New hopes of pricing reform for oil and gas (3)

Areas of expansion

The southwestern province of Sichuan and the city of Chongqing, which account for 16 percent and 5 percent of China's natural gas consumption respectively, are viewed by Japanese brokerage Nomura as the next areas of expansion for the pilot program.

Other jurisdictions - including Shanghai and Beijing, which comprise 4 percent and 7 percent of China's total gas consumption - might be better testing grounds from an affordability standpoint.

Assuming the gas pricing trial is extended to Chongqing and the provinces of Hubei and Jiangsu by mid-2013, PetroChina's earnings per share would grow 14 percent in 2013 from a year earlier, according to a Credit Suisse forecast.

On the coal front, the government announced in the closing days of this year that it would be adopting a more hands-off policy.

Coal companies and power firms will be free to negotiate prices without government interference and will be encouraged to sign long-term contracts, the State Council said earlier this week.

In the past, the annual contracts were signed at a year-end meeting organized by the government, which also arranged the railway quota.

Under those contracts, coal companies were forced to sell certain quantities to utilities at prices below market rates because the state wanted to ensure power supplies and prevent blackouts.

But sharp gains some years in the spot coal price caused coal suppliers to renege on the contracts and revise them upward. The State Council said the system is unfit for a market economy and reform is inevitable.

"Coal supplies have been easing this year, which was rare in recent years, and the price spread is narrowing between key term contracts and the spot market," it said.

Macquarie Bank analysts said the reform will benefit big miners such as China Shenhua Energy and China Coal, rather than smaller producers, because the large players have long-term relationships with power producers and are able to expand their market share even in the current weak market.

Also, without government allocation of rail capacity, coal companies will need to negotiate with the Ministry of Railways on supply contracts. Shenhua, which itself has railways, and China Coal, a major shareholder in Daqin Railway, a key coal-transport rail service in northern China, will be least affected by the reforms, Macquarie said.

The State Council also said China will lengthen from six months to one year the review period for a cost pass-through mechanism triggered for on-grid tariffs when coal prices fluctuate more than 5 percent.

Some analysts interpret the longer period as a government concession to grid companies that have to pay the on-grid tariffs to power producers.

"The government is avoiding adjusting on-grid prices too frequently because grid companies have to shoulder the cost increase at a time when retail power prices are still tightly regulated because of consumer inflation concerns," said Armand Cao, consulting director of energy and power at Martec Group.

China's Cabinet also said 10 percent of that coal price increase will be borne by power producers.

That's down from the previous 30 percent and an attempt to balance the impact on power firms and grid operators.