the provincial level to implement independent
supervision of fair access to gas pipelines, regulate prices and quality of products and services,
and maintain an orderly gas market.
Local pipeline reform is a key part of China’s
market-oriented reform of the oil and gas pipeline network. Local reform should be carried out
alongside long-distance pipeline reform, or the
latter will be one step short of success. Reform
measures for local pipeline networks include
establishing independent gas pipeline companies,
unbundling pipeline transmission and gas sales,
and allowing fair third-party access to infrastructure. First, the creation of independent
provincial pipeline companies and the unbundling of pipeline transmission and gas sales should
be accelerated. Provincial pipeline companies
should not operate gas sources or purchase or sell
gas. They should only provide a gas transmission
service. Second, provincial pipeline companies
must allow fair and non-discriminatory access to
pipelines to third parties, and provide all users
with pipeline transmission, gasification, liquefaction and compression services. Third, local
pipeline construction should be deregulated to
encourage private capital to construct gas
infrastructure included in the provincial plan.
The rate of construction of intra-provincial
pipelines should be planned, taking into
account oil and gas resources and demand. The
principle of “adapting pipelines and storage tanks
to local conditions” should be followed to allow
storage to play a dominant role in cities with
lower gas demand, thus avoiding unnecessary
pipeline construction. Fourth, intra-provincial
pipeline interconnection should be promoted by
developing consistent technical pipeline standards and by setting a reasonable lowest load
indicator when estimating the transmission tariff
for connecting pipelines, thereby ensuring gas
supply security. Fifth, in provinces with excessive transmission and distribution, reform should
reduce the number of nodes to lower gas transmission and distribution costs. Users should be
encouraged to negotiate prices direct with gas
source companies to encourage fair competition
on the supply side.
(3) Promote oil and gas pricing reform and
create natural gas exchange centres
In accordance with the principle of “maintaining
administration over pipeline transmission tariffs
in natural monopolies and deregulating gas
source and sale prices”, China’s oil and gas
pricing reform should: (i) improve the oil product
pricing mechanism and allow the market to play
the decisive role; and (ii) gradually deregulate
gas source and sale prices, improve the price
protection mechanism for low-income groups
and establish a market-oriented oil and gas
pricing mechanism. The government should only
regulate those pipeline transmission and distribution tariffs under natural monopoly, and
restrict price intervention to abnormal oil and gas
price fluctuations and to emergencies. This
would enable the government to transition its
role from pricing to regulation and ultimately to
marketise oil and gas prices.
The oil product price mechanism should be
further improved. After several rounds of price
mechanism reform, China’s pricing system for
refined oil products has become increasingly
market-oriented. In the current and future international energy market, with abundant oil supply
and rapid development of alternative energy
sources, the external conditions for marketoriented oil product pricing are good. China’s
oil product market is characterised by three features. First, market participants are diversified.
Private refining and chemical companies, oil
product businesses and service stations have
developed rapidly, and their market penetration
matches that of the three state-owned enterprises:
CNPC, Sinopec and CNOOC. As the crude oil
import quota is gradually deregulated, the quota
granted to local refineries, including private ones,
has exceeded 100 million tonnes, allowing oil
product sources to diversify. Second, there is
regular market competition. Excess oil refining
capacity has intensified competition in the oil
product market. This means that governmentguided crude oil and oil product prices have
declined in significance. Third, there are regular
price adjustments. As the market-oriented pricing
Special Report 4: China’s Energy System Revolution
469
supervision of fair access to gas pipelines, regulate prices and quality of products and services,
and maintain an orderly gas market.
Local pipeline reform is a key part of China’s
market-oriented reform of the oil and gas pipeline network. Local reform should be carried out
alongside long-distance pipeline reform, or the
latter will be one step short of success. Reform
measures for local pipeline networks include
establishing independent gas pipeline companies,
unbundling pipeline transmission and gas sales,
and allowing fair third-party access to infrastructure. First, the creation of independent
provincial pipeline companies and the unbundling of pipeline transmission and gas sales should
be accelerated. Provincial pipeline companies
should not operate gas sources or purchase or sell
gas. They should only provide a gas transmission
service. Second, provincial pipeline companies
must allow fair and non-discriminatory access to
pipelines to third parties, and provide all users
with pipeline transmission, gasification, liquefaction and compression services. Third, local
pipeline construction should be deregulated to
encourage private capital to construct gas
infrastructure included in the provincial plan.
The rate of construction of intra-provincial
pipelines should be planned, taking into
account oil and gas resources and demand. The
principle of “adapting pipelines and storage tanks
to local conditions” should be followed to allow
storage to play a dominant role in cities with
lower gas demand, thus avoiding unnecessary
pipeline construction. Fourth, intra-provincial
pipeline interconnection should be promoted by
developing consistent technical pipeline standards and by setting a reasonable lowest load
indicator when estimating the transmission tariff
for connecting pipelines, thereby ensuring gas
supply security. Fifth, in provinces with excessive transmission and distribution, reform should
reduce the number of nodes to lower gas transmission and distribution costs. Users should be
encouraged to negotiate prices direct with gas
source companies to encourage fair competition
on the supply side.
(3) Promote oil and gas pricing reform and
create natural gas exchange centres
In accordance with the principle of “maintaining
administration over pipeline transmission tariffs
in natural monopolies and deregulating gas
source and sale prices”, China’s oil and gas
pricing reform should: (i) improve the oil product
pricing mechanism and allow the market to play
the decisive role; and (ii) gradually deregulate
gas source and sale prices, improve the price
protection mechanism for low-income groups
and establish a market-oriented oil and gas
pricing mechanism. The government should only
regulate those pipeline transmission and distribution tariffs under natural monopoly, and
restrict price intervention to abnormal oil and gas
price fluctuations and to emergencies. This
would enable the government to transition its
role from pricing to regulation and ultimately to
marketise oil and gas prices.
The oil product price mechanism should be
further improved. After several rounds of price
mechanism reform, China’s pricing system for
refined oil products has become increasingly
market-oriented. In the current and future international energy market, with abundant oil supply
and rapid development of alternative energy
sources, the external conditions for marketoriented oil product pricing are good. China’s
oil product market is characterised by three features. First, market participants are diversified.
Private refining and chemical companies, oil
product businesses and service stations have
developed rapidly, and their market penetration
matches that of the three state-owned enterprises:
CNPC, Sinopec and CNOOC. As the crude oil
import quota is gradually deregulated, the quota
granted to local refineries, including private ones,
has exceeded 100 million tonnes, allowing oil
product sources to diversify. Second, there is
regular market competition. Excess oil refining
capacity has intensified competition in the oil
product market. This means that governmentguided crude oil and oil product prices have
declined in significance. Third, there are regular
price adjustments. As the market-oriented pricing
Special Report 4: China’s Energy System Revolution
469