China’s Draft Pipeline Guidelines Seen Boosting Gas Demand

  • Companies should give independent pipeline accounting: NDRC
  • Proposal ‘long-term positive’ for gas industry: Morgan Stanley

China’s latest attempts at reforming the country’s extensive pipeline network are aimed at lowering prices for end users and boosting gas demand, analysts said Wednesday after the country released draft guidelines.

The National Development and Reform Commission proposed setting gas transmission fees for companies rather than for individual pipelines, the country’s top economic planner said in the policy draft released Wednesday. Operators should publicly disclose cost data to allow effective supervision and should be guaranteed an 8 percent return if they utilize at least 75 percent of their capacity, it said. Owners should also create conditions for equal access to pipelines for all customers, according to the draft.

“The ultimate purpose of NDRC’s pipeline reform is to find a way to deliver cheaper natural gas to end users and therefore improve the fuel’s mix in China’s energy consumption,” said Tian Miao, a Beijing-based analyst at North Square Blue Oak Ltd. “Pipeline companies currently enjoy a 10 to 12 percent return. By capping investment return at 8 percent, the extra margin could be passed down to city gate prices and end users.”

The world’s largest energy consumer is seeking to raise the share of less-polluting natural gas in its energy mix. The government of President Xi Jinping cut gas prices twice last year in an attempt to boost demand.

Separating Pipelines

The NDRC also said pipelines should be separate units from other businesses “in principal.” In the case of integrated companies involved in production and distribution where a physical separation may be difficult, owners should at least provide separate financial accounting for the pipeline operations, it said.

Among the country’s two largest energy producers, China Petroleum & Chemical Corp. would be required to disclose more information if the policy is enacted, according to Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein & Co.

PetroChina Co. already reports its pipeline business in its financial accounts, while China Petroleum, known as Sinopec, would need to provide separate figures “to provide greater transparency on pipeline operations,” Beveridge said.

The draft policy is also the latest indication that the government has iced plans to strip oil and gas pipelines from its biggest energy companies, said Laban Yu, head of Asia oil and gas equities at Jefferies Group LLC in Hong Kong.

‘No Rush’

“It seems there is no rush to spin off pipelines from the big Chinese oil companies based on what they say in the draft,” he said. “The independent accounting requirement seems aimed at long-term reform that will make pipeline spin off much easier if the government eventually plans to do so.”

Bloomberg News reported in May 2015 that the government intended to create an independent national pipeline company as part of broader energy reforms aimed at allowing equal access to infrastructure for gas producers and distributors.

Those plans appear to have changed. China National Petroleum Corp., PetroChina’s parent, in June decided to invest in expanding a major natural gas pipeline after determining the government will no longer seek to spin off its pipeline assets into an independent company, people with knowledge of the plan said. Sinopec this month approved a plan to sell as much as a 50 percent stake in a pipeline asset, a move seen to be following CNPC’s footsteps.

The new policy may be able to provide some transparency that can assist opening pipelines to new producers without having to spin them off.

“This new proposal is a long-term positive to the whole gas industry,” said Andy Meng, an analyst at Morgan Stanley in Hong Kong, said in a note to clients Wednesday. “Release of tariff and return benchmark will significantly improve industry transparency, making ‘Open Access’ of the pipeline more likely.”

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