speed of pipeline construction does not meet
demand, and the efficiency and economic benefits of pipeline investment and construction need
to be improved. Some provinces with their own
pipeline companies want gas pipelines to be built
and operated by these companies in a centralised
manner, excluding other companies from
investing in and constructing gas pipelines in
their province. In other provinces that do not
have such policies, the monopoly policy is
exercised during project approval. Gas storage
facilities also lack diversity. The country’s 12 gas
storage facilities are owned by CNPC and
Sinopec. Six private gas companies have jointly
constructed one town gas storage facility, but it is
yet to be provided with working gas.
Third, gas infrastructure is highly integrated,
which hinders downstream market development.
China’s gas sector has not yet separated transmission from distribution and sales. As a result,
the highly integrated upstream, midstream and
downstream monopoly business model dominates. For example, about 98% of upstream gas is
supplied by CNPC, Sinopec and CNOOC. These
three companies have built about 95% of trunk
oil and gas pipelines and account for 90% of the
receiving capacity at China’s 17 liquefied natural
gas (LNG) terminals. They are also the principal
actors in gas production, purchase and sales. As
pipeline construction and investment needs to
have gas sources and a market, the upstream
monopoly creates a barrier for pipeline investment that prevents other participants from
entering the field. In addition, the upstream
monopoly restricts direct gas purchase transactions with large users and hinders growth in
imported gas, which has a negative impact on the
development of the downstream natural gas
market.
Fourth, most of China’s trunk gas pipelines
are owned by CNPC, Sinopec and CNOOC, but
they are poorly interconnected. And most
provincial pipelines were built jointly by
provincial state-owned enterprises and the three
oil and gas titans. Typically controlled by
provincial state-owned companies, the provincial
pipelines are not interconnected with national
trunk pipelines. Access to pipelines and fair
services is difficult for newcomers, even for
state-owned enterprises supervised and managed
by central government. Why? Under the vertically integrated model of operation, pipelines
help large oil and gas companies integrate
exploration with imports and sales. Large oil and
gas companies with upstream resources do not
want to lose the lucrative midstream pipeline
transmission market and be restricted in their
sales activities. There is not enough pressure on
them to open pipeline infrastructure to others.
Also, large oil and gas companies view LNG
terminals as gas supply points, rather than public
infrastructure. There is, therefore, a conflict of
interest between maintaining the price of gas
high over the long term, providing third-party
access to infrastructure, and performing the duty
of ensuring supply. The existing oil and gas
system can meet the demands of market-oriented
reform, but it has become a bottleneck impeding
the rapid, healthy and sustainable development of
the natural gas industry.
5.2.2 The Market’s Ability
to Determine Price Is
Insufficient
First, market-oriented pricing has not been
implemented in competition-based sectors. The
price of most oil products and natural gas is
currently set by the government, rather than by
the market. Since the conflict between the
transparency of the oil products pricing mechanism and the hysteresis of price adjustments has
not been resolved, the oil product price mechanism cannot fully reflect supply and demand in
China, or the scarcity of resources or environmental impact. As a result, it cannot effectively
stimulate or restrain the efficient development
and reasonable consumption of oil and gas
resources. As for the natural gas pricing mechanism, the current city-gate price is a benchmark
price set by government, including ex-plant price
(imported gas price) and the pipeline transmission tariff. This pricing model, with its two links,
impedes third-party access to pipeline facilities.
Although the Circular on Adjusting the Residential City-Gate Gas Price of May 2018 stated
that China would gradually unify the residential
Special Report 4: China’s Energy System Revolution
461
demand, and the efficiency and economic benefits of pipeline investment and construction need
to be improved. Some provinces with their own
pipeline companies want gas pipelines to be built
and operated by these companies in a centralised
manner, excluding other companies from
investing in and constructing gas pipelines in
their province. In other provinces that do not
have such policies, the monopoly policy is
exercised during project approval. Gas storage
facilities also lack diversity. The country’s 12 gas
storage facilities are owned by CNPC and
Sinopec. Six private gas companies have jointly
constructed one town gas storage facility, but it is
yet to be provided with working gas.
Third, gas infrastructure is highly integrated,
which hinders downstream market development.
China’s gas sector has not yet separated transmission from distribution and sales. As a result,
the highly integrated upstream, midstream and
downstream monopoly business model dominates. For example, about 98% of upstream gas is
supplied by CNPC, Sinopec and CNOOC. These
three companies have built about 95% of trunk
oil and gas pipelines and account for 90% of the
receiving capacity at China’s 17 liquefied natural
gas (LNG) terminals. They are also the principal
actors in gas production, purchase and sales. As
pipeline construction and investment needs to
have gas sources and a market, the upstream
monopoly creates a barrier for pipeline investment that prevents other participants from
entering the field. In addition, the upstream
monopoly restricts direct gas purchase transactions with large users and hinders growth in
imported gas, which has a negative impact on the
development of the downstream natural gas
market.
Fourth, most of China’s trunk gas pipelines
are owned by CNPC, Sinopec and CNOOC, but
they are poorly interconnected. And most
provincial pipelines were built jointly by
provincial state-owned enterprises and the three
oil and gas titans. Typically controlled by
provincial state-owned companies, the provincial
pipelines are not interconnected with national
trunk pipelines. Access to pipelines and fair
services is difficult for newcomers, even for
state-owned enterprises supervised and managed
by central government. Why? Under the vertically integrated model of operation, pipelines
help large oil and gas companies integrate
exploration with imports and sales. Large oil and
gas companies with upstream resources do not
want to lose the lucrative midstream pipeline
transmission market and be restricted in their
sales activities. There is not enough pressure on
them to open pipeline infrastructure to others.
Also, large oil and gas companies view LNG
terminals as gas supply points, rather than public
infrastructure. There is, therefore, a conflict of
interest between maintaining the price of gas
high over the long term, providing third-party
access to infrastructure, and performing the duty
of ensuring supply. The existing oil and gas
system can meet the demands of market-oriented
reform, but it has become a bottleneck impeding
the rapid, healthy and sustainable development of
the natural gas industry.
5.2.2 The Market’s Ability
to Determine Price Is
Insufficient
First, market-oriented pricing has not been
implemented in competition-based sectors. The
price of most oil products and natural gas is
currently set by the government, rather than by
the market. Since the conflict between the
transparency of the oil products pricing mechanism and the hysteresis of price adjustments has
not been resolved, the oil product price mechanism cannot fully reflect supply and demand in
China, or the scarcity of resources or environmental impact. As a result, it cannot effectively
stimulate or restrain the efficient development
and reasonable consumption of oil and gas
resources. As for the natural gas pricing mechanism, the current city-gate price is a benchmark
price set by government, including ex-plant price
(imported gas price) and the pipeline transmission tariff. This pricing model, with its two links,
impedes third-party access to pipeline facilities.
Although the Circular on Adjusting the Residential City-Gate Gas Price of May 2018 stated
that China would gradually unify the residential
Special Report 4: China’s Energy System Revolution
461