China Raises Natural Gas Prices in 1st Increase Since November 2007

By Jim Bai and Chen Aizhu

BEIJING, May 31 (Reuters) - China announced a 24.9 percent rise in natural gas prices on Monday in a reform to spur supply of the cleaner-burning fuel, use of which is growing fast as the country gives more weight to the environment.

China last raised both wellhead gas prices and wholesale prices to industrial users in November 2007 but exempted more sensitive consumers such as households and fertiliser firms.

This time, China's top planning body, the National Development and Reform Commission (NDRC), said it would abolish the two-tiered gas pricing system.

Gordon Kwan, head of regional energy research at Mirae Asset Securities in Hong Kong, said Beijing's decision to proceed with the long-awaited reform in the current macro-economic climate showed its determination to change energy policy.

"I was positively surprised by the timing of the natural gas price hike amidst domestic efforts to cool inflation and economic growth uncertainties stemming from the Euro crisis," Kwan said.

"The gas price hike signifies a new era in which China will increasingly focus on fostering energy efficiency and environmental protection."

The NDRC announcement, on its website (www.ndrc.gov.cn), did not explain the impact on big industrial users such as power plants and on fertiliser producers, whose costs are passed on to the farming sector.

It said onshore wellhead prices would rise 0.23 yuan a cubic metre, or 24.9 pct, which would result in a total of 1,155 yuan ($169.1) per 1,000 cubic metres.

The increase was in line with analysts' expectations for a hike of between 20 and 30 percent.

The NDRC said sellers would be able to charge up to 10 percent over the new price, which takes effect from Tuesday, but the change would add only 4.6 yuan ($0.67) to the average monthly household budget.

PETROCHINA, SINOPEC TO BENEFIT

The move is likely to boost the profits of the country's leading onshore gas producers PetroChina (0857.HK) and Sinopec Corp (0386.HK), which have been earning much less from gas output than their rivals abroad.

It will also help attract larger imports of liquefied natural gas from around Asia.

The NDRC said it hoped the price increase would spur more gas production.

"One of the reasons for the price rise is that China is short of gas resources," it said in a statement.

While China has overtaken the United States as the top emitter of greenhouse gases, the government has vowed to crack down on energy intensive industry and to try to cut coal use, a tough job given China's reliance on its immense supplies of cheap coal.

Analysts have long anticipated China would raise gas prices as its imports grew rapidly -- via a landmark central Asia pipeline from Turkmenistan and tankers from Australia, Indonesia and Qatar, all of which are linked with global markets.

Oil firms have long lobbied for a market-oriented pricing system as they push to boost domestic natural gas production to meet a double-digit percentage rally in demand.

China, which regulates natural gas prices, has kept them artificially low partly to support farmers who are vulnerable to rises in the price of fertilisers made from gas.

"China's oil price is now basically linked to international markets. It wouldn't be reasonable to keep natural gas prices unchanged," said Zhang Xinfa, an analyst at Galaxy Securities.

"Fuel prices and natural gas prices should be closely linked," he said. He added that he thought the change would have little impact on inflation.

One group of gas customers, taxi drivers who run their cars on compressed natural gas (CNG), should get subsidies from local authorities to help them cope with the rise, the NDRC said.

China's CNG prices are now less than half the equivalent gasoline price but that ratio will rise to 75 percent.

The price increase comes 18 months after the NDRC revamped China's pricing system for retail gasoline and diesel, a reform that ushered in big price increases but appeared to have a negligible effect on demand.

Oil demand has boomed since then, despite the NDRC lifting pump prices to record levels. Those prices will come down on Tuesday, due to a 4 percent cut announced at the same time as the natural gas price increase. [ID:nTOE64U06B]

Raising the gas prices may help stave off shortages like the one that hit China in the past winter, which was unexpectedly cold and forced suppliers to ration gas, cutting supplies to industry in favour of residential users. [ID:nSP444918]

China has hugely ramped up its gas imports to meet the gap in supplies. This year imports will grow to 15 billion cubic metres from 7.8 bcm in 2009, the NDRC said. (Additional reporting by Judy Hua in Singapore, editing by Anthony Barker)