Asia China
Energy Oil & Gas
25 February 2009
China Oil and Gas
China Natural Gas - expanding
the market
J Clarke
Research Analyst
(852) 2203 6371
j.clarke@db.com
Tony Lee
Research Analyst
(852) 2203 6239
tony.lee@db.com
Fundamental, Industry, Thematic, Thought Leading
Lack of competitive pricing and access to markets have been inhibiting factors to
the growth of China's upstream gas sector. Although a price increase could be
imminent, pricing and policy reform will be required for increased medium and
long term sector investment and market development. This report looks at China's
upstream natural gas sector, the key market development/regulatory hurdles and
the companies best positioned to benefit from market expansion.
Deutsche Bank AG/Hong Kong
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LOCATED IN APPENDIX 1.
FITT Research
Fundamental - China Natural Gas: near term hurdles but long term growth
Relative to other countries (developing or developed) gas in China is currently
underutilized as an energy source, meeting only 3% of total energy demand.
Under the current 11th 5 year plan, the central government aims to increase this
percentage to 5% by 2010, implying significant market growth in the medium and
potentially longer term. However there are several market and regulatory hurdles
which must be overcome before this growth can be realized.
Industry: Detailed overview to gas sector dynamics
We detail the key market participants and identify which company looks best
positioned to benefit from the growth in China’s conventional gas, unconventional
gas (Coal bed methane), and LNG sectors.
Thematic: Gas price increase and reform required
To promote the development of gas projects (and to ensure supply), gas prices in
China must increase, in our view, potentially reaching parity with international
prices in the longer term. We believe the government is in the process of
reforming China’s gas pricing regime, with a possible announcement as early as
March during the National Peoples Congress. We expect at this time, the
government could lift wellhead gas prices (10%-15%). However, the timeline to
address other issues, such as pricing mechanism reform and stimulating power
sector gas consumption remains unclear.
Thought Leading: Gas price scenarios for the China oil companies
We assess the upside potential to PetroChina, Sinopec and CNOOC if well head
gas prices in China increased to international (US natural gas) prices. We use the
resources of our energy research partners Wood Mackenzie to provide a detailed
overview of the China gas sector, gas demand and supply, regulation and the
current pricing regime, as well as insight to China’s LNG and the unconventional
gas (Coal Bed Methane) sectors.
Thematic stock ideas: PetroChina looks best placed to benefit, but in the
longer term
With its significant portfolio of gas production assets, strong pipeline of gas
development projects, and access to equity gas from international sources, in our
view PetroChina would benefit the most from rising gas prices and market
expansion, with Sinopec benefiting the least. Although we expect a price increase
in the near term, much of the policy change required for gas market development
will happen in the medium to longer term, in our view.

Table of Contents
Investment thesis .............................................................................. 3
Blue pricing sky scenario .................................................................. 4
Near term hurdles to long term growth.......................................... 7
Putting together the China gas picture ......................................... 10
China LNG ........................................................................................ 23
Unconventional gas......................................................................... 27
PetroChina........................................................................................ 30
Sinopec-H......................................................................................... 36
CNOOC Ltd....................................................................................... 42
Appendix A – Coal vs gas fired generation in China..................... 46
Appendix B - Coal Seam Methane 101 .......................................... 48
Appendix C – Regional gas demand .............................................. 51
Appendix D – Company charts ....................................................... 52
Appendix E– Comparable companies ............................................ 57