After fuel and power price rises, eyes on China gas

By Chen Aizhu - Analysis

BEIJING (Reuters) - China may raise natural gas prices as soon as September in its latest effort to normalize cheap domestic energy rates, but it treads a fine line in trying to bolster long-term supply while damping short-term demand.

A rise in domestic rates, which are half U.S. prices and less than one-third those of spot LNG imports, will be a boon for top producer PetroChina (0857.HK) and peer Sinopec (0386.HK), whose regulated wellhead prices have risen only twice in the past three years.

But it is unlikely to resonate as loudly as last month's sharp fuel price and rare power tariff increases, as natural gas occupies just 3 percent of China's energy basket. Beijing aims to double the share of gas by 2020 as part of a high-profile effort to encourage greener economic growth.

To get there, it must increase prices enough to make it economical to produce domestic gas from remote areas or import it, and cut demand to avoid a short-term supply crisis that would force companies to seek other fuels.

At the moment, demand is galloping as natural gas looks an increasingly good choice compared to coal -- the price of which Beijing effectively liberalized last year before freezing again in June -- and to oil, which has surged to highs near $150.

"With coal prices already market driven and Beijing just raised fuel and power prices, people asked me what's next? I said it should be natural gas," said Yang Fuqiang of the U.S. Energy Foundation, which advises Beijing on energy policies including pricing.

"Possibly as soon as after the Olympics. Low gas prices are not conducive for demand control."

Controlling demand without killing it is crucial for policy makers who want to ensure the success of huge projects like the $30 billion Central Asia pipeline.

GAS PUZZLE

China's gas policy is the most complex and opaque piece of its energy pricing puzzle, as the sector is in its infancy and geared most toward the heavily subsidized fertilizer industry.

Natural gas makes up 3 percent of China's overall energy use, versus a third in the United States and a quarter in Europe, Cambridge Energy Research Associates (CERA) said in a report.

A surge of enthusiasm for imported LNG has been dulled by escalating global prices and stagnant local rates.

China last raised wellhead gas by a third last November, after a 5-15 percent hike two years earlier, but it only affected industrial and commercial users, sparing more price-sensitive residential consumers and fertilizer makers.

Even after that increase, prices at around 1.40 yuan per cubic meter, or $5.6 per million British thermal unit (mmBtu), are well below U.S. levels <0#NG:> at $10 per mmBtu and versus long-term LNG contracts now hitting $15 per mmBtu.

The timing may also be right for policymakers to raise gas prices, as annual inflation for June was at 7.1 percent, easing