OREANDA-NEWS. March 19, 2013. China is working to revamp its fuel pricing system to allow refiners to adjust domestic prices of gasoline and diesel more swiftly in response to changes in world crude prices, a senior planning official said.

The current system, which measures the change in the 22-day moving average cost of a basket of crude grades and has a four percent threshold for revisions, does not let domestic fuel prices respond fast enough to international crude costs, said Zhang Ping, chairman of China's top economic planning agency.

China, the world's second-largest oil consumer, is studying plans to shorten the 22-day adjustment period as well as scrap the four percent threshold -- a plan more aggressive than its earlier proposal to only cut the trigger range.

Such a move would allow more frequent adjustments to domestic fuel prices, boosting profits for both PetroChina and Sinopec's refining divisions. Higher fuel prices, aimed at curbing excessive fuel consumption, may also weigh on China's oil demand growth.

"We plan to make the adjustment period a little shorter to better reflect the global price changes. We are also preparing to scrap the 4 percent ... which will make the system more flexible," Zhang, who chairs the National Development and Reform Commission (NDRC), told a news conference.

Plans by Beijing to overhaul its fuel pricing method since 2011 have been delayed by inflation concerns.

But with Beijing setting out a timetable to roll out cleaner fuel standards, analysts said the pricing reform could not be postponed much longer as refiners needed to be profitable before committing to billions of dollars to upgrade their plants.

China National Petroleum Corp., the nation's biggest energy company, will need to spend 15 billion yuan (\\$2.4 billion) over the next three to five years to upgrade the quality of fuel it refines, while China Petrochemical Corp. Chairman Fu Chengyu told state media it would spend about 30 billion yuan a year to upgrade its plants.

"These are significant investments and the refining majors will have a tough time meeting Beijing's deadlines to upgrade the facilities if they continue to make losses," said Liao Kaishun, an analyst with ICIS C1 Energy.

Chinese refiners have endured eight quarters of refining losses. PetroChina's refining processing operations lost 30 billion yuan in the first nine months of 2012, the firm said in its earnings report.

The government is expected to set a minimum and maximum level for fuel price changes to manage inflation risks, Liao added.

China said last month it would make compulsory by the end of 2017 the national V standards for automotive diesel fuel -- similar to Euro V with a sulphur content no greater than 10 ppm -- and the national IV for diesel by the end of 2014.