China’s efforts to create a national pipeline company gained momentum in 2018 as its National Development and Reform Commission (NDRC) focused on increasing natural gas demand and maximizing China’s oil and gas output. These efforts accelerated in May when NDRC and other national agencies enacted new “Measures for Regulation of Fair and Open Access to Oil and Gas Pipeline Facilities.”
Research from Wood Mackenzie indicates that the creation of a national pipeline company in China will help but will also result in higher end-user prices in the short term as the country tries to balance institutional reform with implementation risks.
Wood Mackenzie believes the success of China’s national pipeline should be measured on three main criteria: new capacity investment, third-party access, and operational efficiency. While the first measure is within the pipeline company’s control, according to the consultancy, the other two factors could be problematic and will require additional reform.
Trial measures
Government and industry discussions on a national pipeline have been ongoing since trial measures in 2014. WoodMac consultant Xueke Wang said: “There are two main factors supporting pipeline reform. Firstly, existing infrastructure is insufficient to meet China’s energy demand growth. Pipelines are already running at maximum capacity during peak seasons, and we expect gas demand to rise 2.5 times from 2018 to 673 billion cu m (bcm), accounting for half of Asia’s gas consumption by 2040. Secondly, not everyone has fair access to infrastructure. Independent upstream producers face difficulties accessing takeaway capacity at competitive tariff rates, restricting the pace of upstream development, just when the government needs it most.”
Issues arose which hindered implementation of open pipeline access as set up in the 2014 trial measures. One of the key issues, according to Herbert Smith Freehills LLP, “was the lack of clear definition of ‘surplus capacity’ and no official or independent mechanism or authority to determine what constituted ‘surplus capacity.’” China’s pipeline operators were allowed to determine on their own whether they had surplus capacity to offer into the market and only rarely did so. The second key issue identified by Herbert Smith Freehills was government control of the pricing mechanism when capacity would become available.1
WoodMac assumes the following pipelines to be included in the initial phase of the reform:
• Onshore gas trunk pipelines owned by PetroChina Co. Ltd., Sinopec Group, and China National Offshore Oil Co. (CNOOC).
• Onshore oil pipelines owned by PetroChina, Sinopec Group, and CNOOC.
• China-Myanmar domestic oil and gas import pipelines, including associated compression units.
• Suburban natural gas pipelines above 4 million tons/year.
“Post-reform, we think the three national oil companies could collectively hold up to 70% ownership of the national pipeline, with PetroChina taking pole position at just under 50%,” WoodMac senior analyst Maxim Petrov said.
While the move is unlikely to have material impact on Sinopec and CNOOC, midstream operations are significant to PetroChina’s financial performance, accounting for 25% of operating earnings over the past 5 years, according to WoodMac. The company operates the largest pipeline network in the world, accounting for 63% of China’s total network. Pipeline reform would free up funds for domestic investment and overseas expansion, WoodMac said.
China has also been trying to liberalize its gas pricing for years. But despite efforts in this direction on the national level, local and provincial subsidies remain. The resulting opacity makes it difficult to attract private investors. To the degree a national pipeline will help create either clear market incentives or provide support guarantees for those willing to enter China’s market without them, investment from the outside will become more attractive. Such investment in turn would help both third-party system access and operational efficiency.
1. Sun, M., Ho, C., and Lau, H., “China enacts new measures for third-party access scheme,” Herbert Smith Freehills LLP, June 7, 2019.
Christopher E. Smith | Editor in Chief
Chris brings 32 years of experience in a variety of oil and gas industry analysis and reporting roles to his work as Editor-in-Chief, specializing for the last 20 of them in the midstream and transportation sectors.
