Oil reform likely to open upstream market with breakthroughs

Key issue in the energy field reform this year: oil reform is preparing for breakthroughs.

SSN learns from various channels that reform in upstream fields will be one of the cores for this round oil reform. Mining rights market is likely to open after the reform, with restrictions on the qualification for oil & gas exploration and development likely to ease; meanwhile, it proposes to implement a bidding system for mining rights with advance application replaced by competitive transfers, strictly control the mechanism for the exit of oil and gas exploration right, increase the cost for holding mines and establish systems for the transfer of oil & gas mining rights as well as the reserves transfer.

China always implements registration system for first-grade state examination and approval of oil & gas exploration and development. Any enterprises engaged in such business must be approved by the State Council, with licenses of oil & gas exploration, development and mining approved and issued by Ministry of Land and Resources. Besides shale gas, foreign and private capital can only carry out businesses through joint ventures with large oil companies.

But along with changing situations, limitations of mining rights management system have constantly exposed, which means that entry system of oil & gas industry is not perfect, market-oriented allocation of its mining rights is at a low level, and input for oil & gas exploration in some areas is obviously insufficient.

Therefore, this round of oil reform is likely to become an opportunity to open the upstream market. According to authoritative source, oil & gas reform will be carried out based on three aspects of government, market and enterprises with industrial chain as the mainline; and market-oriented reform will be implemented for main links along the upstream, midstream and downstream sections in the oil & gas industry, including mining rights transfer, exploration and development. Specifically, transferring of mining rights would reform from pre-application to competitive assignment; meaningfully, it would restrict the exit mechanism for transfer of exploration right to rise the carrying cost.

In terms of industrial situation, these measures will enhance and incent China’s oil & gas exploration and development, strengthen input and competitiveness of upstream sections, improve enterprises’ input in exploration, encourage and push progress in the technologies. It will weaken monopoly of upstream enterprises for a long run, and enhance the speaking right of private exploration and development service providers.

Jing Chunmei, associate researcher at information department of China International Center for Economic and Technical Exchange (CICET), told SSN reporter in an interview that the domestic and international environment, namely softer demand in China and sharp falling of international oil price, forces China to implement structural reform in oil and gas industry. But this sector is well positioned for an overall and complete reform, since marketization of this segment started much later in the overall energy sector, there are ready-made experience from electricity segment, given the similarity of the nature of their industrial chain. “Reform could be implemented through the whole industrial chain, with the upper stream act as a leading role to push forward the opening in the middle and downstream. Only by lifting restrictions in the upper stream, allowing oil and gas sources to connect pipeline and forming sufficient competition and supply, could we provide favorable conditions for reform in the middle and downstream and make independent pipeline meaningful”.

An employee from China National Petroleum Corporation (CNPC) told SSN reporter that in the past, upper stream sector is controlled by the government and the overall direction is opening step by step, because “opening brings opportunities”, which will benefit social capitals. But he also added that private exploration and development participants are fragmented in capital and technologies, and their risk tolerance is weak, which place them on an inferior position to cope with large scale concentrated exploitation. And the exploration model of shale gas, in which SOEs take the lead and private enterprises participate in operation, is more appropriate.

Fan Bi, inspector from the State Council Research Office, suggested that a package should be made for the reform in oil and gas sector. The package should specify the three main bodies of the reform, i.e. enterprise, market and government, and cover various links of the whole industrial chain, including mining right transfer, exploration and development, and pipeline network transport. And the reform should be carried out in three steps: firstly, initiate reform on mining right, pipeline network, SOEs finance and taxation; secondly, open up import and export, circulation and admission as well as liberate price control in this sector; thirdly, comprehensively improve government supervision.

However, relevant laws and regulations also need to be revised. The above authority believed that corresponding amendments should be made to several laws, including mineral resource law, measures for the area registration administration of mineral resources exploration and survey, measures for the registration administration of mineral resources exploration, and measures for the administration of transfer of mineral exploration right and mining right; regulation on Sino-foreign cooperation in the exploitation of continental petroleum resources should also be amended, due to the change of mining investment system.

“Currently, main petroleum production regions are still dominated by major oil companies, and these companies’ leading position in exploitation and development will not be challenged. But the construction of mining right transfer and reserve trade mechanisms requires a relatively long term. ”