PetroChina is reconsidering a plan to auction off its multi-billion dollar natural gas pipeline unit, and could instead sell it to an affiliate, three people who were briefed on the matter by the Chinese energy giant told Reuters.

Selling PetroChina Eastern Pipelines Co Ltd to the affiliate, 50 percent owned by PetroChina, would enable China's largest energy producer to maintain control over the national gas grid as well as raise cash to fund oil and gas exploration.

But scrapping the auction would pose a setback to the government's plans to open up the state-dominated energy sector to domestic private investors to improve competition and rein in corruption.

PetroChina controls more than 80 percent of China's natural gas grid, and some privately owned domestic gas companies have complained this monopoly hurts their business.

"It's almost a done decision to let the joint venture... acquire Eastern Pipelines," said a Beijing-based energy industry executive, who declined to be named as the matter remained confidential.

"Few private investors also have the financial appetite to swallow such a massive asset," the executive added.

A financial industry executive who was also briefed on the sale added: "It's a possibility that PetroChina actually would like to see. They are moving in that direction."

PetroChina's spokesman, Company Secretary Mao Zefeng, declined to comment. Analysts expect PetroChina to make a final decision on the sale in the fourth quarter.

The potential buyer of Eastern Pipelines is PetroChina United Pipelines Co Ltd - a 50-50 joint venture PetroChina set up last year with a domestic insurance firm and an investment fund that counts numerous non-state institutions among its investors, the sources said.

Gas pipelines generate the steady, long-term returns favored by deep-pocketed financial investors such as insurers and funds.

United Pipelines is one of a few local companies with enough capital to buy a huge asset like Eastern Pipelines, one of the sources said. Eastern Pipelines carries an estimated net asset value of between $4.7 billion and $6.3 billion.

United Pipelines, which already acquired parts of PetroChina's gas pipeline assets last year, has a total registered capital of 40 billion yuan ($6.46 billion).

Chinese fund management firm Taikang Asset Management Co Ltd has a 30 percent stake in United Pipelines. Beijing Guolian Energy Industry Investment Fund owns 20 percent.

The remaining 50 percent of United Pipelines is owned by PetroChina.

PRIVATE INVESTMENT

Like many other state-owned enterprises in sectors largely controlled by the government, PetroChina is under pressure from Beijing to bring in private investment.

In May, it said it would auction Eastern Pipelines, which controls the two west-to-east, cross-country gas pipelines in China.

There has been speculation that some privately-run natural gas distributors, which buy gas from PetroChina and sell it to consumers, would be interested in the pipeline assets.

But most of these companies, however, do not have the capital to buy a meaningful stake in Eastern Pipelines, said a senior executive with a Hong Kong-listed, privately controlled Chinese gas company.

"Such projects require huge amounts of investment," said the executive, who declined to be named as he was not authorized to speak to the media. "We just cannot afford to join."

Like its peers, PetroChina is cutting capital spending and selling some non-core assets to fund more profitable exploration and production projects. Runaway spending in the downstream business was one of the factors that have hurt the company's finances for several years.

Sinopec Corp, China's second-largest oil and gas producer, is selling up to 30 percent of its retail arm to raise up to $20 billion. Both companies are following Beijing's policy to promote so-called "mixed ownership" in the energy sector which has enjoyed massive expansion over the last two decades but has also become a breeding ground for corruption.

PetroChina and its parent firm, China National Petroleum Corp (CNPC), are at the center of one of the biggest corruption investigations into the Chinese state sector in years.

($1 = 6.1944 Chinese Yuan)