August 24, 2020 [S&P Global Platts] – China’s pipeline reforms, which progressed with the transfer of assets from national oil companies to the newly created PipeChina this year, have left some questions unanswered over the status of commercial contracts tied to LNG terminals, and usage rights of pipeline and terminal capacity.
So far, executives have said that asset transfers were primarily related to ownership and no changes were expected in commercial contracts, and current LNG terminal capacity and pipeline injection rights.
Industry people also said some uncertainty on new capacity was unavoidable due to the scale of the transactions, and companies were still ironing out finer details of future access mechanisms.
The shape of these future access policies will determine China Oil & Gas Piping Network Corp., or PipeChina’s, role in not just managing the country’s vast energy networks, but also driving China’s gas market liberalization that calls for pipeline reforms and independent infrastructure to support a free market.
“It could take a couple of years before PipeChina comes up with new policies to formalize things like allocation of terminal slots, but they will not be engaging in trading or procurement activities at the start,” a gas trader in southern China said.
In July, state-owned PetroChina agreed to transfer its main oil and gas pipelines, storage facilities, LNG terminals and related assets to PipeChina, making it one of the largest stakeholders in the pipeline company with a 29.9% stake worth $21.3 billion.
When fully operational, PipeChina will be China’s largest midstream oil and gas company, with assets worth between $40 billion and $70 billion, and one of the largest pipeline and terminal operators in the world.
Around 10 existing and planned LNG receiving terminals affiliated to the three national oil companies are expected to be transferred to PipeChina, of which seven existing terminals have a capacity of around 23.4 million mt/year, according to S&P Global Platts data.
Each terminal is linked to an LNG sale and purchase agreement. PetroChina will not transfer its term LNG contracts to PipeChina, but it will have to pay the pipeline fee once assets are transferred, according to a PipeChina executive who declined to be named.
At least two other China-based traders said they did not expect any changes in the contracted LNG volumes delivered at these terminals, and that it would be difficult for contracts to be renegotiated if counterparties were to change.
“I think the term contracts should remain under the NOCs’ portfolio as the companies that signed these contracts are not the receiving terminals, so these contractual volumes have nothing to do with them,” a trader in eastern China said.
“Not even one ton of our contractual volumes will be transferred to PipeChina,” an executive with one of the Chinese state oil companies said, adding that there will also be no change in pipeline injection rights. “We will still use the pipelines. The only thing that changes is that the pipeline fees will be paid to PipeChina instead of our own pipeline company.”
What could change in future though is how access rights are granted.
Before the asset transfer, PetroChina’s natural gas sales structure used to include pipeline operators, regional gas sales and city gas distribution, which is under its subsidiary Kunlun Gas.
If a factory wanted to buy pipeline gas directly from PetroChina, its sales companies would determine the price and volume, and coordinate with the pipeline operators to decide whether the factory could be added to the network.
Downstream gas buyers would have to apply for a connection to trunk pipelines from upstream suppliers who owned the pipeline assets. The NOCs are likely to lose this control over permissions for access to pipeline networks.
“Once PetroChina’s pipeline asset and operation rights are transferred to PipeChina, PetroChina’s sales company, such as Kunlun Gas, will lose priority of access to the trunk pipelines,” said a source in northern China.
This, however, is in line with ongoing efforts to boost third party access to LNG infrastructure, which separates NOCs from direct control of distribution infrastructure and capacity that is now being auctioned on platforms like the Shanghai Petroleum and Natural Gas Exchange.
Traders said Chinese end-users who do not possess their own terminals are more likely to buy terminal spots directly from the open market, when available, rather than dealing with the NOCs.
There is also a temporary hold on some pipeline activities while the asset transfer is being processed.
PipeChina is said to have asked the big three NOCs to temporarily stop approving and accepting opening of new pipelines, or conducting any exclusive discussions on pipeline capacity, until the transfers are complete, to avoid confusion, sources said.
The three NOCs — PetroChina, Sinopec and CNOOC — have also been asked to stop transferring to third parties any LNG receiving terminal capacity and peak-shaving gas storage capacity that has been assigned to PipeChina, according to local media reports, citing a notification from PipeChina to the companies.
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