China speeds up gas production, supply and sale system

By Wang Jihong & Liu Ying, Zhong Lun Law Firm

On 30 August 2018, the State Council issued Several Opinions on Promoting Co-ordinated and Stable Development of Natural Gas, which gave some specific and practical opinions in terms of natural gas production, supply, storage and sale.

Wang JihongPartnerZhong Lun Law Firm
Wang Jihong
Zhong Lun Law Firm

As one of the world’s biggest gas consumers, China contributed more than 30% to the increase in world natural gas consumption in 2017, becoming the main driving force for the development of natural gas around the globe. However, China’s domestic natural gas production growth rate is lagging behind that of consumption. In 2017, the annual consumption was 238.6 billion cubic metres, surpassing output of 148 billion cubic metres.

The exploration and exploitation of natural gas in China is underdeveloped, far below the world average. The opinions specifically require a strengthening of capacity in domestic exploration and development, encouraging the oil and gas companies to increase investment and working in exploration and exploitation, with the objective of achieving a domestic production volume of more than 200 billion cubic metres by the end of 2020.

With the exploration and exploitation of natural gas being categorized as an encouraged sector for foreign investment, foreign companies can invest by themselves in the exploration of natural gas by signing agreements with companies such as CNPC, SINOPEC and CNOOC.

The imbalance of supply and demand has led to a rapid increase in China’s import of natural gas, with the total import volume being 94.6 billion cubic metres in 2017. LNG was imported from 22 countries. Although the number of energy importing countries into China has increased significantly, a major part of the imported volume is still concentrated in a few countries, with about 85% of pipeline natural gas imported from Turkmenistan.

Liu YingAssociateZhong Lun Law Firm
Liu Ying
Senior associate
Zhong Lun Law Firm

Australia is still the largest source of China’s LNG imports, with annual imported volume representing almost 50% of total LNG imports. The opinions further emphasize the need to diversify overseas supply sources of natural gas by guaranteeing a balance between both long-term contract and spot contracts.

The International Energy Agency predicts that China will become the world’s largest importer of natural gas in 2019, and will purchase natural gas from more countries and natural gas suppliers in the future. Diversification will be achieved through transportation methods, import channels, contracting models and participants. Consequently, lawyers in the natural gas field must keep up the pace by reflecting the actual business demands of companies in the contract in response to the promulgation of a series of new laws and regulations.

China’s natural gas storage capacity is inadequate. The opinions affirm the need to build a multi-level storage system with underground gas storage and coastal LNG receiving stations as the mainstay, with inland intensive large-scale LNG storage tanks in key areas and pipeline network interconnection as supplements.

The opinions also propose a target in terms of gas storage capacity, where that of the gas supply enterprise will reach not less than 10% of its annual contract sales by 2020, and the town gas enterprise not less than 5% of its annual gas consumption, and finally not less than the 2020 storage capacity to guarantee a reserve of a three-day average consumption in the administrative area for each of them.

To achieve this goal, domestic and foreign gas supply companies need to provide more gas storage facilities in the following two years. Foreign companies will then be able to use their advanced technology to pursue wider opportunities.

The pipeline system in China is poorly interconnected between main pipelines, trunk pipelines, provincial pipeline networks and coastal LNG receiving stations. As at the end of 2017, only three interconnections between the three major oil companies’ pipelines had been achieved. The opinions require a focus on the major projects of pipeline interconnection and intercommunication, and gas pipeline network systems should be promptly proposed to promote a fair opening-up of infrastructure facilities such as natural gas pipeline networks to third-party market entities.

For foreign investors willing to sell oil and gas in China, according to the Special Management Measures on Foreign Investment Access (Negative List) (2018 edition), a previous requirement has been cancelled, which stipulated that for enterprises invested in by the same foreign investor that have set up more than 30 branches, engaging in the sales of different types and brands of refined oil products from multiple suppliers and running the construction and operation of chain gas stations, the Chinese counterpart shall be the controlling shareholder.

Driven by strong policies in economic development and air pollution control, natural gas, deemed as clean energy, will play an increasingly important role in various fields of China’s economy. It will bring opportunities for the development of enterprises in the natural gas sector in the following two to three years.
It is certain that new laws and regulations will be promulgated and the innovation in business models is to be expected.

Wang Jihong is a partner and Liu Ying is a senior associate at Zhong Lun Law Firm

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