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China struggles to open its energy sector to more non-state entities

Public Policy

As China forges ahead toward the end of its 12th Five-Year Plan in 2015, the path toward reform in the energy sector for easier market entry and more competition—outlined as a main target in the plan—remains long and winding.

State-owned enterprise reform was only made a priority this year, with the government pledging to introduce more participation from non-state entities in a number of sectors monopolized by SOEs, including oil and gas.

Sinopec and China National Petroleum Corp. duly announced their reform plans. The former is partially divesting its downstream marketing business while the latter said it would welcome private investment in six business areas, including gas infrastructure, refinery projects and, crucially, in the upstream.

While tantalizing to companies clamouring for active participation in the country’s bankable energy sector, the reality will be less promising.

The main aim of the reform is for the SOEs to bring in more shareholders to enable them to tap equity and capital markets to fund their operations. It is unlikely that the companies will freely open up swathes of acreage to new investors.

Instead, the existing practice of cherry-picking only what the companies cannot develop on their own to farm out will persist.

“Production sharing contracts—which are already the main way through which companies come in—will still continue to be used for foreign participation, but only limited to areas such as the unconventionals,” said an analyst.

CNPC has been reported to be mulling a new bid round for onshore blocks in western Xinjiang province for cooperation, a rare move given state companies’ tight control of conventional onshore acreage.

But the blocks are believed to be technologically complex to exploit and the round is seen more as a reflection of CNPC’s need for foreign expertise than a real desire to involve external parties on an operational front.

Elsewhere, operating conditions have been slow to improve.


Earlier this month, Canadian independent Enviro Energy said its relationship with state-owned partner China National Petroleum Corp. had deteriorated to such a point that it was seeking to terminate its production sharing contract for a coalbed methane block in Xinjiang.

Enviro’s grouse was what has been a long-standing complaint by many CBM operators—other Chinese coal companies, including state giant Shenhua, were mining in land that had been demarcated as part of the PSC. The company claims the work reduced the resource base at what was otherwise a prolific block.

In all fairness, some measures have worked, such as government efforts to simplify the approvals process. Since May last year, smaller oil and gas projects no longer need to be sanctioned by the central government before commercial development can start.

“The central government has decentralized control and allowed provincial divisions to be engaged in regulating CBM development, compared with say, five years ago. …This makes [project] execution more convenient,” said another foreign CBM operator.

This is all the more advantageous because the nature of CBM dictates that more collaboration with local governments is beneficial to ongoing projects, said the operator.

“Because it is unconventional [gas] trapped within coal seams, there is a lot more engagement at the provincial level than there is with the central government,” he added.

However, the downside of decentralization of these processes means any company keen to get involved in a new project will find the bureaucracy difficult to navigate, the operator said.

“The hurdles have gotten worse, because now you’ve got to start at the provincial level and make your way to the central level to ever get anything approved. So from an execution standpoint, if you have a deal, it’s getting better. If you don’t and you want to do a new deal, in my view it’s impossible,” the operator said.

In the last year, internal turmoil within CNPC—China’s dominant upstream player—has also arguably held up progress on projects.

Sources speculate the problems faced by Enviro Energy likely stem from the corruption scandal that has plagued CNPC, which has resulted in the resignations of a number of highly-placed personnel and a management reshuffle.

Enviro claims it has not heard from CNPC regarding its initial protest last year that coal companies were encroaching in its block and the sources attributed this to management being too caught up its own imbroglio to pay attention to operational issues at projects.

— Song Yen Ling in Singapore


One Comment on "China struggles to open its energy sector to more non-state entities"

  1. Davy on Tue, 29th Jul 2014 8:09 am 

    I have been reading several articles on Zerohedge on the significant corruption at the very top of the CNPC and their subsidiaries. This is something that will hamper any expansion if your leaders are in court on fraud charges. CNPC is an example of the rot throughout the Chinese business community in every sector. China has a culture of corruption. China is a big balloon ready to pop mostly from issues related to corruption, mismanagement, and a huge credit explosion. This is a very real danger for the rest of Asia in particular.

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