China May Loosen Energy Price Controls After Planning Meeting

China may announce looser energy price controls and the break up of the domestic duopoly of PetroChina Co. and China Petroleum & Chemical Corp. after a four-day Communist Party meeting ends today.

“We expect an announcement on liberalizing of resource price and an opening up of the energy industry to more private investment,” Simon Powell, head of oil and gas research at CLSA Ltd., said in a telephone interview yesterday. “Any fuel price reforms would be mildly positive for Sinopec and natural gas price liberalization would help PetroChina.” China Petroleum is known as Sinopec.

Chinese Politburo member Yu Zhengsheng said last month reforms to be discussed at the meeting of the party’s Central Committee meeting will be unprecedented “and will promote profound changes in every area of the economy and society.” Yu is ranked fourth in the seven-strong Politburo Standing Committee headed by party chief and President Xi Jinping.

China uses its big three oil companies, of which PetroChina is the largest, to control domestic fuel prices and secure energy supplies from overseas to meet the burgeoning needs of the world’s second-biggest economy.

Energy price liberalization was mentioned last month when the Development Research Center of the State Council, a government affiliated think tank, published recommendations for reform known as the ‘383 plan.’ The report suggested China should develop new price-setting mechanisms to better reflect international markets, relax barriers to oil and gas exploration and speed up development of shale gas resources.

Shale Subsidies

“China will triple subsidies toward higher cost shale gas projects and increase all natural gas selling prices by 15 percent in 2014,” Gordon Kwan, an analyst at Nomura Holdings Inc., said in an e-mail yesterday. “This will encourage the accelerated development of domestic gas supplies.”

Environmental policies such as improving fuel standards may also be on the agenda, said Kwan. Price reform will help PetroChina and China Petroleum to invest in upgrading fuel standards to improve air quality, he said.

The government shortened its fuel price adjustment window to 10 days in March from 22 days to allow retail rates to reflect movements in global crude markets more closely.

Spin Off

The plenum may also accelerate the break up of China’s largest energy companies, said CLSA’s Powell. Sinopec sold shares in its engineering and construction unit in May. The company may also spin off its oilfield services unit, he said. PetroChina may follow a similar path.

“Spinning out part of PetroChina’s pipeline assets into a separate public company could be beneficial” for investors, Powell said. A sale of as much as 75 percent in the business will leave the company with control and create value for shareholders, he said.

Analysts such as JPMorgan Chase & Co.’s Scott Darling said any reform won’t be dramatic.

“What you’ll get will be a broad comment on increasing efficiencies and maybe introducing more competition into the energy sector,” Hong Kong-based Darling said. “But that does not mean wholesale breakup of state-owned companies.”

Reforms will take place over years and not weeks, said Powell. Many state-owned company chiefs are part of the Central Committee.

“Any reform of the state-owned enterprises will be slow,” Powell said. “Especially given how powerful they are and how many of their heads sit on the central committee.”