China’s Pipeline Reform to Boost Gas Demand

China’s looming pipeline reform is poised to spur competition in its natural gas industry, lowering prices and supercharging demand from the world’s top importer in years to come, according to Credit Suisse Group AG.

The government is creating a national pipeline operator from the assets of its three biggest oil and gas companies. The move will break a monopoly which China’s state-owned giants have over downstream users and result in gas prices falling ten percent over 2020 and 2021, the bank’s analysts including Horace Tse said in a report.

The national operator is likely to be formed by August, Citigroup Inc. said, citing a National Development & Reform Commission official.

“We do not believe that the market has taken active views on post-reform pricing,” the Credit Suisse analysts wrote. “The majority of investors have only focused on asset sales and valuation specific to the pipeline company.”

Lower prices will revitalise China’s gas demand in two years, according to Credit Suisse, predicting consumption growth of 13 percent in 2021.

That outlook contrasts with rival Citigroup Inc.’s view that demand expansion in the world’s biggest natural gas importer will hold steady for another three to four years then slow to about 4% after 2022.

China’s gas demand has skyrocketed in the past two years amid a state campaign which favours the cleaner-burning fuel over coal.

Consumption rose 15 percent in 2017 and a further 18 percent last year, but that rate may weaken to 11 percent this year and 10 percent in 2020 amid an economic slowdown, Credit Suisse said.

Price Declines

Falling prices following the reform will entice higher consumption from industrial users, which make up about 40 percent of national demand, according to the bank. The national pipeline company will be “a game changer,” the analysts wrote.

It has major repercussions for China’s natural gas companies. Without direct pipeline control, top producer PetroChina Company will probably suffer from price declines and market share loss, while Cnooc Ltd should gain from the easing of infrastructure bottlenecks, Credit Suisse said.

The pipeline network will continue to expand based on government plans, which could challenge the already oversupplied domestic liquefied natural gas processing and trucking business. Gas distributors will be winners from better demand and improving margins, the bank said.

The pipeline company could operate similarly to China Tower Corporation, the US$43 billion giant which maintains and operates telecommunication towers in the country, Citigroup analysts including Toby Shek said in a note on the 4^th June, citing comments from NDRC analyst Liu Manping during a conference call on the 30^th May

Some LNG import terminals and gas storage facilities are likely to be included in the pipeline giant, with none of China’s big three oil companies holding a majority stake.

Source: Rigzone