1. China to Ease Ownership Rules on Oil Exploration, City Gas
China is easing foreign access to a range of industries including oil, mining and city gas pipelines as the government follows through on pledges to open up to overseas investors.
China will scrap the need for joint ventures in oil and gas exploration, and for domestic control of gas networks in cities with more than 500,000 people, the National Development and Reform Commission said on its website Sunday. The statement formed an update to the commission’s so-called negative list of industries where overseas investors are restricted or banned.
The new rules take effect July 30. The commission said it will also scrap all the restrictions not mentioned in the negative list by the end of this year.
The announcement comes a day after the U.S. and China struck a truce in their trade war and agreed to resume talks, while President Donald Trump said he’d delay restrictions against Huawei Technologies Co. China had already announced an easing of restrictions on ownership of banks, car manufacturing and insurance firms before the dispute with the U.S. worsened.
Wood Mackenzie believes more regulatory changes that will specify how these rules will work in practice are on the way.
Further incentives and/or acreage to be released to attract new, non-NOC investment in the upstream sector are also to be expected. The two main goals for the Chinese government are to increase domestic production and diversify sources of upstream investment, and these changes are just a first step in the right direction.
How will NOCs benefit China’s new unconventional subsidy scheme?
On another note, China’s Ministry of Finance (MOF) recently announced a revised unconventional gas subsidy scheme, effective until 2023.
The new scheme creates a subsidy pool to be shared by all unconventional gas producers based on their subsidy-eligible volumes. And for the first time, tight gas is included in addition to shale gas, coal bed methane (CBM) and coal mine methane (CMM).
The new subsidy scheme bodes well for Chinese national oil companies (NOCs) and will see concerted efforts to boost their unconventional portfolios.
“PetroChina will benefit more in the near term than Sinopec and CNOOC, partially due to higher anticipated unconventional ramp-up over the next few years. Higher CBM output and better tight gas acreages should also increase PetroChina's share in the subsidy pool,” said research analyst Xianhui Zhang.
“We expect Sinopec to shift its focus towards tight gas projects in the Ordos basin, and away from its shale gas operations, including its mature Fuling project, and the newer but challenging Weirong development,” added Zhang. “On the other hand, CNOOC has invested in CBM projects onshore China through its acquisition of China United Coal Bed Methane Company. The potentially lower subsidy per unit of production could put it in a dilemma."
Overall, the new scheme will incentivise higher unconventional gas output over the next few years. However, operators will still face challenges in bringing unconventional costs down, accessing infrastructure and realising commercial returns on investment.
“With the new revisions, the government has higher flexibility to adjust the subsidy pool based on unconventional gas development and the MOF’s budget. We expect the 2019 subsidy pool to be larger than 2018's RMB4.9 billion (US$753 million) grant, given the inclusion of tight gas,” concluded Zhang.