Visitors at a booth of the China National Petroleum Corp at an international exhibition of ocean oil and gas technology in Houston, the United States. Facing an inflow of Russian fuel, the nation's largest energy producer is seeking to combine units to create a single gas company to compete with private rivals. [Photo/Xinhua]

Energy producer China National Petroleum Corp is seeking to combine units to create a single gas company to compete with private rivals, ahead of an inflow of Russian fuel at the end of the decade, according to two company officials familiar with the project.

The plan under consideration would be for CNPC's Hong Kong - listed unit Kunlun Energy Co Ltd to buy unlisted PetroChina Kunlun Gas Co, the two people said, asking not to be named as the discussions are not public. Kunlun Energy is CNPC's main commercial gas supplier in China, while Kunlun Gas distributes fuel to households in more than 100 Chinese cities. Both companies are housed within PetroChina Co, State-owned CNPC's largest listed unit.

Kunlun Energy could pay more than $3 billion for Kunlun Gas, according to one analyst's estimate. The asset injection is being discussed for the second half of the year although precise timing has not been decided, company officials said.

CNPC sees to invest at least $2b in Peru

Board changes to drive CNPC

CNPC's desire to combine commercial sales of liquefied natural gas with retail gas distribution is a long-standing one and was derailed last year by a government graft probe that snared two Kunlun Energy chairmen in quick succession, the officials said.

Shi Yan, an analyst at UOB Kay Hian Ltd in Shanghai, said: "Investors have been looking for a sign that the parent's support to Kunlun Energy has not been swayed by what happened last year."

Kunlun Energy rose 5.4 percent to HK$12.88 in early morning trade in Hong Kong, its biggest gain since October.

Qu Guangxue, CNPC's Beijing-based spokesman, did not answer two calls to his office seeking comment. Mao Zefeng, PetroChina's Beijing-based spokesman, said the company has no comment on the matter. A Hong Kong-based official at Kunlun Energy, who declined to give her name by phone, did not respond to e-mailed questions. Two calls to Kunlun Gas' general telephone line went unanswered.

The Russian deal, and China's need to reduce its reliance on more polluting fuels like coal, has contributed to a sharp rally in gas supplier shares - with Kunlun Energy an exception. At Wednesday's Hong Kong close, the company was down 6.6 percent over the past year, compared with an 83 percent gain in China Gas Holdings Ltd and a 29 percent advance for ENN Energy Holdings Ltd. Hong Kong's benchmark Hang Seng Index was up 10 percent.

UOB's Shi said Kunlun Gas could be worth between 10 billion and 20 billion yuan ($3.2 billion), based on a multiple of one or two times the value of its assets of some 10 billion yuan. China Petroleum & Chemical Corp, known as Sinopec, and ENN Energy, offered HK$15.3 billion to buy China Gas in 2011, at a multiple of 1.5 times, a deal which ultimately failed.

CNPC's strategy is to concentrate spending on higher margin energy exploration and production, rather than so-called downstream assets. By folding Kunlun Gas into a listed company, the arrangement would also align with the government's pledge to expand the influence of the free market on the economy.