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08 April 2019
On 19 March 2019 the seventh meeting of the Communist Party's Central Comprehensive Deepening Reform Committee approved:
The government had previously asked the China National Petroleum Corporation (CNPC), Sinopec Group and the China National Offshore Oil Corporation (CNOOC) to divest their oil and gas pipeline assets and businesses. These assets and businesses will be integrated into the new national pipeline network company, which will be independent of the CNPC. This initiative will significantly transform China's oil and gas sector into a more competitive and non-discriminatory environment for all players.
China's natural gas industry has long since failed to separate transportation, distribution and sales, which has led to a highly integrated monopoly in the upstream, mid-stream and downstream markets. According to media reports, PetroChina, Sinopec and the CNOOC account for 98% of the upstream natural gas supply and 95% of the main pipelines. Further, out of the 17 liquefied natural gas receiving stations in China, the three national oil companies (NOCs) account for 90% of the receiving capacity. Since these NOCs control the oil and gas pipelines, they primarily invest in and develop the natural gas pipeline network trunk line and any associated projects. Oil and gas resources developed or imported by private enterprises cannot freely enter the pipelines and it is difficult to realise the significant investment potential of natural gas pipeline construction. As such, the government has realised that it must:
In recent years, various documents have been published regarding the promotion of the market-oriented reform of the oil and gas pipeline network.
Development Research Centre report
In 2013 the State Council's Development Research Centre submitted a general report on the reform, proposing that the government:
separate the oil and gas pipeline network business from the oil and gas enterprises integrated in the upstream, mid-stream and downstream, set up several oil and gas pipeline network companies, and establish a government supervision system for oil and gas pipeline networks.
Communist Party and State Council guidance
On 13 September 2015 the Central Committee of the Communist Party and the State Council issued the Guiding Opinions on Deepening the Reform of State-Owned Enterprises. The guidance opined that the reform should be carried out in industries with a natural monopoly and focus on:
Further, in accordance with the characteristics of each industry, network transportation should be separated and opened up to competition in order to promote the marketisation of public resource allocation.
Opinions on implementation plans
During the solicitation of opinions on widening the oil and gas reform in 2016, opinions were put forward which urged the government to:
Communist Party and State Council opinions
In May 2017 the Central Committee of the Communist Party and the State Council issued Several Opinions on Deepening the Reform of Petroleum and Natural Gas System, which encouraged:
National Development and Reform Commission development plans
On 5 March 2019 the National Development and Reform Commission issued:
The plans confirmed the establishment of a national pipeline network company to promote the independence of oil and gas trunk pipelines and separate pipeline transportation from sales.
Now, following the issuance of the Implementation Opinions on the Reform of the Operation Mechanism of Oil and Gas Pipeline Network on 19 March 2019, it is clear that that the government intends to:
The government will also promote the formation of an oil and gas market system which is characterised by:
This should improve the efficiency of oil and gas resource allocation and ensure the safe and stable supply of oil and gas. This policy meets the requirements of a market-oriented oil and gas industry, which is conducive to eradicating monopolies and encouraging more enterprises to invest in oil and gas.
Pursuant to the Development Report for China's Energy and Chemical Industry 2019, which was issued by Sinopec's Economic and Technological Research Institute, the national pipeline network company is expected to be established in 2019. Its establishment will be carried out in three stages:
In 2016 the NOCs began to streamline their pipeline assets and separate their associated pipeline network companies from their downstream sales business. At present, the pipeline networks of CNPC, Sinopec and the CNOOC have been separated internally. Once the integration operation begins, the pipeline assets and related personnel of the NOCs will be merged into the newly established national pipeline network company.
The promulgation of the Implementation Opinions on the Reform of the Operation Mechanism of Oil and Gas Pipeline Network is an important step towards the marketisation of China's oil and gas pipeline industry. This measure is conducive to the separation of oil and gas transportation and marketing and will have a significant impact on China's current oil and gas market mechanism.
Impact on market competition
At present, China's natural gas pipeline network is controlled by three major oil companies. The integrated operation of supply and marketing and the regional natural gas monopoly have rendered the bargaining power of other gas suppliers and downstream gas enterprises weak. The establishment of an independent pipeline network company will:
The initiative will improve competition among other market subjects and therefore increase overall market competition.
Impact on market prices
At present, China's natural gas prices are managed in a graded, segmented manner. The wholesale price of the central city gate station is regulated by the competent pricing department of the State Council or the provincial pricing authority. The terminal retail price of local distribution companies is determined by the local price authority in accordance with the principle of cost addition. The gate station price is calculated by binding the gas source ex-factory price with the long-distance pipeline transportation price. Once the national pipeline network company has been established, the price of a long-distance pipeline network can be separated from the gate price paid by downstream gas users, which will lay the foundations for liberalising gas prices.
Impact on market regulation
Pipeline networks are a natural link in a monopoly and gas supply and consumption is a competitive business. Previously, oil and gas enterprises were a combination of competitive and monopoly business. The government mainly supervised prices and rarely regulated behaviour. Once the national pipeline network company has been established, the monopoly business previously distributed among many enterprises will be concentrated into one company, thereby creating an even greater monopoly. At this time, the government must:
The national pipeline network company will have a significant impact on assets and efficiency indicators. As a listed company, the divestiture of the national company's pipeline assets will face investor scrutiny. At present, the organisation and operation of mixed-ownership enterprises under the control of state-owned entities are facing challenges. As potential major shareholders, large state-owned petroleum and petrochemical enterprises will bear greater social responsibility and operational pressure. According to media reports (eg, Weixin), the CNPC has – in anticipation of its pipelines assets being carved out – started taking advantage of its current monopoly in the upstream and midstream markets for supplying gas to the main cities of various provinces and has made aggressive efforts to enter the municipal gas sales market. For example, on 9 November 2018 the CNPC's natural gas sales branch signed a gas pipeline opening agreement with its affiliate pipeline company and the downstream Kunlun Energy Company, thereby raising concerns of possible violations of China's anti-trust law. With problems like this emerging, it is still uncertain whether the establishment of a separate and independent pipeline sector and the reform of the national natural gas pipeline network system will meet their objectives. China still has a long way to go to establish and regulate an independent pipeline sector.
For further information on this topic please contact Chen Yingnan at Broad & Bright by telephone (+86 10 8513 1818) or email (firstname.lastname@example.org). The Broad & Bright website can be accessed at www.broadbright.com.
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