China's new natural gas pricing system, which links gas prices to fuel oil and LPG prices, would benefit local producers and importers of piped and liquefied natural gas as well as promote domestic production, Bernstein Research said in a note Thursday.
However, PetroChina would be the only producer/importer to benefit in the short term as the new pricing system will kick off in South China's Guangdong and Guangxi provinces, where it is the sole supplier, Bernstein analysts said. But there is no clear timeline on when the pricing reform would be introduced to South China or when it would be extended to the other regions.
China National Offshore Oil Corp. has the potential to add significantly to its gas reserves from the South China Sea, which could feed directly into the Guangdong market. As such, CNOOC would be able to enjoy oil-linked pricing for the South China gas, thus supporting deepwater gas developments, Bernstein said.
This is the first time the country has linked gas prices to oil prices, Bernstein pointed out. Fuel oil and LPG prices are "highly correlated with international crude prices and the net effect of the reform is China has essentially linked gas prices to oil," the analysts said.
Platts reported earlier that under the new pricing mechanism, the ex-gas station price in Guangdong and Guangxi would be based on a basket of high sulfur fuel oil and LPG in a 60:40 ratio, and calculated based on 90% of the market price of the basket.
The price of the basket of alternative fuels -- fuel oil and LPG -- traded in Shanghai would be used as the pricing benchmark.
Based on 2010 import prices for high sulfur fuel oil and LPG, and a corresponding international crude oil price of around $80/barrel last year, the maximum ex-gas station price would be Yuan 2.74 ($0.433)/cubic meter in Guangdong and Yuan 2.57/cubic meter in Guangxi.
Meanwhile, Guangdong and Guangxi are slated to receive 9.1 billion cubic meters and 1.1 billion cu m of Turkmenistan gas, respectively, from PetroChina in 2012, which would be piped through the recently operational second West-to-East pipeline.
PetroChina currently sells gas at Yuan 2/cu m, while the breakeven price at Shanghai city gate and Guangdong are higher at Yuan 3/cu m after adding a Yuan 1/cu m transportation cost from the Chinese border to Guangdong on top of the Turkmenistan piped gas price of Yuan 2/cu m.
Bernstein analysts estimated that the price reform could see PetroChina cut its losses from Yuan 27 billion to Yuan 20 billion as the company planned to import a total 27 Bcm of gas in 2012.
GAS REFORM SUPPORTS LNG IMPORTS AND PIPING GAS FROM RUSSIA
If the new gas pricing could be applied to eastern China, city gas prices would be similar to that of oil-linked LNG prices, thus supporting LNG imports and providing momentum to piping gas from Russian.
In Asia, the formula in long-term LNG contracts usually takes the form of a percentage of crude oil price plus a fixed differential.
"The netback to the Russian-China border will produce a gas price which is equivalent to what Gazprom receives as a European netback," the analysts said.
Moscow and Beijing signed an initial agreement on gas supplies in 2006, when they agreed to build two pipelines to transport a total 68 Bcm/year of gas from Russia to China over 30 years, Platts reported previously.
In September 2010, Gazprom and China's state-owned energy company China National Petroleum Corp. signed a legally binding agreement on the supply of up to 30 Bcm/year.
But the talks have since stalled, and the June 2011 visit of China's President Hu Jintao to Russia, against expectations, delivered no breakthrough.
EXPANSION OF REFORMS TO WELLHEAD PRICES
Successful implementation of the pilot projects at Guangdong and Guangxi, could see expansion of the price reform to include the whole of China, paving way for Shanghai to become a core pricing hub.
"The Shanghai hub price will set the price of gas in Asia and be a benchmark in the same way that Henry Hub prices are to North America," analysts said.
Subsequently, wellhead prices at different basins would be netbacked from the Shanghai central market prices based on transmission distances and pipeline tariffs.
At oil prices of $85/b, the price of gas in Shanghai would be $13/Mcf, resulting in a gas price netback of $9-10/Mcf in Sichuan and Ordos and $8/Mcf in Xinjiang, according to calculations by Bernstein Research.
Current wellhead gas prices in China were around $5/Mcf, the report added.
However, the analysts noted that exclusion of Shanghai from the pilot project suggested local resistance to the price reform.
