PUBLISHED : Wednesday, 14 May, 2014, 10:07pm
UPDATED : Thursday, 15 May, 2014, 2:07am

Opening up China's natural gas sector can spur wider market liberalisation

Hu Shuli says lowering entry barriers for private capital is a good start, but other steps must follow if state monopolies are to be tamed


Hu Shuli is editor-in-chief of Caixin Media Company, editor-in-chief of the weekly magazine Century Weekly, executive editor-in-chief of the monthly journal China Reform and dean of the School of Communication and Design at Sun Yat-sen University. She founded CAIJING magazine, a business and finance review, in 1998.

A slowing economy isn't always bad news. In China, officials who were used to investing their way out of a slump have found their hands tied by monetary constraints and massive local government debt. Thus, the government is shifting its focus to the state monopolies, stepping up the pace towards market liberalisation.

Premier Li Keqiang's government work report this year identified the natural gas sector as one of the first sectors for opening up.

Words on paper aren’t enough to convince entrepreneurs that change is in the air

Only late last month, the National Development and Reform Commission published a directive on safeguarding the stable supply of natural gas. On the same day, a work conference of the State Council proposed opening some 80 projects to private capital, including those involving gas and oil pipelines.

That's not all. In February, the National Energy Administration released the "Measures for Regulation of Fair and Open Access to Oil and Gas Pipeline Networks"; in March, the NDRC published guidelines for the construction and operation of natural gas infrastructure.

These guidelines encourage and support private capital participation in the investment and construction of basic gas infrastructure, and require that pipeline and facility operators open their networks to third parties and provide transport, storage and other services to them, provided the operators have surplus capacity.

There are good reasons for hastening the opening up of the natural gas sector. In China, three state-owned companies control the sector. In the past two years, one of them, the China National Petroleum Corporation, has tried to inject private capital into building gas pipeline networks, but, overall, the industry remains largely a state monopoly.

China does not have abundant reserves of conventional natural gas, and basic infrastructure is lacking, so few private investors have been interested. And while the country does have huge reserves of unconventional natural gas, such as shale gas and coal-bed methane, mining licensing and market entry barriers have impeded their development.

Now, however, with the ever-rising demand for scarce resources and America's shale gas revolution leading the way, there is great pressure for China to open up its gas industry.

The series of official directives issued thus far is perhaps more significant in another way: they give hope that the "glass door" that blocks private capital from getting a foot into many industries may be shattered. Words on paper aren't enough to convince entrepreneurs that change is in the air, however; we recall how landmark guidelines issued in 2005 and 2010 in support of private enterprises have yet to be implemented.

Until the government releases more details on the directives and rolls out related reform measures, entrepreneurs will remain wary.

As it stands, two natural gas businesses have piqued investor interest: access to the import of natural gas and the midstream activities associated with a pipeline network.

Currently, a company wishing to import natural gas must fulfil two conditions: first, its business licence granted by the Ministry of Commerce must include a permit for natural gas operations; second, it must have access to specialised port facilities to handle the imports. Such port handling capability must be vetted by the NDRC. To get approval, a company must not only meet certain land and environmental conditions but also submit a signed contract with a foreign company securing natural gas supply.

In addition, the port location must not "contradict the country's strategic objectives", meaning there must be no conflict with the three state-owned enterprises. ENN Energy, the only private company allowed to import LNG, has had to change its port location from Wenzhou to the Zhoushan islands for this reason.

If the National Energy Administration's guidelines are implemented, there is a good chance more private companies will be allowed to use the port facilities now controlled by the state-owned energy giants.

As for access to the pipeline network, whether more private investment will be allowed will depend on how much state-owned giants are willing to share.

The provision of natural gas is a public utility. While the government sets the retail price, the prices upstream are determined by international markets. This creates uncertainty that deters profit-minded private investors. The NDRC has proposed reviewing the pricing structure, such as by introducing a staggered rate for residents. This will help convince private investors.

To successfully break up a monopoly, policymakers must do three things in sequence: lower market barriers, allow price reform and eventually privatise state-owned enterprises. Changes being proposed for the natural gas sector so far are going according to script. If successful, it may well be an example for other state monopolies to follow.

This article is provided by Caixin Media, and the Chinese version of it was first published in Century Weekly magazine.



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