The three major oil companies may face major asset restructuring: The National Development and Reform Commission has approved the plan for establishing a \"pipeline company\"

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The long-awaited **Petrogas Pipeline Company has finally been included in the plans for 2019**. **Pipeline Companies: Reform and Restructuring – 2,300 words | Estimated reading time: 4 minutes | By Tudu. On January 25, according to the Economic Reference News, the **Development and Reform Commission held a meeting to approve** the plan for establishing oil and gas pipeline companies; this plan has been submitted for approval at the higher levels, with the expectation that these companies will be established in the first half of this year. It is worth noting that once the **pipeline company is successfully established, it will become a large-scale enterprise similar to grid companies or China Tower Co., Ltd.; a oil giant with an estimated valuation of 500 billion yuan could emerge, one whose strength would be on par with the Big Three oil companies. ◆◆◆**How to establish an oil and gas pipeline company: The establishment of the long-planned China Pipeline Company is a topic that has attracted considerable attention in the oil industry. At present, the establishment of the new pipeline network company will take place in three phases: the pipeline assets of large state-owned oil and gas companies such as CNPC, Sinopec, and CNOOC will be separated and reorganized, so as to distinguish between pipeline transportation and sales ； Social capital is planned to be introduced to advance reforms in the operation mechanism of oil and gas pipelines, ensuring fair access ； Finally, the new pipeline company will seek to go public. As can be seen from the above, the key steps are to achieve independence for pipeline assets and to separate pipeline transportation from sales. In these two aspects, the three major oil companies are essentially fully prepared. As early as the end of 2016, CNPC decided to separate its natural gas sales operations from its pipeline operations. By last October, CNPC merged its Natural Gas Sales Branch and Kunlun Energy Co., Ltd. to form a specialized natural gas sales company, marking the official separation of its sales and pipeline operations. On January 14, 2019, Bloomberg reported that the listing of Sinopec Sales Co., Ltd. had been approved by China’s State Council. The planned listing of the sales company also indicates that Sinopec has divested its crude oil and refined oil pipeline assets in preparation for selling them to **Pipeline Company. Regarding the shareholding structure of the new company and the introduction of social capital, sources familiar with the matter indicate that in the newly established oil and gas pipeline company, the state-owned oil companies will hold the majority of shares, while the remaining shares will be determined based on the valuation of each company’s pipeline assets, thereby ensuring fair access. Xu Jiangfeng, a senior engineer in comprehensive planning at the Planning Institute of CNOOC, also said that in the establishment of the new company, it is necessary to reflect the shareholding ratios determined based on assets, while ensuring relative independence; the three major oil companies should not have absolute control, and several large funds could be brought in. Obviously, the details and structure of the plan for establishing the new pipeline company may already be finalized, and an official announcement from a **major oil giant is expected. Some estimates suggest that if the pipeline assets operated by each of the ‘three major oil companies’ are taken into account, the valuation of the new pipeline company could range from 300 billion to 500 billion yuan. If the injection of social capital is taken into account, undoubtedly a pipeline \"giant\" will be created. ◆◆◆Pipeline network reforms boost vitality in the oil and gas market. Once the new pipeline company is established, it will serve as a boost for the domestic oil and gas market. At present, the construction and operation of pipeline networks are mainly concentrated in a few large state-owned enterprises, and the phenomenon of fragmented and monopolistic pipeline networks is becoming increasingly apparent. Data shows that by the end of 2017, the total length of domestic oil and gas transmission pipelines in China was approximately 133,100 kilometers. Of this total, PetroChina’s pipelines accounted for about 65% of the total length, while Sinopec’s pipelines made up 15%. CNOOC had the shortest pipeline network, which was mainly focused on natural gas transportation. Undoubtedly, this hinders the interconnection of pipeline networks; even some oil and gas resources that are developed through market mechanisms or imported cannot enter the pipelines freely, posing significant constraints on resource allocation and ensuring a stable supply in the market. **The \"2018 Natural Gas Development White Paper\" issued by the Energy Administration in conjunction with the Development Research Center of the State Council and relevant departments of the Ministry of Land and Resources shows that the level of interconnection between main pipelines, between main pipelines and provincial pipeline networks, and between coastal LNG receiving stations and main pipelines is relatively low. At the same time, there are numerous regional gas source \"islands\" or standalone