The new year brings renewed hopes that China will take more serious action on reforming pricing for oil products and natural gas.

 

The Party Congress last month signaled its intent to move forward on deregulation to link energy prices more directly to supply and demand. That has led many analysts and investors to believe China is likely to start the reforms soon.

 

Market pricing would benefit energy giants such as Sinopec Corp, Asia's largest fuel refiner, and PetroChina Co, the country's largest gas importer.

 

There is a bit of deja vu to reform expectations. Energy market participants had similar high hopes for reform at the start of this year, after the National Development and Reform Commission, China's top planning agency, submitted plans to revamp the fuel pricing system to reflect market costs. In reality, however, refiners suffered through the first half of 2012 amid strong global crude oil prices and the inability to pass them on under the centrally controlled pricing system. The companies' bottom lines got some relief from fuel price rises later in the year.

 

"For us, 2012 was a lesson to be cognizant of the pragmatic approach of Chinese regulator towards refining returns," Credit Suisse analysts David Hewitt and Horace Tse wrote in a note. "With high crude prices and a focus on inflationary pressures in the early part of the year, the refiners were left to record material losses, disappointing those expecting a transformational adjustment to the refined-product pricing mechanism." 

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