By Michael Lelyveld
Plans to create a giant new pipeline company in China appear to be on again after years of talks on reforming the state-owned petroleum industry.
On June 11, Bloomberg News reported that government regulators are preparing an announcement before winter on a decision to split off and merge the networks of China’s three national oil companies (NOCs). The combined assets are said to be valued at up to 500 billion yuan (U.S. $75 billion).
The plans for a new China Pipelines Corp. may sound familiar to industry-watchers, since similar proposals to shake up the sluggish petroleum sector have been aired with variations for the past several years.
Like earlier versions, the merger would include the pipelines of state-owned China National Petroleum Corp. (CNPC), China Petroleum and Chemical Corp. (Sinopec) and China National Offshore Oil Corp. (CNOOC).
The reorganization would allow the NOCs to focus on increasing production, proponents say.
Another common goal is to promote competition by ensuring third-party access for independent producers to encourage new investment and output.
One of the new wrinkles of the latest plan is that it would include both oil and gas pipelines at a time when China is pushing for more gas production to reduce reliance on high-polluting coal.
While domestic oil output has gradually declined in recent years, the growth of China’s gas production has also been a fraction of surging import rates.
In the first five months of this year, domestic gas volumes edged up 4.3 percent from a year earlier as imports soared 36.4 percent, according to National Bureau of Statistics (NBS) and customs data.
Government planners have been scrambling to deal with gas shortages that emerged last winter after a badly-executed attempt to reduce smog by banning coal-fired heating in 28 northern cities.
The pipeline initiative is intended to pry open the door for new investors in domestic resources, including developers of shale gas.
Over the years, advocates of restructuring the NOCs have pointed to the example of the European Union’s market reforms under the “third energy package,” which generally bars petroleum producers from owning and operating pipelines and distribution networks.
“If you look at every liberalized gas market, there is a clear separation of pipeline ownership and gas supply,” Sanford C. Bernstein & Co. analyst Neil Beveridge told Bloomberg.
‘Government wants to control sector’
Under the current version of the Chinese plan, state and private funds would be drawn into the new pipeline company to lower the combined shares of the three NOCs to “about 50 percent,” Bloomberg said.
But other analysts said the plan as outlined would fall far short of European Union-style competition reforms.
“I am still trying to figure out how forming a gas pipeline monopoly is market liberalization,” said Edward Chow, senior fellow for energy and national security at the Center for Strategic and International Studies in Washington.
Like most of China’s plans to reform state-owned enterprises (SOEs), the goal is to attract capital from public-private partnerships to help lend support, but it is a far cry from promoting privatization or open markets that would sideline SOEs.
“One thing seems clear — the central government wants to control the energy sector,” Chow said.
Philip Andrews-Speed, a China energy expert at National University of Singapore, also questioned the combination of oil and gas pipelines under a single company.
“To my knowledge, this is not the usual way in which governments unbundle hydrocarbon supply chains,” Andrews-Speed said.
“Gas and oil should be treated separately. Otherwise, there is a risk of just creating another huge monopoly,” he said.
While previous pipeline plans have varied in scope and details, so have the motivations for spinning off the infrastructure of the oversized NOCs.
One major advantage of the latest plan is that shedding the pipeline operations would clear the way for the public listing of Sinopec’s retail subsidiary, said an industry analyst quoted by Bloomberg.
Previous plans have also been driven by NOC financial considerations rather than a push for market reforms.
CNPC has used partial sales of pipeline assets to raise funds as far back as 2010.
In 2102, the company reached an investment agreement with pipe producer Baosteel, two state funds and the Industrial and Commercial Bank of China to build the third strand of its West-East Gas Pipeline while retaining control with a 52-percent share.
In 2015, Bloomberg reported that the National Development and Reform Commission (NDRC) was considering a limited industry restructuring that would establish pipeline operators as independent businesses, allowing the NOCs to raise cash for more profitable exploration and production activities.
Later that year, CNPC’s PetroChina subsidiary also announced a plan to sell 50 percent of its Trans-Asia Gas Pipeline Co. to state-owned China Reform Holdings Corp. for U.S. $2.4 billion (16 billion yuan).
The move was widely seen as shoring up the NOC’s balance sheet at the time of the world oil slump.
In December 2015, PetroChina considered selling a U.S. $47-billion (313-billion yuan) interest in its entire gas network, including the West-East pipelines, Reuters reported.
Sinopec also announced limited plans in 2015 to sell stakes in its East China Gas Pipeline Company for cash needs.
Stopgap measures, smokescreens
The flurry of deals raised expectations of more restructuring to come. But the sales turned out to be little more than stopgap measures and smokescreens for more government support.
In July 2016, the government threw a wet blanket over plans to break off all of the NOC pipelines for the sake of third-party access, apparently reasoning that a time of low oil prices was no time to expose the companies to competition.
“One reason why a national pipeline company that provides access to all producers is no longer needed is because opposition among policymakers has increased to opening upstream exploration to more participants,” Bloomberg quoted an unnamed source “with knowledge of the plan” at the time.
A key question for the NDRC planners and government regulators is why a pipeline spinoff into a separate entity is even necessary to ensure third-party access with equal treatment for independent investors.
Couldn’t the government simply enforce fair access rules for pipelines under existing ownership, as an unnamed official threatened last September in the official Economic Information Daily?
“We have been talking about open and fair pipeline access for a long time, and the detailed plans will likely be released soon. For those who have the capability to give access but decline to do so, there will be punishment,” the official was quoted as saying.
Andrews-Speed voiced doubt that the government has the will to enforce rules for fair competition.
“The key to success is tough regulation of transmission tariffs and of third-party access,” Andrews-Speed said by email.
“With the NOCs remaining as shareholders and a poor track record of tough and consistent regulation in China, it is far from certain that the government’s stated objectives will be attained,” he said.