Freeing up China’s midstream sector
The creation of the China Oil and Gas Pipeline Network Group (PipeChina for short) in December 2019 kicked off some radical reforms in the country’s oil and gas sector. China’s biggest national oil companies (NOCs) forged lucrative, over-the-odds deals to sell their assets to the new entity. China effectively freed up its midstream sector from NOC control, with PipeChina acquiring pipelines, storage facilities and import terminals from the biggest operators in the country.
PetroChina agreed in July to transfer its oil and gas pipelines, storage facilities, LNG terminals and assets to PipeChina for a cash payment of 119.2 billion yuan (US$17 billion), in addition to a 29.9% stake in the new corporation, itself worth US$21.3 billion.
Sinopec followed suit by selling its assets for 122.7 billion yuan (US$17.5 billion). Sinopec will receive 52.7 billion yuan (US$7.5 billion) in cash and a 14% stake in PipeChina.
A CNOOC deal has also been made, but details have not been made public.
Experts estimate that PipeChina paid 1.2 times the book value for PetroChina’s assets and 1.4 times the book value of Sinopec’s. It is believed that complex negotiations took place to secure co-operation from the big NOCs, and that the high payments reflect the level of persuasion needed to seal the deals.
PipeChina will now manage China’s huge network of pipelines and will foster gas market liberalisation and encourage independant investors to increase the country’s oil and gas production.
Meanwhile the state-owned NOCs will focus future efforts on upstream exploration and development, and downstream distribution and sales.
Question marks still surround the allocation of new pipeline terminal capacity and pipeline injection rights. There is also a temporary hold on some pipeline activity: as PipeChina is said to have asked the three big NOCs to halt approving and opening new pipelines until the transfer is complete. The restructuring continues to take shape and the new terms are expected to become clearer once China outlines its 14th Five Year Plan, for the 2021 - 2025 period.
When fully operational, PipeChina will be China’s largest midstream oil and gas company, with assets worth between US$40 billion and US$ 70 billion.1
Historically, most of China’s pipelines were owned by PetroChina and its parent company CNPC. This market dominance of the distribution network came to be seen as stunting the domestic drilling industry, as outside companies could be blocked or face expensive fees to get their oil and gas to market.2
What does China’s pipeline reform need to achieve in order to be a success? A boost in domestic energy production, particularly gas, is necessary to keep up with pace in the world’s largest energy market. Lower gas prices should result, and access to pipeline capacity should be more fair across the board. The LNG market should benefit too, as emerging LNG importers reap the rewards of lower spot volumes and better access to terminal facilities.3