The long-awaited reform plan for China’s oil and gas industry is finally announced. The Central Committee of the Communist Party of China (CPC) and the State Council recently approved the Certain Opinions about Deepening the System Reform for Oil and Gas Industry (hereinafter referred to as the Opinions) to define the guiding ideology, basic principles, overall thought and main tasks for deepening the reform.
“The release of the Opinions is a great news for private capital”. Lin Boqiang, head of China Institute for Energy Policy Studies at Xiamen University, remarked that the better-than-expected Opinions is very comprehensive and explains the principles and overall thought of the reform well. Standards set for detailed principles are much higher than expected. It is because state-owned enterprises (SOEs) constitute a large part of the oil and gas industry, and the reform is set to shake the monopoly position of SOEs, and leave more room and flexibility to private enterprises.
The journalist learnt that the Opinions also propose to complete key reform tasks in eight aspects. Firstly, improve and decontrol oil and gas exploration system in an orderly way, and enhance the guarantee ability for resource continuation. Secondly, improve the import & export management system for oil and gas, and the ability to utilize resources and prevent market risks at home and abroad. Thirdly, reform the operation mechanism for oil and gas pipe network, and improve intensive transmission and fair service ability. Fourthly, deepen the reform of downstream competitive links, improve the production and supply ability of high-quality oil and gas products. Fifthly, reform the pricing mechanism of oil and gas products, and effectively release vitality of competitive links. Sixthly, deepen the reform of state-owned oil and gas enterprises, and make key oil and gas enterprises robust enough. Seventhly, perfect oil and gas reserve system, and improve the supply ability of oil and gas. Eighthly, build a perfect security and environmental protection system for the oil and gas industry, and improve the safe and clean operation ability of the whole industrial chain.
Lin believed that the capital and technology strength of private capital make it hard for private capital to enter upstream fields of the oil and gas industry. Especially that private capital usually expects shorter cycle of investment return, while the return cycle of upstream exploration is actually very long. “Since overall scheme has been launched, specific rules for implementation will be rolled out in the future. The government might provide private capital with financing and technology support in entering the upstream of the industry in detailed rules.”
Lin told the journalist that “in addition, as to the improvement of oil and gas reserves system, we usually equate strategic reserves with governmental reserves in the past. But the Opinions now proposes to encourage social capital to participate in the investment and construction of reserve facilities later, and this is never seen before”.
A long-existed controversy about the system reform for the oil and gas industry is that should the independence of oil and gas pipe network be realized inside or outside China National Petroleum Corp (CNPC), China Petrochemical Corp (Sinopec) and China National Offshore Oil Corp, which are top three state-owned heavyweights. It is only said in the Opinions to advance the independence of main pipelines of large state-owned oil and gas enterprises step by step, separate pipe transmission and sales, perfect fair access system for pipe network, and make main pipelines and provincial/trans-province pipe network all fairly available to third-party market players.
Lin believed that splitting the oil and gas pipe network assets of the three state-owned heavyweights for external independence will make the pipe network more independent, but it does not necessarily mean that external independence will certainly outdo internal independence. “The oil and gas industry is different from other industries. Since China is highly dependent on foreign oil and gas, how Chinese oil and gas companies compete with its peers in the international market must be taken into consideration. These companies will surely be stronger in strength if pipe network is just split inside them.”
Noticeably, the oil and gas reform sector of the A-share market also embraced its sixth winning streak last Friday as the reform scheme for oil and gas launches. Based on the sector’s closing index on May 11, the sector totally climbed 7.5 percent in the following six trading days. Stocks like Sinopec Oilfield Service Corporation (600871.SH), China Oilfield Services Limited (601808.SH) and Sino Geophysical Co., Ltd. (300191.SZ) led the gains.
The journalist noticed that many securities companies proposed investment opportunities under the background of oil and gas reform. For instance, Chuancai Securities pointed out that the industrial chain of oil and gas resources is mainly divided into three fields which are upstream exploration, midstream pipe transmission and downstream sales. The released reform plan covers all three fields and is expected to bring following opportunities.
Firstly, improved asset structure and efficiency achieved through professional integration in central state-owned groups might enhance the earnings of listed companies. Unlisted quality assets under these groups might be injected into listed companies. Attentions should be paid to the separation of primary and auxiliary business, professional reorganization and the listing of quality assets of the three state-owned heavyweights. China Petroleum & Chemical Corporation (600028.SH) is recommended.
Secondly, the decontrol of oil and gas blocks and the separation of pipe network break the monopoly of the oil and gas industry. The introduction of private capital means increasing efforts in upstream exploration and investment in constructing pipe network. Companies engaged in oil fields services will benefit a lot. Attentions should be paid to the transfer of oil and gas blocks and the benefit brought by the reform of pipe network。 Sinopec Oilfield Equipment Corporation (000852.SZ) is recommended.
Thirdly, companies with oil and gas resources abroad will directly have the right to import after the right of crude import is decontrolled. Their profit will be
Shenwan Hongyuan Securities pointed out that as the participation of social capital in the reform of the oil and gas industry advances, enterprises with soft power like international vision and practical operation experience in trade arbitrage will see benefit. Stocks like Changchun Sinoenergy Corporation (600856.SH), Oriental Energy Co., Ltd. (002221.SZ) and Zhejiang Xinao Textiles Inc. (603889.SH) are recommended. China Petroleum & Chemical Corporation and PetroChina Company Limited (601857.SH) are also recommended due to investment opportunities brought by revaluation of assets and improvement of operation efficiency.
Translated by Jennifer Lu
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