By Michael Lelyveld
After previous predictions have gone by the boards, China’s government has confirmed plans for major steps to reform the oil and gas sector this year.
Last month, the China Securities Journal and the official English-language China Daily reported that the government is “likely to create a giant oil and gas pipeline company … around the middle of this year,” renewing a push to transform the state-controlled petroleum industry.
Various versions of the pipeline and reform plans have been reported with similar confidence for the past several years.
As with the last series of reports in 2018, the government would establish a new pipeline operating entity by merging the oil and gas infrastructure of China’s three national oil companies (NOCs) — China National Petroleum Corp. (CNPC), China Petroleum & Chemical Corp. (Sinopec), and China National Offshore Oil Corp. (CNOOC).
On Jan. 25, the financial portal chinaknowledge.com reported that the National Development and Reform Commission (NDRC), China’s top planning agency, had approved the spinoff of the combined assets to form a “National Oil and Gas Pipeline Network Company.”
On March 5, the NDRC formally announced the plan in its annual report to the National People’s Congress (NPC), but without committing to the midyear time frame.
“We will carry out structural reform of the petroleum and natural gas industries, and establish a national oil and gas pipeline corporation so as to separate transportation and marketing,” the agency said.
The current version of the plan, reported by Bloomberg News last June, surprised analysts, since all previous reports had called only for merging the three companies’ oil pipeline networks alone.
According to Bloomberg, government regulators had prepared an announcement of the pipeline merger before winter, but no announcement was made.
In December, a Reuters commentary predicted that the plan “will get underway in 2019,” calling it “a major step toward energy market reform.”
The goal of the merger is to open China’s pipeline systems to third parties, independent producers and new players in the petroleum market.
“We will lift restrictions on access to petroleum and natural gas exploration and exploitation, and actively encourage private investors to step up exploration and exploitation activities,” the NDRC said in its report.
As with previous attempts to involve the private sector in state-owned enterprises (SOEs), the government is hoping that the process will promote more modern management.
“In addition, authorities will also be inviting non-government funds to enter the market to reform operating mechanisms,” the China Knowledge report said in January.
In his annual work report to the NPC, Premier Li Keqiang suggested that the oil and gas overhaul could be a model for restructuring other state monopolies.
“Reforms will be deepened in sectors including power, oil and natural gas, and railways,” Li said.
“In natural monopoly industries, network ownership and operation will be separated in light of the specific conditions of these industries to make the competitive aspects of their operations fully market based,” he said.
“SOEs should get stronger and healthier through reform and innovation to continue increasing their vitality and core competitiveness,” Li said.
The new pipeline company would have an estimated value of 300 billion to 500 billion yuan (U.S. $44.7 billion to $74.6 billion), said the China Knowledge portal, echoing previously published valuations of U.S. $75 billion.
The plan calls for attracting half of its funds for expansion from non-government sources, “such as privately-operated investment funds,” it said.
Reform-minded regulators have reportedly been trying for years to rein in the power of the state oil giants to restrict access to their pipelines, effectively discouraging competition from independent producers.
It is unclear whether China’s current economic difficulties have given the reformers a stronger hand in a period that Li acknowledged as a “hard struggle.”
Despite the series of false starts, the pipeline reorganization could be significant for efforts to boost domestic energy supplies and slow China’s growing dependence on imported oil and gas. But any payoff in increased production is likely to take years.
Experts have said that the plans are aimed at separating production from distribution, adopting a principle of the European Union’s Third Energy Package of reforms to encourage competition.
Previous efforts were stalled by supporters of the NOCs in 2016 after regulators floated earlier versions of the plan.
“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 inside source as saying at the time.
The revival of the pipeline merger plan suggests a continuing behind-the-scenes struggle between industry interests related to the NOCs and the regulators.
In theory at least, the NOCs could benefit from shedding their pipelines and opening up to private investment.
One advantage previously reported by Bloomberg is that a pipeline spinoff would clear the way for a public listing of Sinopec’s retail subsidiary, implying that the pipeline operations have been a drag on profits.
One major difference with reorganization efforts this time is the government’s experience with the difficulties of developing adequate gas networks over the past two years.
The government’s drive to ease winter smog in northern cities by replacing coal with gas heating led to shutoffs and shortages in December 2017 when construction of new connections fell behind.
This winter, the NOCs have been scrambling to build new storage facilities to guard against gas shortages again
‘Probably will happen’
Mikkal Herberg, energy security research director for the Seattle-based National Bureau of Asian Research, said the gas squeeze has made the case for moving the pipeline plan ahead.
“It probably will actually happen this time because it’s needed to make the expansion of the natural gas market possible,” Herberg said.
“The recent winter gas crisis was a demonstration of the problems with the current system of control by CNPC and Sinopec. And gas expansion is a key goal of the government in their air pollution battle,” he said.
At the government’s direction, the NOCs have been investing heavily in network expansion as part of the clean-air campaign to reduce reliance on coal.
While separating the pipelines would help to clean up the NOCs’ balance sheets, it is still unclear how a new pipeline monopoly would operate, attract private capital and continue to expand without substantial rate hikes, subsidies or loans.
Another earlier version of the industry reform plan, reported by The Wall Street Journal in 2015, called for merging CNPC and Sinopec to create a single state-controlled “new national champion,” which would be capable of competing with international oil companies (IOCs).
According to the China Securities Journal, CNPC owns 53,834 kilometers (33,450 miles), or 76.2 percent, of the country’s gas pipelines in addition to 20,359 kilometers, or 68.9 percent, of the pipelines for crude.
Gas pricing has been partially liberalized for several years, but remnants of government controls remain.
“In theory, from April 2015 onwards most natural gas prices should have been set by reference to international benchmarks,” said a paper by senior visiting research fellow Stephen O’Sullivan at the Oxford Institute for Energy Studies in November.
“However, the price adjustment process remains opaque and the best that can be said is that international prices have an influence on the domestic gas price,” O’Sullivan said.
According to another Oxford Energy paper in December, pipeline work and household gas sales have been supported by various provincial and local government subsidies.
In the eastern port city of Tianjin, for example, half of the residential gas price is subsidized, said the paper by researchers at Japan’s Osaka Gas Company, Ltd.
If the government follows the pattern it has used for other sectors, it will try to gradually reduce subsidies and promote market mechanisms.
But the goal of attracting half of expansion funds from private investors appears remote without clear market incentives or support guarantees.
China’s mixed model of public-private partnerships (PPP) makes investment difficult in an industry driven by daily fluctuations in international market prices.
Nothing in the plans reported so far suggests that the state intends to relinquish control of the new pipeline company or the NOCs.
Sources of investment capital are likely to come from financial institutions and asset management firms that are answerable or subject to state control in some way.
Please Donate Today
Did you enjoy this article? Then please consider donating today to ensure that Eurasia Review can continue to be able to provide similar content.