for jet fuel shipped from Singapore.
Industry watchers had been expecting more announcements by the government on pricing reforms for other commodities.
"PetroChina has been trying very hard since late 2009 to convince the government to remove the VAT for gas imported from Turkmenistan. So this is some form of compromise between the company and the government," Zhang said.
Zhang believes that the government will likely delay any price reform to next year or 2013, following the introduction of the VAT rebate.
Analysts agreed that the VAT rebate was a small step in the right direction in alleviating losses by state-owned enterprises, and would go a long way in preventing any gas shortage in the short term, particularly in the upcoming winter.
