OIL & GAS：SEVERAL LOCAL GOVERNMENTS INTRODUCE NEW WINTER GAS PRICING POLICIES
Beijing and Shanxi unveiled new policies for winter price hikes at bothcity gate and end user levels for non-residential consumption. Shanxifor the first time introduced a tiered city gate pricing mechanism andallowed full price pass-through to end users. Beijing, which did notallow its city-gate prices to be raised last winter, will accept a 10%price hike （Rmb0.184/m3） this winter. Beijing’s gas price for end users（incl. power and heating plants） will increase by only Rmb0.16/m3.Government subsidies will make sure there is no extra cost burden topublic utilities which are responsible for residential heating.
New pricing policies in north China aimed at cushioning the pricehike. Under Shanxi’s new policy, higher volumes will incur higherprices. A bidding price only applies to the YoY incremental volumeand cannot exceed the ceiling set by the Shanghai Petroleum andNatural Gas Exchange （SHPGX）。 The new pricing mechanism is likelyaimed at mitigating the winter hikes. Upstream companies’ realizedgas prices, however, may still rise 5–10% YoY. Beijing’s compromisealso suggests that upstream suppliers may see net gains.
Winter gas prices in north China may near south China levels. Weestimate gas prices in northern China （typically Rmb0.1–0.2/m3 lowerthan in more developed eastern and southern areas） may approachor even exceed southern China prices after prices rise for the winter,considering the volume growth may mainly come from the north.
SHPGX sets new price cap for bidding. The bidding for five regionalmarkets will be conducted separately, and the ceilings for all bids canbe 55% above the base prices which are local average non-residentialcity-gate prices. If demand is stronger than expected, we expectPetroChina may provide more gas than the current planned 1.2bcm（1% of the country’s winter consumption） to the SHPGX for bidding.We expect upstream gas suppliers may widely benefit from thewinter price hikes. City gas companies in northern China may fullypass through the price hikes and thus keep their margins stable, whilecompanies in southern China may face greater margin pressure.National companies will almost certainly see a slight margin squeeze.
Weaker than expected winter demand; margin squeeze; extremeweather; winter gas import price hike.