NPC: Revved Up

According to sources, the National Pipeline Company (NPC) may be founded in August 2019. State Council may adopt the new enterprise mode in the foundation of NPC: to separate the ownership, operation right and usage right.

The Chinese Government has determined to advance the marketization reform in the oil & gas market, yet the operational difficulty is beyond expectation. Bothered by multiple preparation work such as asset reorganization and HR arrangement, the original plan which requires NPC to start in H1, 2019 can hardly come true.

However, the rough design of NPC has been leaked. NPC will be a vice-ministerial level enterprise (at the same level of NOCs) which will be controlled by the central government directly and managed by State-owned Assets Supervision and Administration Commission (SASAC). The core assets of NPC will be the natural gas pipelines amid some other pipelines for crude and refined oil. In addition, some gas storages, LNG receiving terminals and some oil wharves will also be transferred to NPC. SASAC will hold over 50% shares of the new NPC, and the three NOCs will hold shares based on their present volume of pipeline assets, roughly 7 (CNPC): 2 (Sinopec): 1 (CNOOC). Considering the asset volume, the total asset of NPC will be around RMB 300 billion to 500 billion.

Besides, considering the State Grid Corporation of China (SGCC) and the Power Construction Corporation of China in the power industry, State Council may also set a pipeline construction corporation with NPC at the same time. Although NPC may start in August, SCI heard from multiple sources that the normal operation might delay by at least one year or more.

A New Enterprise Mode

The enterprise mode of NPC will be unique among all enterprises owned by the central government as the ownership, operation right and usage right will be separated. In its mixed ownership, SASAC will hold the share on behalf of the state, and some of the other shares could be sold to the public. NPC will operate independently. And, what’s more, all customers will have the same priority when renting the pipelines.

The main assets of NPC will be the natural gas pipelines. Specifically, all the pipelines with the design pressure of over 5 MPa may be transferred to NPC, including the trunk pipelines and some sub-lines. All pipelines of NOCs must be transferred, and the handing over of those belonging to provincial pipeline companies will be optional and voluntary. For those small-scale and city-level pipeline network will still stay with city gas companies.

Some gas storages, LNG receiving terminals and oil wharves may also be transferred to NPC. There’s no clear information so far about which parts of these infrastructures will go to NPC. Some market players said such activity was to keep some high quality assets and advantages for NOCs. There’re unsupported rumours that terminals with high utilization rate will be kept for NOCs, such as the Tianjin FSRU. What’s more, to ensure the stable operation of NPC, the cross-border pipelines will still be operated and managed by CNPC. This is mainly because of the complicated equity structure of international pipelines.

Difficult Asset Stripping

The length of the NOCs pipeline takes up over 80% of the total in China. Among them, CNPC owns 84 thousand km (taking up 63% of the total), Sinopec owns 15% of the total and CNOOC owns 7%. Resources said, according to such situation, SASAC will hold over 50% shares of NPC, and the proportion of CNPC, Sinopec and CNOOC will be 7:2:1.

But how to finish the asset stripping as pipelines are important assets to NOCs. It will cost a long time to do the accurate calculation of the original value, the appreciation and other numbers. NOCs have done some preparations. For instance, CNPC has already broken up and separated transportation and sales.

In the three NOCs, CNPC will face the largest losses as the major operator of China’s present natural gas pipelines. What’s more, in the year of 2017 and 2018, to ensure the gas supply, CNPC signed some gas import contracts with overseas enterprises at relevant high prices. According to CNPC financial report, the profit of the natural gas and pipeline business was RMB 25.52 billion in 2018, up 62.6% Y-O-Y. However, the loss of the gas import was RMB 24.91 billion. After it transfers pipelines to NPC, CNPC will face a net loss in the natural gas industry. Some experts advise that both the assets and the debts should be passed to NPC at once.

Potential Pipeline Building Boom

Natural gas is thought to be a perfect choice as a kind of clean energy in the transformation of energy structure. However, the gas industry in China is always limited by the lack of pipelines. Now the total length of China’s gas pipeline is 77.2 thousand km (133.1 thousand km for all oil & gas pipes), which is around 1/8 of that in the U.S. and 1/9 of that in France. The interconnection between different pipeline networks is also insufficient.

In this way, the first task of NPC after founded is to gain more investment and build more pipelines. According to NDRC and NEA’s Petroleum & Natural Gas Pipeline Project in Medium and Long Term, the total length of China’s oil & gas pipeline shall reach 240 thousand km, in which the length of gas pipes will be 163 thousand km. This means in the next five years, the length of the gas pipeline shall double.

Previously, the construction of the natural gas pipeline relied on the work of CNPC. In 2018, CNPC paid RMB 26.5 billion in the construction of multiple lines such as WEP III-Fujian & Guangdong Sub-line and China-Russia Pipeline North Section. The budget for pipe construction is 17.8 billion in 2019, focusing on the construction of sub-lines and other infrastructures. Luckily, pipelines are considered to be high quality assets in China. SCI has heard from different enterprises that they had interest in the investment of gas pipelines. Besides, NPC’s nature of mixed ownership also gives it the chance to absorb capital from the market.

The gas price is another problem that raises wide awareness among the “liberal economists”. Although the foundation of NPC could reduce the pipeline transportation fee, there are still other factors affecting the gas price. SGCC and its partner China Southern Power Grid have been criticized as a symbol of state monopoly, despite their excellent work. According to the Petroleum & Natural Gas Industry Marketization Reform Plan, indeed the control of the price may loosen. There will also be supervision from the public. But you’ll never see the pricing formula decided by the company or the capital. After all, that’s something far more beyond the word “reform”.