Long-waited Reform Plan for Chinese Oil and Gas Industry

Chinese government recently announced the long-waited reform plan for China's oil and gas industry. A key feature of the plan is set to shake the monopoly position of SOEs, and leave more room and flexibility to private enterprises.

The Central Committee of the Communist Party of China and State Council recently issued the “Certain Opinions on deepening the System Reform for Oil and Gas Industry” (the “Opinions”), specifying the issue-oriented and market-oriented guidelines for the system reform for oil and gas industry (the “Reform”), and setting out the following main tasks for the Reform:

01

To improve and orderly open up the exploration and exploitation system of oil and gas, and enhance the guarantee ability for resource continuation. To implement a compete-to-enter system and a stricter withdrawing mechanism in exploration blocks. To reinforce the qualification management for security and environment protection. To allow qualified entities to participate in the conventional exploration and exploitation of oil and gas, on the basis of protective development. To gradually form an oil and gas exploration and exploitation system involved in the participation of diverse economic sectors, which will be led by large state-owned companies.

02

To optimize the import and export trade management system for oil and gas, and to enhance the ability to utilize resources and prevent market risk at home and abroad. To establish oil and gas management system by establishing a dynamic management system for crude import, which is mainly based on qualification management. To complete the policies on processing trade of refined oil products and policies on general export trade.

03

To reform the operation mechanism of the oil and gas pipeline network, and improve intensive transmission and fair service ability. To gradually separate the main pipelines of large state-owned oil and gas companies, and to unbundle the transmission and sale. To improve the fair mechanism for connecting to the pipeline networks, and open the main pipelines, provincial and inter-provincial pipeline networks to third party market participants.

04

To deepen the reform of downstream competitive links, and increase supply capacity for high-quality oil and gas products. To set stricter technical standards for quality,security, environment protection, energy consumption and other aspects to perfect the entry and elimination mechanism for gas and oil processing. To improve ability of domestic crude intensive processing, and to accelerate the speed in closing down backward production facilities. To increase the development and cultivation of natural gas downstream market, and promote fair competition in gas distribution.

05

To reform the pricing mechanism of oil and gas products, and effectively release vitality of competitive links. The market plays the leading role in determining prices, while government reserves its marco-control right in abnormal fluctuations of market price. To marketize gas prices for non-residents, while to improve the gas pricing mechanism for residents. To accelerate the establishment of oil and gas trading platforms according to law, and to encourage qualified market entities to participate relevant transactions, forming the prices through market competition. To enhance the regulation of pipeline transmission costs and prices, setting the prices scientifically according to the “permitted costs plus fair return” principle.

06

To deepen the reform of state-owned oil and gas companies, releasing the vitality of the key ones. To optimize corporate governance structure for state-owned oil and gas companies, and to encourage the companies meeting requirements to develop diversified forms of ownership. To promote specialized reorganization for state-owned oil and gas companies. To support specialized reorganization for engineering, construction and equipment manufacturing businesses and support them to participate in the competition as independent market entities. To support state-owned oil and gas companies to strip away their social functions and solve the issues left over from history.

07

To improve the oil and gas reserve system and its strategic and secure supply capacity. To establish an organically integrated reserve system consisting of governmental reserve, corporate social responsibility reserve and business inventories. To improve the investment and operation mechanism for reserve facilities through increasing the government investment, and encouraging social investment to participate. To formulate peak-shaving policies and establish hierarchical reserve system. The responsibilities to reserve and peak-shave are specified as: gas suppliers and pipeline companies are responsible for seasonal peak-shaving; local governments are to coordinate between the responsible parties for daily peak-shaving; while gas suppliers, pipeline companies, urban gas companies and big users are encouraged to arrange their daily peak-shaving responsibilities in the purchase and sale contracts for natural gas.

08

To establish and improve a secure and environmental protection system for oil and gas, improving the secure and clean operating capability of the whole industrial chain. To strengthen security supervision throughout the whole process of oil and gas exploitation and utilization, to establish and complete a safe production responsibility system for the whole industrial chain of oil and gas, and to improve the security risk response and prevention mechanism.

The Opinions stress that the Reform is imperative in national security, economic development, peoples’ well-being and social stability, and therefore, should be implemented in an orderly manner with practical plans and supporting measures.

Translated and edited by Eileen Zhang and Yanjing Yang.