More Parts of China’s Gas Industry Will Be Opened

SCI99

2019-07-11

More Parts of China’s Gas Industry Will Be Opened

On June 30, 2019, NDRC and Ministry of Commerce published the new edition of 2019 Negative List for Foreign Investment. Compared with the old editions, the restrictions in the exploration & exploitation of oil & gas and city gas companies are eased or cancelled.

In the Foreign Investment Guide Book (2017 Revision), the exploration and exploitation industries of petroleum and natural gas are encouraged to absorb foreign investment. However, the Special Management of Foreign Investment Access (2017 ver. and 2018 ver.) required that such projects should be started and operated via cooperation or joint ventures with the Chinese companies. Besides, most of the exploration projects which foreign companies got involved in were technically hard to be carried on. Now, with the new 2019 Negative List, the above restrictions are cancelled.

China is a country with abundant coal reserves but limited petroleum and natural gas. Thus, China’s gas supply relies on import heavily with a dependent degree of around 46%. As the demand volume is large but the self-supply volume is small, the gas exploitation in China is still attractive to foreign capital. Many international energy giants showed great interest in gas exploration and exploitation. However, to gain access toward upstream areas of oil & gas is just the first step. There are other barriers that international energy companies should try to break. They need to find a way to get the exploration block fairly, which will bring problems in the quit & transfer of the block. Besides, the output of the gas fields needs pipelines to transport, and this problem could only be solved with the normalized operation of the national pipeline company.

Foreign capital will also face no limits to the investment on city gas companies. According to the Negative List 2019, the former regulation of “the city-level residential gas pipeline and heating system of a city with a population of over 500 thousand must be held by Chinese companies or government” is cancelled. Before the marketization reform, the city gas company is like other public services in China: government monopoly, limited market size and sometimes low profits. When the Foreign Investment Guide Book was first implemented on April 1, 2002, multiple kinds of urban public services, the telecom, residential gas, heating and water supply and sewage industries, were opened to foreign investment. In the 2007 ver. of the Guide Book, it was cleared that the construction and operation enterprises of the residential gas, heating and water supply and sewage networks in large cities must be controlled by Chinese companies or government. The Guide Book was revised for several times after that, but this regulation was kept unchanged. Finally, the Chinese control of the urban residential gas and heating industries is abandoned in the 2019 ver.

Obviously, this brings a chance for foreign capital to enter China’s city gas industry and makes it more convenient for some large Chinese city gas companies which went public in HK Exchange Market to expand their business. With the marketization reform and the central policies, the gas cost for end users, especially for inhabitants, has decreased greatly. The margins of city gas companies trended down, and the profit rate of them was controlled by the authority. In this case, owners of some city gas companies with low competitiveness may seek to transfer the property or absorb more investment to strengthen the enterprises. However, the total effect of the foreign investment on city gas companies will still be limited: The ownership of city gas companies with great effect won’t change a lot, and that of companies with great potentials has already be sold to new purchasers.

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