PetroChina Will Benefit From Further Natural Gas Price Hikes in China

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Chinese state-owned oil and gas companies PetroChina (NYSE: PTR  ) , Sinopec (NYSE: SNP  ) , and CNOOC Limited (NYSE: CEO  ) reported their financial results for the fourth quarter and full-year 2013 in the past week. Among the three companies, only PetroChina was able to post an increase in fourth-quarter profit. PetroChina's bottom line was boosted mainly by a hike in natural gas price for non-residential users. The company can expect a similar boost to its profit levels as China plans more natural gas price hikes in the future.

PetroChina profit rises
PetroChina last week reported that its fourth-quarter profit rose 21% to 34.3 billion yuan ($5.5 billion). This is in contrast to other Chinese oil majors Sinopec and CNOOC. While Sinopec reported a 35% drop in its fourth-quarter profit, CNOOC said on Friday that its fourth-quarter profit dropped 11.4%. PetroChina's bottom line mainly benefited from a hike in natural gas prices.

Like in many other emerging economies, the Chinese government controls the prices at which state-owned oil and gas companies such as PetroChina and Sinopec can sell natural gas and fuel. Subsidizing fuels can have a major impact on state-owned companies' profitability, as we have seen in the case of Brazilian oil and gas major Petrobras'  (NYSE: PBR  ) financial performance. While PetroChina has not suffered like Petrobras, price controls were hurting the company's profitability.In July of last year, PetroChina got a major boost as the Chinese policymakers announced a price hike.

China's National Development and Reform Commission (NDRC) raised the wholesale price of natural gas by 15% to 1.95 yuan per cubic meter. The price increase was certainly welcome even though it was still below what PetroChina has to pay for LNG.

The price increase benefited PetroChina the most since the company is China's largest producer and importer of natural gas. The price hike, though, was only for non-residential users.

Prices could be raised further
While the price hike last year helped PetroChina, the good news for the company is that the NDRC is considering further price increases. Earlier this month, NDRC said that it would raise natural gas prices for residential customers by the end of 2015. NDRC said in a statement that the price hike would not affect 80% of households. For the rest, there will be an increase, with the heaviest consumers paying about 1.5 times a base rate for household use gas.

The price hike comes at a time when China is looking to increase its use of natural gas for generating energy. China generates around two-thirds of its power from coal; however, serious pollution problems have forced the country to cut its reliance on coal. Natural gas is expected to play a major part in the new energy mix. At the moment, natural gas only accounts for 4% of China's total energy consumption, according to the U.S. Energy Information Administration (EIA).

If China has to increase natural gas' share, then price hikes are necessary. PetroChina has to pay market price for importing natural gas; however, the company cannot charge customers at market price because of China's policy of controlling prices. This means if the company imports more natural gas to meet growing demand, then it has to incur losses. The more the company imports, the higher its losses. The pricing issue could derail China's plan to cut reliance on coal for energy generation.

If price increases are allowed, China will be able to cut its usage of coal. It will also narrow the losses PetroChina and other Chinese state-owned oil and gas companies have to incur on natural gas distribution. Finally, it will encourage investment into areas such as shale gas development in China.

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Varun Chandan

I have a Master in Finance degree from IE Business School in Madrid. I use the top-down approach when it comes to investing. I like to analyze macroeconomic factors and how they impact individual companies.

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