China gas market reform creates multiple investment opportunities

Rita Huang's picture
Rita Huang, Information Director – Senior Analyst, ICIS - China
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China’s natural gas apparent consumption increased by 10.89% from a year ago to 109bn cubic metres in the first half of 2016, according to data from the National Bureau of Statistics (NBS). The growth was mainly attributable to the natural gas market reform, more natural gas and LNG infrastructure, improved natural gas competitiveness and policy support for natural gas utilisation.

China starts the natural gas market reform in 2016 - the starting year of the 13th Five-Year Plan period (2016-2020). The deep reform is expected to bring significant changes to the natural gas industry and create unprecedented opportunities for foreign and private enterprises. However, the reform may be a challenge for state-owned and traditional enterprises.

China will gradually remove control on natural gas city-gate prices. From November 2016, natural gas suppliers and users can negotiate the prices based on current benchmark prices. The government only capped the range of upward adjustment at 20% and set no limit on downward adjustments. The move laid a foundation for complete open-up of the prices.

The Chinese government brought forward many documents in 2016 to promote fair access to gas pipelines and to enhance supervision on gas pipeline transmission and distribution charges. In 2016-2017, China is likely to improve and release more detailed documents on fair access to gas pipelines and other infrastructure. In 2017-2018, natural gas city-gate prices to residential and non-residential users are expected to be unified and the government control of natural gas city-gate prices may be further lifted. In 2019-2020, China aims to complete the natural gas market reform. In Europe and the US, it took 10 years to complete their natural gas market reforms. China targets to fulfil the reform in five years, which presents a great determination but also implies challenges.

On the policy side, China’s top economic planner - the National Development and Reform Commission (NDRC) issued the Notification of Enhancing Supervision on Natural Gas Pipeline Transmission and Distribution Charges and the Notification of Disclosing Basic Information of Oil & Gas Pipelines and LNG Terminals in August-September. The NDRC required rationalising natural gas prices in all segments, urged operators of oil & gas pipeline and LNG terminal to disclose information of their facilities and to define conditions for using gas pipelines. The release of the two documents will help push forward the natural gas market reform in the mid-stream storage and transmission sector. In addition, the NDRC issued the Interim Provisions for Management Measures of Natural Gas Pipeline Transmission Prices and the Interim Provisions for Supervision and Review of Natural Gas Pipeline Transmission Cost in mid-August and asked for advice from the whole society on the natural gas pipeline pricing mechanism.

The natural gas market reform encourages private and foreign enterprises to invest in the up- and downstream sectors. Many enterprises began to invest in LNG terminals in China. They have entered into or are negotiating on several LNG import contracts. Many companies eye on mid-stream and downstream sectors and step up their pace in investment. Market-oriented investment and diversification of investors create many investment opportunities.

Looking into 2016, China’s natural gas market reform will go on steadily. Oil & gas giants will gradually restructure their companies and carry out mixed-ownership structure reform. The policy inclination to natural gas projects instead of coal projects will create new opportunities for China’s natural gas market and boost gas consumption growth. In this context, more social capital is attracted to enter the natural gas upstream, mid-stream and downstream sectors.

In the new economic situation and the new market pattern, China’s natural gas enterprises begin to cooperate with each other and explore the whole industry chain. They will bring forward new commercial patterns and strategic plans and make innovations to adapt to the industrial changes.

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