By Emma Graham-Harrison

BEIJING, Oct 10 (Reuters) - China may re-establish an energy ministry and a sector watchdog under a draft law that could be finalised by next year, sources said, as Beijing seeks to tighten control of the strategic sector and boost efficiency.

"They are looking at two bodies, an administrative one and a regulatory one," one industry source, who declined to be named, told Reuters.

The regulator might also be rolled into the new energy body, which would not necessarily be called a ministry, another source and an official paper said.

Analysts warn that any body without ministerial status might find it difficult to manage powerful state-owned energy firms or influence other top officials.

China, the world's number two oil consumer, dismantled a previous energy ministry in 1993, and brought energy affairs under the control of the National Development and Reform Commission (NDRC), an economic planning super-ministry.

The draft law -- which is also likely to cover foreign ownership of energy assets and strategic reserves -- could be unveiled soon if internal revisions went smoothly, the Shanghai Securities News reported, citing a member of the drafting team.

"We expect that at the earliest the draft could be finished late this month or early next, then it will be made public to solicit comments," the paper cited the source as saying.

The administrative body could be called an "Energy Ministry" or "Energy Commission", the paper added.

But the country is currently gearing up for the most important political meeting in five years, when President Hu Jintao will try to consolidate his position and other top leaders will be jostling for power, so any draft is unlikely to surface until after that ends.

When it is finalised, the government would likely seek to have it approved by the annual full session of China's parliament, usually held in March for around two weeks.

One source said it might be ready in time for the 2008 meeting, although the Shanghai Securities News said the drafting process was likely to last through the second half of that year.

URGENT NEED

In 2003 Beijing set up an energy bureau under the NDRC, and in 2005 added a vice-ministerial level energy office, but together they have fewer than 100 employees, compared with thousands at the United States' Department of Energy.

They have struggled with a plethora of challenges, from a growing reliance on imported oil and the fallout from state-owned firms' overseas ventures to managing low state-set fuel prices as global crude markets climbed over $80 a barrel.

Last year Beijing also pledged to massively increase energy efficiency by 2010, as it wrestled with serious air pollution at home and looks set to overtake the United States as the world's top emitter of greenhouse gas carbon dioxide

A plan drawn up by the World Bank and the national power regulator had recommended China should set up an energy ministry and the deputy head of the International Energy Agency told Reuters in April that the concept was back on the table.

But William Ramsay warned that although China needed stronger institutions -- from regulators to policy-makers -- to guide the sector, and reform should be a priority for law-makers, an energy ministry might raise new complications.

Beijing would have to weigh up whether it should control policy in areas like transport and housing, key to energy demand but with major social implications, he said. (Additional reporting by Alfred Cang in Shanghai)

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