China’s recent love affair with natural gas is taking a new turn after the creation of a nationwide pipeline network last year.
The change in recent months has rocked China’s three energy majors, China National Petroleum Corp. (CNPC), China Petrochemical Corp. (Sinopec) and China National Offshore Oil Corp. (CNOOC). Everyone suddenly found their position strongly changed after the last rejig which created a modern national distribution network accessible to all.
This network came into being in October with the official launch of China Oil & Gas Network Corp., also known as PipeChina. After years of work, the company took over the pipeline and gas assets, storage facilities and import terminals from the three state-run majors, CNPC, which operates under the name of PetroChina, providing the most assets. The change was aimed at making the system more efficient and opening the door to competition between the three giants and potentially other future players by giving everyone access to the same national network.
Such reorganizations are relatively common in large state-controlled industries, as Beijing tries to find the most effective formulas for large-scale assets that were once all part of the vast state-run complex in the era. of the planned economy. In the case of PipeChina, the launch of the new grid also lays the groundwork for Beijing’s ambitious plans to generate more electricity from cleaner-burning natural gas rather than dirty-burning coal, traditionally the largest source of electricity. energy from China.
Although still in its infancy, the landscape is already changing as Sinopec and CNOOC open more regional offices to take advantage of distribution capacity where they did not previously have. At the same time, PetroChina – the biggest loser after PipeChina was established due to the loss of its extensive and exclusive network in many parts of the country – is taking a step back to determine its next steps.
The three energy majors have generally localized their decision-making as they attempt to define regional strategies that will give them the greatest competitive advantage in the future, said Shi Ning, senior partner of industrial consultant Zizhitonglian.
“The reforms of PetroChina and Sinopec are more about the decentralization of power to their provincial sales units,” said Shi. “In fact, it would have been unimaginable in the past.”
An industry source said PetroChina is currently working on a resource allocation plan to adapt to the new landscape, involving greater use of nearby natural gas supplies to reduce costs by decreasing its dependence on transportation. by long-distance pipeline. The company held a 90-minute teleconference last July to explain the likely impact of the creation of PipeChina to its senior executives. At the time, CFO Chai Shouping said the assets PetroChina was losing provided the company with 15.65 billion yuan ($ 2.4 billion) in profits in 2019, representing one-third of its total.
In the meantime, Sinopec is rapidly diversifying its national sales network after entering markets where it previously had no distribution infrastructure. For example, Sinopec will now have access to networks in Yunnan and Guizhou provinces. It had never before attempted to enter these markets due to the lack of pipeline resources, said Wu Bin, general manager of Sinopec’s liquefied natural gas (LNG) unit in northeastern Qingdao city. is.
In anticipation of the coming change, Sinopec launched a major overhaul of its natural gas business last year by integrating its upstream and downstream operations. The company has also aggressively developed its natural gas sales network.
This network was previously centered on three large sales units, one covering northern China, one for the area from Sichuan province east to Shanghai and one for southern China. Working on this basis, the company recently added another 16 sales centers, allowing it to cover all 29 Chinese provinces.
“Our previous system only had sales centers wherever we had pipelines, i.e. northern China, Sichuan to Shanghai and southern China,” said Xi Haihong, director of the sales department of the natural gas division of Sinopec. “As we only opened sales offices in places where we had pipelines, the emphasis on sales was light in the past and not too aggressive. Following the reform, we split these three big pieces into smaller pieces to target local markets. “
Of the three energy majors, the one with the most to gain is CNOOC, which previously lacked pipelines to transport natural gas long distances within China. Many industry watchers told Caixin that CNOOC was moving quickly to try to grab downstream market share in the space. In particular, the company has taken advantage of the low prices of imported LNG in an attempt to seize market share in the wealthy coastal regions of eastern and southern China.
The launch of PipeChina and the competition it now sparks are just the latest wrinkles in the development of China’s natural gas network over the past 30 years.
The industry took a significant step forward in 2004 when it achieved east-west distribution across the country to help fuel its rapid industrialization and urbanization. In 2010, he completed another campaign that saw him set up a new generation of local natural gas distributors to supply the country’s energy-hungry cities during its rapid urbanization.
This process has seen the rise of companies such as Hong Kong and China Gas, China Resources Gas Group, ENN Energy Holdings, China Gas Holdings, Kunlun Energy, as well as gas operators in the major cities of Beijing, Shanghai and Shenzhen. This group could also benefit from the formation of PipeChina by giving it more choice when selecting its natural gas suppliers.
With all of these together, China hopes to dramatically increase its use of cleaner-burning fuel as part of its ongoing campaign to clean the country’s air.
Natural gas accounted for just 8.8% of China’s energy consumption in 2020, far below the global average of 24%. That left plenty of room for expansion, with the three energy majors announcing big plans to increase their natural gas business in the years to come.
PetroChina said natural gas will grow from 43% of its combined oil and gas production in 2020 to 55% in 2025. Sinopec said it aims to keep its natural gas production growing at an annual rate of 10 % or more over the next three years, reaching over 100 billion cu. meters by 2025 – double the amount from 2020. And CNOOC said natural gas will increase from 19% of its total combined oil and gas production in 2020 to around 30% in 2025, and will increase further 50% by 2035.
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Caixinglobal.com is the English-language online news portal for the Chinese financial and business news group Caixin. Nikkei recently agreed with the company to exchange items in English.