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ANALYSIS: China's latest energy liberalization policy set to break oil and gas monopolies

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ANALYSIS: China's latest energy liberalization policy set to break oil and gas monopolies

Singapore — China's decision to open up its oil and gas infrastructure to third parties will pave the way for the break-up of energy monopolies in the country and the creation of national pipeline companies.

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Operators will be required to open their facilities to all eligible users through transparent tendering processes, and to separate their pipeline business from other segments such as upstream production and sales, according to the new measures announced by China's National Development and Reform Commission on May 24.

As part of this resolution, a cornerstone of Beijing's energy liberalization strategy, China has also decided to adopt thermal units of measurement instead of volumetric units, as the standard units for measuring and pricing domestic gas by end-May 2021, NDRC said.

"The move aims to break the monopoly of state-owned companies in the gas sector, and allow more participants to enter into the market," said a gas trader in Beijing.

The liberalization measures include infrastructure such as oil and gas pipelines, LNG terminals and underground gas storage. It excludes special pipelines for oil and gas field production, refinery pipelines and city gas facilities.

The new measures follow an announcement earlier this year of the government's plan to establish a national pipeline company, and also update the trial measures that were issued in 2014 with a validity of five years, NDRC said.

The new policy is more specific and detailed than previous ones, which will be superseded by the latest notifications, the National Energy Administration said Tuesday.

PETROCHINA AND CNOOC

State-owned PetroChina and CNOOC are the companies most affected by the decision, as they own and operate most of the country's pipelines and LNG facilities.

PetroChina is the biggest operator of oil and gas pipelines. It controls 84,000 km of pipelines, comprising 52,000 km of gas pipelines, 20,000 km of crude oil pipelines and 12,000 km of oil product pipelines, according to the company's 2018 annual report.

CNOOC is the biggest operator of LNG import terminals in China. It controls nine facilities along China's coastal areas, accounting for nearly half of the country's LNG terminals and total receiving capacity.

CNOOC has taken the initiative to open up its LNG import infrastructure to third parties.

It awarded access to its Yuedong LNG and Zhejiang LNG terminals to third-party consortiums through auctions on the Shanghai Petroleum and Gas Exchange (SHPGX) last year. This year, CNOOC launched agreements for long-, medium- and short-term LNG terminal access on SHPGX, the most recent ones in May, which is a further step towards the opening up of its LNG receiving facilities.

"CNOOC's terms for third-party access are considered to be a bit strict but it is understandable. After all, they have invested a lot in building those LNG facilities and signed many long-term LNG contracts in a bid to guarantee domestic supply," said a gas trader in southern China.

The trader said the price of LNG cargoes under long-term contracts is now higher than spot LNG prices, making it more lucrative for industry players to tap international markets, facilitated by liberalization policies.

Meanwhile, PetroChina in late May announced its plans to sell imported pipeline gas on SHPGX through auctions, a new step towards the liberalization of its gas business, although it has not yet released the terms and conditions of third-party access to the company's pipelines and other infrastructure.

The company is still engaging in the separation of its pipeline business from other oil and gas operations, according to market sources.

"PetroChina's pipeline companies used to recoup some losses for its gas import business due to high import cost versus lower domestic city-gate gas prices which was capped by the government," said the gas trader in south China.

"The disaggregation of its pipeline business would inevitably encourage the company to raise its wholesale natural gas prices in a bid to compensate some losses for the import business," the trader added.

URBAN GAS PIPELINE COMPANIES BENEFIT

Urban gas pipeline operators are expected to benefit from the liberalization of upstream facilities because they will have more options in choosing gas suppliers and sources of natural gas.

This includes China Gas, one of the largest city gas companies, and several other smaller city gas operators like Guangzhou Gas and Foshan Gas, which operate in the local market.

These companies supply gas to end-users through their own pipeline networks, which are linked to national and provincial gas pipeline networks that have not been liberalized.

"Once the upstream facilities are fully opened, we will have more choices in sourcing resources. For example, we can purchase LNG directly from the international market by obtaining access to LNG terminals and send them to our city pipelines via access to national and provincial gas pipelines," said a source with China Gas.

"Currently, we can only purchase pipeline gas from PetroChina, or buy LNG from CNOOC and then deliver it by truck," the source said.

--Analysis by Cindy Liang and Abache Abreu

--Edited by Alisdair Bowles, newsdesk@spglobal.com