Oil and petrochemical industry: market price reform of natural gas started

Recently, the National Development and Reform Commission issued a notice and decided to launch pilot reforms of natural gas price formation mechanism in Guangdong Province and Guangxi Autonomous Region starting from December 26, 2011.

main conclusion:

The gas price reform meets our expectations. We believe that the petrochemical industry will focus on policy adjustments in 2012, namely reform of refined oil prices, increase in special oil proceeds thresholds, and natural gas price reforms.

The pilot reform has little impact on the natural gas industry. We believe that the price of PetroChina’s West-East Gas Pipeline II (West Second Line) is expected to increase. The West Second Line project is expected to reduce losses or even make profits. However, if the natural gas wellhead price in other regions of the country needs to be raised, further reforms will be needed.

Established the direction of market-oriented natural gas price reform. That is, the price of natural gas is linked to the prices of alternative energy sources (fuel oil and LPG), and the market price of natural gas is calculated through the market's net return value method. After the implementation of this mechanism throughout the country, the domestic gas price is expected to rise. By then, natural gas production companies such as PetroChina and Sinopec will directly benefit; coal urea and urban gas, among others, are also expected to benefit indirectly.

Maintain the "overweight" investment rating of the petrochemical industry. The market-oriented reform of natural gas prices has been initiated, and further improving the mechanism for the formation of crude oil refined oil prices has been listed as one of the major tasks for 2012 by the Central Economic Work Conference. The introduction of these policies will help increase the predictability of profitability in the petrochemical industry and help steadily increase the performance of the industry, thus enhancing the overall valuation of the industry.

Comments:

1. Natural gas pricing method changed from cost-plus method to "market net return value" method

In recent years, great changes have taken place in China's natural gas production and market conditions. Gas supply methods and gas sources have become more complicated. The dependence on natural gas continues to increase and the import gas price is higher than domestic gas prices. In the past, the "cost plus" pricing method made the price mainly adjusted based on changes in costs, and it was difficult to reflect the constraints of consumer demand on prices. In this case, natural gas price reform is imperative.

The ultimate goal of China's natural gas price reform is to liberalize the ex-factory price of natural gas, which is formed by market competition. The government only manages the price of natural gas pipelines with natural monopoly properties. The reform pilot will adopt a “market net return” pricing method to establish a dynamic price adjustment mechanism that reflects market supply and demand and resource scarcity. The pilot work was carried out in Guangdong and Guangxi in the near future, and accumulated experience for advancing reforms throughout the country.

According to the notice, the main content of the reform of the natural gas price formation mechanism is fivefold:

(1) The current pricing method for natural gas based on “cost plus” is replaced by the “market net return value” method.

(2) The current practice of differentiating the gas source and route, and setting the ex-factory price and the pipeline transportation price, respectively, will be changed to the province to formulate a uniform gate station price.

(3) The price of a unified gate station established by the country is the highest ceiling price, and the supply and demand sides can independently negotiate and determine the actual transaction price without exceeding this price level.

(4) The price of the gate station adopts a dynamic adjustment mechanism, which will be adjusted once a year according to the changes in the prices of alternative energy sources, and will be gradually adjusted to every six months or quarterly.

(5) For the three unconventional natural gasses such as shale gas, coalbed methane and coal gas, the ex-factory price shall be adjusted by the market, and shall be negotiated between the supply and demand sides; if the long-distance pipeline is mixed and transported, the price of the unified gate station shall be implemented.

According to the pilot reform mechanism, the Shanghai market (central market) is selected as the benchmark for pricing, and the central market gate prices are determined based on 0.9 times the weighted value of the equivalent calorific value fuel oil (60%) and LPG (40%). Based on the station price, according to the flow direction of natural gas and the cost of pipeline transportation, taking into account the economic and social development levels of Guangdong and Guangxi provinces (autonomous regions), the prices of gate stations in two provinces (regions) will be determined. The prices of the most expensive natural gas stations in Guangdong and Guangxi were 2.74 yuan/cubic meter and 2.57 yuan/cubic meter, respectively.

2. Pilots favorable to PetroChina West Second Line

At present, the second line of the West-East Gas Pipeline has been fully connected, and natural gas will be transported to Guangdong Province in the future. The duty-paid price of imported natural gas in Central Asia at the Horgos Port in Xinjiang is 2.02 yuan/cubic meter. According to a notice issued by the National Development and Reform Commission in May 2010 on the basis of raising the benchmark price for domestic onshore natural gas production, imported Central Asian natural gas transported on the West Second Line was executed at the same price as domestic natural gas, and we estimate the sales price to be 1 yuan/cubic meter. The loss of 1 cubic meter of natural gas in Central Asia for CNPC is about 1 yuan.

