[NGW Magazine] China Eyes Pipes Merger

Competition for gas customers could develop in China, if plans to create an arm's-length operator come to fruition, allowing smaller companies to secure capacity that would otherwise be blocked off. 

China may finally create a new multi-billion dollar oil and gas pipeline entity which will shift power over the country’s energy pipeline network away from its three state-owned oil and gas giants. Talks are now underway among regulators for a plan that could be formalised before winter to combine the oil and gas pipeline assets of Sinopec, CNPC and Cnooc, under a new operator, a Bloomberg report said  on June 11, citing sources familiar with the matter.

The new company would initially be called China Pipelines Corp and valued around $78bn (yuan 500bn). State-controlled and private funds could also be used to lower the stakes of the three state-owned oil majors to around 50%, therefore reducing their long-standing monopoly in the energy pipeline sector. The sources added that an initial public offering (IPO) could then be held, though they pointed out that these plans are subject to change.

The breaking up of the oil majors’ grip over China’s oil and gas pipeline sector would be a boon for the country’s smaller energy companies, both state-owned and private firms, who to date have had to obtain permission to access the bulk of the pipeline network. This limited access has prevented these smaller companies from gaining energy market share at the expense of China’s oil majors. 

However, the idea for a massive oil and gas pipeline company in China is nothing new. As far back as 2013, some independent gas producers claimed that PetroChina had imposed unfair conditions on them for access to the pipeline grid, erasing the profit-incentive for boosting output. Others were also asking the state-run oil company for better pipeline access. 

China’s National Energy Administration (NEA) released a report in 2014 that included stipulations and rules for third party access to the country’s networks of oil and gas pipelines and associated facilities, both onshore and offshore. However, the measures were considered a trial version with a validity period of only five years.

Moreover, the Law on Protection of Oil and Natural Gas Pipelines was passed in 2010, which sets forth regulations on pipeline construction and operation. However, it does not provide details on how access can be organised.

China’s National Development and Reform Commission (NDRC), the country’s powerful economic planning agency, started talks in 2015 to divest the country’s three state-run energy firms of a large part of their oil and gas pipeline assets as  part of Chinese president-for-life Xi Jinping's reforms to allow markets a more decisive role in the economy.

The NDRC has already ordered Sinopec and PetroChina to allow other companies equal pipeline access, but the policy lacks the power of enforcement because the controlling companies could decide pipeline capacity utilisation and turn down requests. 

Pipeline network still growing 

China’s oil and gas pipeline network is vast at around 120,000 km (74,500 miles), with an estimated value more than $300bn. Together, the country’s three state-run oil majors own about 98% of the pipeline network.

CNPC’s listed subsidiary, PetroChina, holds a 71% market share, worth nearly $150bn, analysts at Goldman Sachs wrote in a report last year. The company’s pipeline network stretches about 77,000 km with almost two-thirds of that used for natural gas, according to its latest 20-F filing to the US Securities and Exchange Commission.

PetroChina in addition to being listed on China’s bourses also has a listing on the New York Stock Exchange (NYSE). China Petrochemical Corp and its listed unit China Petroleum & Chemical Corp, or Sinopec, are the next largest pipeline operators with more than 30,000 km operational as of 2017.

Additional gas pipelines are scheduled to be built in lock step with China’s gas demand. The International Energy Agency (IEA) estimated in its Gas 2017 report that global gas demand would grow by 1.6%/yr until 2022, with China making up around 40% of this growth. The Paris-based agency also said that China’s gas demand is projected to increase to almost 340bn m³ by 2022, while more new pipelines are scheduled to be built.

China’s pipeline network, though still growing, is only around a fifth the size of the natural gas network in the US, but should surpass the US around the year 2040, Neil Beveridge, a Hong Kong-based analyst at Sanford C Bernstein said recently. Open access to pipelines was one of the main reasons that enabled the US shale gas industry to revolutionise the country’s energy sector, a move that China hopes to emulate. 

Opening up markets

Though China has been slow to forge ahead with plans for a separate pipeline company, its oil majors have anticipated the change in the sector for some time and have already started forming separate pipeline companies.

Last November, CNPC split its gas sales and pipeline business. Xu Wenrong, vice-president of CNPC, said at the time that the move was significant in accelerating market reform in the natural gas sector. The move also helps China speed up market reform in its gas sector while allowing the market to play a more decisive role in resource allocation.

Shenzhen-based Essence Securities said that separating the pipeline business from sales would probably bring more social capital to the construction of pipelines, and allow upstream and downstream participants more access to the infrastructure.

A Deloitte report on China’s oil and gas reform released in November said that open, third-party access to the country’s gas pipeline network would be beneficial, allowing new capital to enter the country’s oil and gas fields. Expanding infrastructure access would also lower the operator's cost. For example, granting third-party access to national oil companies' LNG terminals and opening up the pipeline network would enable gas operators to diversify their supply sources at cheaper prices, which is positive for demand. In short, creating competition will create efficiency, Deloitte added. 

Tim Daiss