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China looks to energy price reform to unlock gas supply, cut waste

Fayen Wong and Judy Hua
Friday, 15 Nov 2013 | 10:54 AM ET

* Gas prices may see biggest reform

* Comes amid winter gas supply crunch

* Crude import system, pipeline access could also change

* Agricultural prices will also see reform

SHANGHAI, Nov 15 (Reuters) - China is set to accelerate energy price reforms to encourage competition, boost oil and gas supply and reduce inefficient fuel consumption in a country that two months ago became the world's largest net oil importer.

China, which already imports about 60 percent of its crude oil consumption, is expected to see its crude import bill alone reach half a trillion dollars a year by 2020. To prevent further runaway rises in fuel costs, Beijing has vowed to allow a greater role for market forces to govern consumption.

"(We will) promote a pricing mechanism that is mainly decided by the market," said a reform document released by the Communist Party on Friday after a four-day conclave of its top leaders.

"We should hand over prices that can be set by market forces to the market... (We will) push forward price reforms in sectors including water, oil, natural gas, power, transportation and telecommunications."

Agricultural prices would also see reforms, the document said.

A gas supply crunch in China is hampering the government's ability to reduce the volume of coal burnt for power. Public anger is rising in major cities over heavy smog caused by emissions from coal-fired power stations.

Gas pricing reforms could help China unlock the vast potential of its shale gas, which is believed to be larger than reserves in the United States where the development of shale gas resources has fuelled an energy revolution.

In China, oil imports, domestic oil and gas fields and basic infrastructure like pipelines are under the control of the state. Reforms to give a greater role to the market and non-state firms in these areas may be rolled out at a slower pace.

But these adjustments, over time, could create a league of new players in the closely guarded sector.

"Without energy price reform, there will not be enough investment into high-cost sectors that can increase supplies to meet demand that is currently subsidised," said Gordon Kwan, head of oil and gas research at Nomura Research.

"They need to do more, a lot more than the baby steps than they've taken (until) now to encourage production of domestic resources."

Fuel price reforms would encourage small competitors to loosen the state's grip on the energy sector. But rising prices would also boost the earnings of state-owned Sinopec Corp and Petrochina , which has already reported a 20 percent rise in third-quarter profit after Beijing recently hiked gas prices and allowed pump prices to track international crude costs more closely.

Beijing is expected to raise natural gas prices by another 15 percent in 2014 and another 20 percent in 2015, said Simon Powell, head of Asia Oil and Gas Research at CLSA in Hong Kong.

"The government can change the laws to allow private investment in upstream gas but no one is going to pump in money if it's not going to be profitable. It's all about the money," said Powell. "This will be an important driver that will create a batch of new players in China's energy scene."

NEW CRUDE IMPORTERS

Even before reforms announced on Friday, China was taking steps to reform its crude import scheme. Beijing is widely expected to issue around 10 million tonnes of crude import quotas to two more independent refineries in 2014, doubling the volume issued to new players in just two years.

More import licenses are likely to follow over the next few years, industry experts said. This would allow independent refiners to choose among suppliers and compete on a more even footing with the dominant state-owned players.

Increasing the number of oil buyers in China would also boost the chances of the Shanghai Futures Exchange (SHFE) launching a futures contract that could become a benchmark for pricing oil imports for China, and possibly for Asia.

SHFE plans to launch the country's first crude futures contract, which it would like to be open to foreign investors. That also depends on the depth of financial system reforms, as trade by foreign investors is currently limited.

SLOWLY CHIPPING AWAY MONOPOLY

Other proposals discussed include opening up of the refined fuel market to bring in more importers, although industry sources said such changes could take a longer time to enact.

Beijing is also considering allowing third-party gas producers wider access to pipelines controlled by PetroChina and Sinopec, industry sources said.

Local media has said Chinese regulators may also give private companies greater access to storage facilities.

(Additional reporting by Chen Aizhu in BEIJING and Ron Bousso in LONDON; Editing by Simon Webb and Mark Bendeich)