My work: China opens up energy market to spur greater production

Posted: March 9th, 2020 | Tags: , , , , | No Comments »

Interfax Global Energy Services closed in February 2020, so I am sharing some of my final articles here to preserve them. This article was published on 13 January 2020.

China opens up energy market to spur greater production

China’s announcement last week that it will open up domestic oil and gas exploration and production to all companies – including foreign players – will increase market participation and competition in the upstream segment. Although the impact will probably be limited in the short term, the move is designed to boost production in the longer term in line with the government’s aim to improve China’s energy security.

The Ministry of Natural Resources (MNR) said last Thursday that companies registered in China with net assets of more than RMB 300 million ($43 million) will be eligible to bid for licences to undertake oil and gas E&P starting from 1 May.

This will effectively end a decades-long monopoly over the upstream sector by China’s three NOCs – China National Petroleum Corp. (CNPC), Sinopec and China National Offshore Oil Corp. (CNOOC) – and the Shaanxi provincial government-backed regional player Yanchang Petroleum Group. There is a longstanding view among some experts in Beijing’s policymaking circle that oil and gas output has underwhelmed because of the inefficient and risk-averse three-way monopoly in the Chinese energy industry.

The MNR’s new policy means IOCs and other foreign companies will for the first time be allowed to explore for and produce oil and gas in the country, opening up the industry on a large scale to firms other than the NOCs as Beijing looks to boost domestic energy supplies.

Long-term impact

The long-awaited opening up of the sector is expected to have a limited impact over the next two-to-three years as CNPC, Sinopec and CNOOC will still hold most of the exploration acreage in an expanded and more competitive market. This means the reform may not lure an immediate inflow of foreign investment as the remaining under-explored resources, such as shale oil and shale gas, are costly to develop because of their complex geologies.

The new regulation will also enhance the transfer of oil and gas acreage between upstream companies, improving resource allocation efficiency. As the NOCs hold most of China’s onshore and offshore acreage, they may not invest in exploring all of it. The MNR’s new regulation stipulates that exploration rights will last for five years at a time and can be renewed four times, but the acreage will be reduced by one-quarter from the originally approved area upon each renewal.

This will force the NOCs to cede some of their acreage to the market, but to avoid losing their best blocks they will most likely hand over areas with unpromising prospects. As such, the relinquished acreage may not be attractive enough for new entrants.

Still, the regulation is expected to boost efforts by upstream companies to explore their acreage and speed up asset turnaround. And in the long run, the regulation should increase the number of market participants – in turn raising China’s oil and gas production, which reached 191 mt and 173 billion cubic metres respectively in 2019.

The move is consistent with the Chinese government’s aim to raise domestic oil and gas production. China currently imports 70% of the crude oil and around 40% of the gas it consumes, posing energy security risks. In 2018, Beijing called on the three NOCs to increase their domestic E&P activities for the sake of national energy security.

The change is part of a restructuring plan released on 31 December by the MNR and follows a series of recent moves to overhaul the energy sector. In September 2018, China’s State Council issued a number of gas development guidelines that included a call to enforce existing ‘drill it or lose it’ rules. This policy mandates companies to either develop idle acreage or relinquish their licences, but it had been weakly implemented over the years.

Then, in July 2019, China scrapped restrictions on foreign investment in upstream oil and gas, allowing foreign companies to participate without the need to enter into a joint venture or partner with a domestic company.

More recently, the country officially debuted a new national oil and gas pipeline company last month. The fact the MNR announced the opening up of China’s upstream sector so soon after the formation of pipeline company suggests the need for independent upstream players is on Beijing’s mind. The ultimate purpose of the company is to provide fair and open pipeline access to all producers, but this would be pointless if the only upstream producers were CNPC, Sinopec and CNOOC.

The 31 December restructuring document for the first time marked the unification of E&P rights for oil and gas companies, whereas previously companies needed to apply for the licences separately. This reduction in red tape should theoretically make it easier for investors to conduct business and will boost their confidence – although industry experts have said other existing regulations will need to be adjusted to comply with the rule change.

Foreign companies engaging in E&P activities will need to comply with regulations, including safety and environmental protection, and have the relevant technical capability.

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