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Letter from China: Pipeline reform heats up

The signs are positive that Beijing is getting serious about opening up its gas network

A lull in China’s pipeline reform activity since the launch of a new national pipeline company seven months ago looks set to end in the second half of this year, as a steady flow of reports in Chinese media suggests work is picking up.

A standalone operating firm, China Oil & Gas Pipeline Network Corporation (PipeChina), had been years in the making by the time Beijing formally inaugurated it last December. A combination of the winter heating season—the busiest time of the year for China’s gas market—and then the Covid-19 pandemic put further progress on the backburner. But, after a quiet few months, pipeline reform appears to be back on the agenda, and the newsflow suggests a rollout could come sooner rather than later.

In April, state-owned Cnooc, China’s top LNG importer, said it had signed an agreement with PipeChina on transferring management rights for some infrastructure. In the same month, local media reported that nearly two dozen subsidiaries of PetroChina, Sinopec and Cnooc—including those running pipelines, LNG regasification terminals and storage facilities—had been transferred to PipeChina.

The announcements are a strong indication that PipeChina is accelerating its efforts to take over supply infrastructure that has been controlled for decades by the three state-controlled oil and gas groups

The biggest headline came in mid-May, when PipeChina announced it had started building its first infrastructure project—an LNG terminal on China’s eastern seaboard that the company had inherited from Cnooc. The facility in Longkou, Shandong province, will require total investment of RMB35bn ($4.95bn) and be able to handle 20mn t/yr when completed.

More recently, PipeChina’s first job posting open to the public revealed the company was hiring for its “discipline inspection and supervision group”—Chinese Communist Party lingo for anti-corruption compliance and ethics.

Momentum building

Viewed together, the announcements are a strong indication that PipeChina is accelerating its efforts to take over supply infrastructure that has been controlled for decades by the three state-controlled oil and gas groups. The signs are encouraging as a lack of details accompanying PipeChina’s establishment, such as the assets to be included and their valuation, sidelined interest in the reform.

But PipeChina still has much to do. Important first steps in the coming months will be establishing which other assets it will take control of, drawing up precise third-party access rules, and then enforcing them.

Accomplishing this would give greater certainty to independent market players and non-NOC actors, and allow them to plan their supply strategies accordingly. ENN Energy Holdings—one of the few independent gas companies in China with unencumbered access to a local LNG terminal—expects PipeChina to begin operating LNG terminals by the fourth quarter and that it will give companies like itself more chances to bid on import slots.

There have been further reports that PetroChina and Sinopec aim to finish moving assets to PipeChina by the end of September, which suggests PipeChina will be somewhat functional towards the end of the year—in time for the next winter heating season.

Big impact

Despite the slow start, pipeline reform remains a potential game-changer for China’s gas sector. Other oil and gas reforms that Beijing is pursuing arguably make little sense if China does not have an independent pipeline system; for instance, upstream liberalisation is unlikely to attract newcomers into drilling for oil and gas if they cannot transport their product to the market via a fair and transparent process.

20mn t/yr – Capacity of planned PipeChina LNG terminal

The reform is arguably long overdue. Most Western oil companies shed their pipeline assets long ago to focus on higher-risk, higher-returning exploration and production activities, or as a result of efforts to open up monopolised sectors via measures such as the EU’s Third Energy Package.

While all three Chinese NOCs are giving up assets, Cnooc and, to a lesser extent, Sinopec are likely to be beneficiaries of midstream reform. The two companies together control less than 40pc of China’s oil and gas trunk lines, so they will benefit from a greater ability to access pipeline infrastructure currently out of their reach via PipeChina. As the country’s largest gas producer and supplier, PetroChina is likely to see its dominance eroded.

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