China considers pipeline reform to boost gas supply


(Repeats item first issued late Friday)

* PetroChina-dominated grid limits small gas producers

* Small producers forced to sell at discount

* Mandating access could encourage shale, coal bed gasoutput

By Chen Aizhu and David Stanway

BEIJING, Nov 22 (Reuters) - As China struggles to rid citiesof choking smog, one of the early priorities for Beijing'seconomic reforms will likely be to force state-run PetroChina to allow private producers fair access to natural gaspipelines.

Without fair access to the distribution network, independentproducers have no incentive to develop the country's vast gasreserves to their full potential. Already the world'sfourth-largest gas user, China's leaders want to boost domesticoutput to accelerate the substitution of cleaner-burning gas forcoal to fuel power and heating.

They included gas price reform and some curbs on the role ofstate monopolies in their boldest reforms in decades unveiledlast week. Industry experts say both are needed to maximise gasoutput and ease annual winter supply crunches that have slowedthe switch from coal in power plants and forced authorities toration industrial gas use.

China's largest oil-and-gas producer, PetroChina, built andruns nearly three quarters of the 54,000-km natural gas pipelinesystem across China. It controls most of the large,long-distance trunk lines that pipe gas from far-flung fields tofast-growing cities. Other state energy firms - Sinopec and CNOOC - run the remaining trunk pipelines but aremuch smaller operators compared to PetroChina.

Some independent gas producers say PetroChina has imposedunfair conditions on them for access to the grid, erasing theprofit-incentive for boosting output, and others are asking thestate giant for better access.

"To have more access to the pipelines and more access tobroader markets would bring more incentive to producers," said asenior executive with Asian American Gas, which pumps gas fromChina's coal seams in Shanxi province.

"We have a plan to access the trunk lines and serve thecoastal markets along with our production growth in the nearfuture. The recently proposed new policies are actually in linewith the party's new policy of letting the market decide theallocation of resources."

Open access to pipelines was one of the key factors thatenabled the U.S. shale gas industry to revolutionise the energysector of the world's largest economy. China's shale reservesare potentially bigger than those in the United States, but theChinese sector is undeveloped.

PetroChina demands independent producers sell the gas theywant to move through the pipelines at a discount to the oilgiant rather than charging a transit fee, said executives withindependent producers. They declined to be named as both wereunauthorised to speak to openly the press.

PetroChina declined to comment on the terms of deals it hasmade for third party access to its pipelines. Only a fewindependent producers needed access and they were able tonegotiate terms, said company spokesman Mao Zefeng.

"It is unfair that any third party has unconditional rightsto use our pipelines," the spokesman said. "As an integratedupstream and downstream oil company, gas pipelines are one ofthe components connecting upstream production with downstreamoperations. Our own oil-and-gas need pipeline capacityallocation."

PetroChina pays independent producers 70-80 percent of theretail value of the gas, the executives with independentproducers said. It then sells the gas to consumers at the retailprice, pocketing the difference and preventing independents fromcompeting for customers.

To avoid selling at a discount, independent producers stickto pumping from gas fields to nearby retail markets they canreach without using PetroChina's pipelines.

That means small producers have no motive to boost outputabove a level that meets local consumption and countersBeijing's aim of boosting natural gas output nationally throughencouraging private enterprise to develop unconventional energysectors such as shale gas and coal-bed methane.

While conventional oil-and-gas fields are reserved forChina's state-owned energy giants, Beijing has allowed privatefirms a role in the unconventional sector.

Production of gas from China's coal seams has been moresuccessful than shale, but output would increase more quicklywith better pipeline access, industry sources said.

"One of the boxes (investors in gas exploration) want totick is access to market managed in a regulated and transparentway because there is access to a pipeline," said Beijing-basedGavin Thompson of energy consultancy Wood Mackenzie.

Beijing has introduced subsidies for shale gas and hiked gasprices this year as it looks to boost investment in the sector.Prices need to rise again to lure investors, industry expertssay, with hikes of at least 15 percent a year for the next twoto three years needed to make shale profitable.

As the role of gas in the economy grows, hiking prices somuch may be difficult without fuelling inflation.

China's natural gas consumption is expected to grow to 250billion cubic metres per year by 2015, up 70 percent from 2012.Imports will need to double to 80 bcm as domestic supply failsto keep pace, industry experts have forecast.


The country's top economic planner, the National Developmentand Reform Commission (NDRC), started work on a new policy forgas pipelines long before the government announced its reforms.

A policy draft seen by Reuters that the NDRC circulated inAugust for feedback from industry participants, calls forpipeline operators to provide non-discriminatory transmissionservices to third-parties.

Forcing state giants to allow access on an equal footing toindependents would stimulate investment, while leaving thestate-owned firm in control of the assets it has built. That mayfit into Beijing's plans for slow monopoly reform.

A deeper, longer-term reform would be to establish aseparate operator to run the pipelines. That reform is not inthe draft, but industry experts say it would accelerate theexpansion the grid needs.

Until then, China is relying on state energy giants to buildthe pipes. They are in the midst of a plan to nearly double thegrid's size by laying 44,000-km from 2011-2015. Top gas consumerthe United States, which burns five times as much as China, runspipeline grids nearly 10 times those in China.

The government needs to ensure improved access to thepipelines does not jeopardise expansion of this hugely capitalintensive sector.

"The balance the government is trying to seek is toincentivise third-party investment but at the same time to makesure the pace of the pipeline development is maintained," saidWood Mackenzie's Thompson.

The NDRC reform draft also seeks to introduce moretransparent accounting of transport costs in a sector that hasbundled transmission and gas sales together.

China has three tiers of pipelines: trunk lines built by thebig state energy firms, intercity lines built by state firmstogether with local government-backed distributors, and citygrids. The grids are run by distributors such as ENN EnergyHoldings Ltd and China Gas Holdings Ltd. (Addtional reporting by Judy Hua and Beijing newsroom; Editingby Simon Webb)

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