China to Create US$78-billion Natural Gas Super Pipeline

- June 13th, 2018

The plan, which has been slowly progressing since 2014, is estimated to be worth US$78 billion and will bring together 70,000 kilometers of pipeline into one entity.

In an effort to combat pollution, China is doubling down on natural gas. The country plans to overhaul its massive gas pipeline network to allow third-party access to miles and miles of state-owned pipeline.

The move is an effort to increase residential and industrial gas use, curtailing and eventually eliminating coal from the country’s energy grid.

The ambitious plan would merge three state-owned oil and gas pipeline assets — China National Petroleum (CNPC), China Petrochemical (Sinopec) and China National Offshore Oil (CNOOC ) — into one national pipeline network, unifying transport and investment decisions.

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The plan, which has been slowly progressing since 2014, is estimated to be worth US$78 billion and will bring together 70,000 kilometers of pipeline into one entity. The national pipeline company may be called China Pipelines, according to a Bloomberg source.

Currently the three Chinese gas giants own 66,000 of the 70,000 kilometers of pipeline. CNPC’s listed arm PetroChina (SHA:601857) — the country’s largest gas producer and importer — owns roughly 70 percent of the gas pipeline network.

A national pipeline and a commitment to reduce reliance on coal energy both fall in line with President Xi Jinping’s commitment to overhaul state-owned enterprises and streamline industrial capacity.

Ideally, state-controlled and private funds will provide sufficient capital to lower the combined stake held by the three oil leaders to about 50 percent. The newly formed company may then file for an IPO.

“If you look at every liberalized gas market, there is a clear separation of pipeline ownership and gas supply,” Sanford C. Bernstein & Co.’s Neil Beveridge told Bloomberg. “Pipeline reform becomes key.”

The overhaul of pipeline ownership would be another crucial step towards a liberalized market, a move China has been touting for some time. Last month, the Asian nation announced plans to harmonize residential and industrial city gate gas prices.

Part of the overhaul includes a gradual residential gas price increase of 20 percent over the next year. The move is expected to incentivize domestic natural gas production and gas imports, because current residential prices are lower than the costs for both domestic and imported gas supply.

“LNG procurement costs in the international market have remained persistently high this year, which means sending imported LNG to downstream residential users is currently a loss-making business,” said Platts in late May.

While the idea of liberalizing the gas sector sounds good on paper, experts believe it could take anywhere from one to two years until the massive pipeline is a reality.

Natural gas prices were up 0.68 percent on Wednesday (June 13) at US$2.96 MMBTU at 12:00 p.m. EST.

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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.

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