According to the new pricing mechanism, the price of the highest gate station in Guangdong Province is 2.74 yuan/cubic meter. According to this price calculation, considering the average pipeline transportation fee of 1.13 yuan/m3 at the West Second Line, the annual import gas price of the West Second Line can be implemented at a unit price of approximately RMB1.61/m3, which is RMB0.6/m higher than the current sales price/ About cubic meters. Assuming that the West Second Line will import 15 billion cubic meters of natural gas in 2011 and 25 billion cubic meters in 2012, according to the current prices, the estimated natural gas loss in the second-tier West Line in 2011 is estimated to be 15 billion yuan. After the trial of natural gas price reform, if the second line of West China is implemented entirely new The mechanism, which is priced according to the "market net return value method" (about 1.60 yuan/cubic meter), then it is expected to reduce losses to 10 billion yuan in 2012 if it takes into account the increase in the profitability of pipeline transportation fees, and PetroChina's Amu Darya in Turkmenistan. The project will also provide some gas supply to the West Second Line (for details, see the report “China Petroleum (601857) Semi-annual Report and Asset Acquisition Announcement Comment 20090831”), and the import cost of natural gas in the second and second line is expected to decrease. Therefore, we believe that after the trial of natural gas "market net return value method", the entire project of West Second Line will reduce losses or even achieve profitability.

3. Market net return method is a common method for pricing natural gas in developed countries

The "market net return value" pricing method is to first select a central market. The sales price of natural gas in the central market is linked to the price of alternative energy formed by market competition. On this basis, according to the delivery process, the use/distribution costs are reversed. After the transportation fees, storage costs and other expenses are pushed back to other city gate stations, wellheads or liquefied natural gas receiving stations, the pricing method for the prices of each link of natural gas can be determined.

In this pricing reform pilot, the selected central market is the Shanghai market, and the sales price of natural gas in the central market is determined by the equivalent heating value of fuel oil (60%) and LPG (40%) weighted value of 0.9 times, through the pushback method. The prices of the most expensive natural gas stations in Guangdong and Guangxi were 2.74 yuan/cubic meter and 2.57 yuan/cubic meter, respectively.

The pricing method of “market net return” has been widely adopted in major countries such as Europe. With the gradual establishment of the new mechanism, it will be beneficial to give full play to the role of the market mechanism, use price levers to guide the rational allocation of natural gas resources, promote operators to increase production, expand imports, and guide consumers to use their gas rationally and save gas.

We believe that this pilot has determined the future direction of natural gas price market reform, that is, the link between natural gas prices and alternative energy prices, and the calculation of natural gas wellhead prices through the market's net return value method. If the market's net return value method is implemented nationwide, domestic gas prices will rise. Rising gas prices will directly benefit PetroChina and Sinopec (600028); in addition, industries such as coal urea and urban gas will indirectly benefit.

4. Unconventional natural gas exploitation will benefit

The total amount of unconventional natural gas resources in China is huge. According to preliminary assessments, China's tight sandstone gas resources exceed 12 trillion cubic meters, coalbed methane resources 36.8 trillion cubic meters, and shale gas resources 31 trillion cubic meters. The above three together totaled 70-80 trillion cubic meters of unconventional natural gas resources in China. Statistics show that as of the end of 2009, the country’s unconventional natural gas proved to have a total of 20.9 trillion cubic meters of geological reserves, accounting for approximately 24% of the country’s cumulative proven geological reserves.

In 2009, the country's unconventional natural gas output was 33.1 billion cubic meters, of which tight sandstone gas production was 25.6 billion cubic meters, and coalbed methane production was 7.5 billion cubic meters, accounting for 30.0% and 8.8% of the country's natural gas production, respectively, while shale gas exploration and exploitation Still in its infancy.

The Development and Reform Commission's natural gas price reform pilot notice pointed out that for shale gas, coalbed methane, coal gas three unconventional natural gas, the ex-factory price market adjustment, agreed by the supply and demand sides; enter the long-distance pipeline mixed delivery, the implementation of a unified portal price.

Unconventional natural gas exploration and mining requires a relatively large capital investment in the initial stage. With the promotion of natural gas price reform, the ex-factory price of natural gas is expected to increase, which will help increase the enthusiasm of unconventional natural gas exploration and mining enterprises, and will obviously help the utilization of unconventional natural gas in China.

5. Key Company Earnings Forecast and Investment Rating

We maintain our investment rating of “overweight” in the petrochemical industry. In the previous report, we believe that the investment opportunities in the petrochemical industry in 2012 will mainly come from policy adjustments (finished oil pricing mechanism, special oil proceeds threshold, natural gas pricing mechanism, etc.). The reform of the natural gas price market has been initiated, and further improvement of the mechanism for the formation of crude oil refined oil prices has been included in the central economic work conference as one of the major tasks for 2012. The introduction of these policies will help increase the predictability of profitability in the petrochemical industry and help steadily increase the performance of the industry, thus enhancing the overall valuation of the industry.