China Contemplates Fourth West–East Gas Pipeline

Following three West–East natural gas pipelines, China is contemplating the fourth one. The proposal is for a four-lane gas pipeline, which is likely to transport natural gas from the Sichuan and Tarim basins in the West to the large potential markets in East China. The first West–East pipeline was completed and commenced its commercial run in 2004; the second is under construction and expected to be completed by 2011; and the third is already proposed but not yet approved by China’s National Development and Reform Commission.

The fourth pipeline is a forward step towards the Chinese Government’s efforts to promote natural gas as a substitute for coal in power generation. At present, two-thirds of China's electricity generation comes from coal-fired power plant sources that generate tremendous amounts of greenhouse gases and lead to air pollution. To solve this problem, China is planning to increase its natural gas usage from 3% to 5.3% by 2010.

We believe that the proposal of making the fourth natural gas pipeline will benefit the most prominent Chinese integrated companies such as PetroChina (PTR - Analyst Report) and China Petroleum and Chemical Corporation (SNP - Analyst Report or Sinopec). Both the companies have a significant exposure in the Sichuan and Tarim basins. While PTR’s proved natural gas reserves and production are specifically focused in the Erdos, Tarim, and Sichuan basins, SNP has earmarked a significant portion of its 2009 capital expenditure for the Sichuan–East China Gas project.

Despite these positives, ADRs of both the companies lagged ADRs of CNOOC Ltd. (CEO - Analyst Report) in terms of upstream assets and growth profile. This lagging also reflects SNP and PTR’s exposure to the heavily regulated downstream sector. As such, our Hold recommendation for PTR and SNP ADRs remain unchanged.