[NGW Magazine] China Revives Gas Pipeline Operator Idea
This article is featured in NGW Magazine Volume 2, Issue 20
By Tim Daiss
An independent gas transmission system operator for all China would be challenging but could help the market to develop along more competitive lines.
China may finally be about to reform its natural gas sector which many, both within the country and outside of it, claim is long overdue. In late September, the National Development and Reform Commission (NDRC), China’s economic planner, said it had revived a plan to create a natural gas pipeline company.
Three senior NDRC officials familiar with the plan said the commission was working with the country’s three state-run oil majors (CNPC, Sinopec Group and Cnooc) on the proposal, Reuters reported.
One of the sources said “talks will examine what assets would be included in the new company, who the main stakeholders will be, and how it will run.”
Talks of establishing a natural gas pipeline company first surfaced five years ago and the idea comes as gas use in China reaches record highs amid the government’s efforts to rein in air pollution caused by coal-fired power generation. Beijing has earmarked gas to account for at least 10% of its power generation energy mix by 2020, up from just over 5% in 2015.
China’s domestic gas demand over the first eight months of 2017 increased by 17.8% year-on-year to reach 150.4bn m³. Natural gas imports from January to August were up 24.8% to 57bn m³.
The Paris-based International Energy Agency (IEA) recently projected that China would account for 40% of the growth in global natural gas use over the next five years.
An even more compelling part of the equation has been China’s recent LNG imports, spiking 44% for the first eight months of the year over the same period a year ago. LNG sales within China rose by 45% year-on-year in H1 2017 to 8.11mn tonnes.
This marked increase in both gas use and LNG imports is also spawning a new LNG sector comprised not only of China’s three state-run oil majors but independent private companies that are importing it and even building their own receiving terminals.
Ripe for change
News that the NDRC could create a natural gas pipeline company comes two years after it called for sector reform. The NDRC said in 2015 that China’s energy companies should provide more transparency about their operations and that pipeline owners should allow equal access to their pipeline networks for all producers and consumers.
Both CNPC and Sinopec divested part of their gas pipeline businesses last year. Sinopec has said it would sell half of its Sichuan-east China pipeline business, eight months after a similar but larger-scale restructuring at CNPC.
However, given the size of China’s gas pipeline network and the power the country’s state-run oil majors wield, more change is needed.
The NDRC forecasts that China’s natural gas pipelines will total 103,000 km by 2020, up from 64,000 km at the end of 2015.
PetroChina, for its part, the listed-arm of CNPC, controls 70% of all natural gas production and sales in China. Sinopec and CNOOC control 16% and 10%, respectively.
Beijing-based Caixin Media said in a May report that China’s natural gas sector “largely remains in the firm grip of a state oligopoly that’s been accused of slowing the gas market’s progress.”
One of the limiting factors for reform has been government-sponsored price setting by the state-run oil majors. “The pricing system has been blamed for rendering natural gas less competitive than other high carbon fuels,” the report added.
Possible sector changes
However, a new gas pipeline company in operation would not of itself change the pricing system. Xunpeng Shi, an adjunct senior fellow at National University of Singapore’s Energy Studies Institute, told NGW that the government has advanced two pricing reforms.
“The first is an audit to calculate the transmission tariff; and the second is conducting an auction through an exchange, the prices of which in the long run will replace city-gate prices,” he said.
“In terms of formality, the pricing system will not be changed significantly by the [new] pipeline company,” he said. “However, the [new] company will definitely increase liquidity in the wholesale gas markets and speed up the development and adoption of wholesale gas prices as benchmarks as an alternative to managed city-gate prices.”
A new natural gas pipeline company could also help China’s independent gas companies navigate the country’s LNG sector. They began importing LNG in late 2014, but many have been limited to importing to terminals owned by the country’s state-run oil majors.
Even after some independent players built their own LNG receiving terminals and started imports they were unable to access the country’s gas pipeline network and had to transport the fuel by truck, which limits their profitability, Mi Lin, an LNG trader for Beijing Gas Group, told NGW in September.
Xunpeng said that a new gas pipeline company would open the possibility for LNG terminals owners to have open access, but added that it’s not clear how much these privately owned LNG terminals could increase their use of gas pipelines.
“There are two reasons that the current model of transportation has been used,” he said. “First, pricing mechanisms for pipeline gas and LNG are different with the latter being liberalized. Therefore, it is often more profitable to use trucks to transport LNG out of terminals.
“Second, the pipelines that LNG terminals can access are often distributional pipelines, which may not be a part of the national pipeline,” he said.
There are other takeaways if China does push through with plans to build a gas pipeline company, including helping the sector to become more transparent – a criticism echoed by the May Caixin Media report.
A new gas pipeline company would also help Beijing reach its goal of using gas for at least 10% of its energy mix by 2020. However, Xunpeng said since it’s still a primary plan further investment is needed for it to help reach that goal.
Tim Daiss