Regional Gas: Fitch: China moves towards market pricing for natural gas
Thursday, June 3 2010 - 03:59 AM WIB
"The increase in the benchmark price for domestically produced onshore gas is part of the Chinese government's long-awaited reforms aimed at promoting the use of natural gas in domestic energy consumption," says Ying Wang, Director in Fitch's Asia-Pacific energy and utilities team. "The increase will narrow the price gap between domestically produced gas and imported gas, such as Liquefied Natural Gas (LNG), in the near-term. In the long-run, it is expected that China will migrate towards a market-based pricing mechanism for its onshore natural gas," adds Ms. Wang. Although the latest price increase has limited credit impact on Chinese natural gas producers in the near-term, the agency expects a market-based pricing mechanism will benefit producers' margins in the long-term.
China's National Development and Reform Commission (NDRC) recently announced a 25% increase, or about USD0.95 per thousand cubic feet, in the ex-factory benchmark price for domestically produced onshore natural gas (benchmark price). The NDRC combined the previous two tier price-setting mechanism into a single tier, where the wholesale gas price negotiated between producers and customers is capped at 10% above the benchmark price, although there is no limitation on the minimum price. The new benchmark pricing took effect on 1 June 2010 and was NDRC's first price adjustment in two and a half years.
Fitch expects China's natural gas demand growth to remain strong at 8% to 10% per year for the next few years, with imported natural gas accounting for an increasing share of domestic gas consumption. The agency estimates that imported LNG represented about 10% of China's gas consumption in 2009. The increase in onshore natural gas prices will increase the revenue and profitability of Chinese natural gas producers who are also major LNG importers.
Fitch believes PetroChina Company Limited (PetroChina, 'A+'/Stable) will be the primary beneficiary of the natural gas price increase, given its position as China's largest natural gas producer, accounting for about 88% of onshore production in 2009. At end-2009, PetroChina had 63.2 billion cubic feet of proven natural gas reserves, representing over 90% of the total onshore proven gas reserves in China. Fitch expects natural gas to be a key strategic focus and an important revenue and cash flow driver for PetroChina in the coming years, as the company leverages on its significant proven gas reserves and extensive pipeline network. In addition, Fitch expects China Petroleum & Chemical Corporation (Sinopec, 'A-'/Stable) to benefit from the natural gas price increase as well, albeit to a lesser extent, due to its smaller proven gas reserves and lower production. Meanwhile, the impact on CNOOC Ltd (CNL, 'A'/Stable) should be relatively limited in the near-term as it has no on-shore gas reserves and it typically negotiates its natural gas sales contracts with its customers on a long-term basis.
That said, the near-term impact of the price increase on Chinese natural gas producers' credit ratings is limited. Much of the price increase was expected and will not change the issuers' credit fundamentals meaningfully, especially given the relatively soft global natural gas prices. In addition, PetroChina's rating is capped by the rating on the Chinese sovereign ('A+'/Stable), and Sinopec's rating is also linked to that of the Chinese sovereign. However, Fitch believes the price increase will take the Chinese government one step further towards establishing a market-based natural gas pricing mechanism in the foreseeable future. The agency believes this process will be accelerated if imported LNG prices rise significantly. (end of release)