China considers taking over pipeline network

Nearly 75% of China’s pipeline network was owned by PetroChina by the end of 2012. (PetroChina)

Reform of the energy industry was absent from a communiqué issued in November by China’s Communist Party after a critical meeting. However, a follow-on document – called the ‘Decision’ – indicated that reforms were in the works for the highly monopolised sector, and that “decisive” measures would be taken regarding resource allocation and the introduction of market-oriented pricing.

The Decision targeted the “natural monopoly sector” and said the pipeline network “should be separated in line with the sector’s characteristics so as to enhance the role of the market in resource allocation”.

The statement raised the prospect that China’s ‘big three’ oil and gas majors – China National Petroleum Corp. (CNPC), Sinopec and China National Offshore and Oil Corp. (CNOOC) – will no longer be permitted free rein over the nation’s pipeline network. Of the three majors, CNPC controls a large portion of the nation’s pipelines, and is also the target of a government probe into corruption at the company’s highest management levels.

China’s pipeline network was 55,000 km long at the end of 2012. Nearly 75% of this critical infrastructure is owned by PetroChina – the listed arm of CNPC.

State media latched onto the notion that the state would intervene in the sector, reporting the National Energy Administration was considering the feasibility of wresting operational control of the country’s expansive gas pipeline network from the big three, with transmission fees to be set by the government.

A matter of urgency

Lin Boqiang, director of the China Centre for Energy Economics Research at Xiamen University, said it was both necessary and urgent that operational control of the gas pipeline network be taken away from the big three for unconventional gas development to succeed in China.

“Most of the national grid is monopolised by PetroChina. Certainly it prefers to transmit the gas produced or imported by itself,” said Lin. “After all, unconventional gas producers are in a sense competing with PetroChina.”

Lin expressed concern that the pipeline grid monopoly will continue to pose the most significant barrier to unconventional gas development over the next few years. “If unconventional gas producers can’t sell their output to the grid, they will close down their business. Who will have the enthusiasm or incentive to invest in the sector in the future?”

China is already struggling to meet targets set by policymakers for unconventional gas output in the 2011-2015 Natural Gas Development Plan, published in October 2012. The National Development and Reform Commission (NDRC) has targeted production of 15-18 billion cubic metres per year of synthetic natural gas from coal-to-gas projects by the end of 2015, along with 16 bcm/y of CBM and 6.5 bcm/y of shale gas. However, the country only produced 12.5 bcm of CBM and 500 million cubic metres of shale gas in 2012. No CTG projects came online during the period.

Transparent acts

Five CNPC subsidiaries in are charge of the company’s gas pipeline network. Among them, two subsidiaries operate the Shaan-Jing Gas Pipeline and West-East Pipeline networks. The other three units manage a vast array of regional pipelines, ranging from Xinjiang and Qinghai in the west to central and coastal provinces such as Shandong.

“These units are monopolising transmission and sales of gas to downstream users and have the final say on gas prices,” a sales manager with an LNG plant in Inner Mongolia told Interfax. “They seem to have no transparent cost accounting system. They set the city-gate price and transportation fee and we can’t question them.”

This puts an enormous burden on the bottom line of liquefaction plants, particularly those located far from gas fields. Disputes between LNG producers and PetroChina have taken place in recent months.

Nine LNG plants in Shaanxi province began boycotting PetroChina in October, after the state giant said it would raise gas prices to RMB 1.955 ($0.32) per cubic metre at the end of September. The factories rejected a RMB 0.4/cm transport fee included in the tariff because they are in the same province as their supplier, PetroChina’s Changqing Oilfield subsidiary.

Changqing Oilfield also supplies LNG factories in neighbouring Inner Mongolia. In October, the subsidiary told producers there that it would start charging them RMB 1.955/cm. “But we didn’t agree,” said the LNG plant sales manager.

The pricing dispute remains unresolved, but the manager told Interfax in December that all parties may arrive at a compromise soon. “We are using [PetroChina’s] gas and have no choice in the matter. We are more concerned with a complete lack of supply than with rising costs.”

If the aim of the central government is to modify the structure of the majors to undermine monopolistic practices, the key is to separate operational control of the gas pipeline network, and to separate gas transmission functions from sales functions.

In essence, the restructuring would see pipeline companies take on the profile of a public utility, Yang Jianhong, deputy director with PetroChina Planning and Engineering Institute, told Interfax.

“This platform should be open, fair and transparent to all gas producers and downstream users. Otherwise, there is no sense in separation. An independent grid company can become another monopoly. It may prefer buying and transmitting gas from the companies it likes and refuse to do business with those it doesn’t,” Yang said.

Yang suggested independent pipeline companies, operating on market principles, would regularly disclose information on their business. “The information can be related to the number of suppliers, transmission volumes and fees charged, to prevent abnormal practices that thwart competition and negatively impact pricing.”

One of the main criticisms levelled at the state energy companies is a lack of accountability. Lin agreed disclosure was key to improving transparency and creating greater accountability. “The goal of reform is to improve efficiencies, said Lin, adding that “openness, fairness and transparency are the crucial means to achieve the goal”. Entrenched interests

The state energy majors wield considerable political influence, and are unlikely to welcome reforms that create more competition. “Back in the 1990s, the restructuring of state enterprises aroused the same concerns, but we cleared all of the hurdles and accomplished it under the directive of former Premier Zhu Rongji,” Yang said.

China’s new administration, under the leadership of President Xi Jinping, believes further reforms are absolutely necessary for the country to move to the next phase of economic development.

“To some extent, if the central government really wants to make the gas pipeline network independent, it can do so,” said Lin Boqiang. “However, a sufficient gas supply is of overriding importance to the central government. Under the present conditions, it is easier for the leadership to order one company to bring its pipeline infrastructure and production capabilities to bear to meet national demand, than it would be to command the various parts of a restructured company to do so, especially during peak heating season.”

Beijing is also considering whether restructuring the pipeline business at this juncture will weaken PetroChina’s international competitiveness and undermine state energy security, Lin added.