LNG terminals; there are few hub stations with interconnection capabilities and pipelines with two-way gas transmission functions. The pressures in the gas networks do not match, preventing the effective utilization of excess gas sources and LNG receiving stations. To this end, a new pipeline company was established to create an independent third-party entity—the Pipeline Company, which helps ensure the efficient and smooth allocation of resources as well as the fair opening of oil and gas infrastructure to third parties. In this way, it will further stimulate activity throughout the upstream and downstream sectors, removing infrastructure constraints that prevent social capital from entering the upstream exploration and development field. At the same time, given that pipelines enjoy economies of scale, achieving interconnection and increasing the transportation distance and load factor of pipelines will effectively reduce the cost of pipeline transportation. According to the \"Medium- and Long-Term Oil and Gas Pipeline Plan\" jointly issued by the National Development and Reform Commission and the Energy Bureau, it is estimated that by 2025, China’s main natural gas pipelines will reach 163,000 kilometers, which is nearly double the 133,100 kilometers available at the end of 2017. Facing such rapid growth in oil and gas pipeline construction, unified planning of these pipelines will facilitate pipeline development and reduce transportation costs. ◆◆◆The oil and gas industry is undergoing comprehensive reforms. In fact, in addition to reforms in the midstream pipeline network, reforms in other segments of the industry chain are also being carried out, presenting new opportunities for the domestic oil and gas sector. The \"Several Opinions on Promoting the Coordinated and Stable Development of Natural Gas\" issued by the State Council (hereinafter referred to as the \"Opinions\") propose to deepen the reform of the management system for oil and gas exploration and exploitation, and to introduce relevant detailed regulations as soon as possible. Strictly implement the mechanism for withdrawing oil and gas exploration blocks, fully adopt competitive bidding for the allocation of such blocks, and encourage the market-based transfer of mining rights. Specifically, the recommendation is to encourage enterprises that meet the entry requirements and possess the necessary qualifications to engage in the exploration and exploitation of conventional oil and gas, thereby gradually establishing an exploration and exploitation system led by state-owned enterprises with the participation of various economic entities. Previously, the two major Chinese oil companies, CNPC and Sinopec, redistributed internal mining rights through internal competition. Internal mineral rights transfers resolved the imbalance in personnel and resources between the eastern and western regions within oil companies, and provided experience for the government to carry out external reforms regarding oil and gas mineral rights. On December 5 last year, three existing oil fields under Sinopec – the Zhongyuan Oil Field, the Jianghan Oil Field, and the Jiangsu Oil Field – were each granted oil and gas blocks in Sichuan, Guangxi, and Liaoning respectively. Shortly thereafter, on December 24 of last year, China National Petroleum Corporation decided to transfer the oil and gas exploration rights covering 18,400 square kilometers in the southern part of the Ordos Basin and its surrounding areas from Changqing Oilfield to Liaohe Oilfield. It is worth noting that China National Petroleum Corporation’s work conference in 2019 also stated that efforts to facilitate the transfer of internal mining rights would be intensified this year, with the second batch of such blocks to be transferred in order to boost exploration activities. In the downstream oil and gas sector, **a posture of continued development is maintained. On June 28, 2018, the Ministry of Commerce and the **National Development and Reform Commission jointly issued the \"Special Administrative Measures for Foreign Investment Access (Negative List) (2018 Edition)\\", which removed the requirement that foreign-owned chain gas stations must have Chinese ownership if they numbered more than 30. Faced with an open downstream market, a large number of international giants and private enterprises have become key players in this market upgrade. BP has stated that it plans to build 1,000 new gas stations in China over the next 5 years. Furthermore, to ensure energy supply security, the policy incentives for domestic oil and gas exploration and development will also be further unleashed. In the coming months, subsidy policies for tight gas extraction and backing gas for gas storage facilities are expected to be introduced one after another. Among them, dense gas is expected to receive a subsidy of 0.2 yuan per cubic meter mined, which will effectively address the issue of rising development costs for enterprises over time and enhance their operational capabilities in the upstream sector. At the same time, the subsidy policies for gas storage facilities not only help to restore profitability in the domestic gas storage sector, but also enhance the capacity for using natural gas storage for peak load management. Clearly, as reforms in the oil and gas industry progress, more companies are expected to enter the mid- and downstream segments of this market and benefit from these reforms.