By Beatrice Bedeschi – A recent decision by the Chinese government to open up the oil and gas upstream sector to direct foreign investments is likely to rekindle interest by international energy companies. However, impact in the short term might be limited as the market awaits further policy changes providing more clarity on how the new rules will work in practice, according to Industry experts and analysts.
China’s state planning agency, the National Development and Reform Commission (NDRC) announced at the end of June it had slashed the so-called ‘negative’ list, which details sectors where foreign investment is restricted, opening up, among others, the oil and gas upstream sector to direct investment by foreign companies.
This means foreign companies will no longer have to joint venture and cooperate with Chinese enterprises when investing in new oil and gas exploration and development activities, energy consultancy Wood Mackenzie says.
China has been progressively cutting down the ‘negative list’ in recent years, with this most recent development happening amid goals to “increase domestic production to boost the nation’s energy security and reduce oil and gas import dependency,” says Xianhui Zhang, research analyst at Wood Mackenzie. “The government wants a more competitive and diversified upstream sector, instead of one dominated by national oil companies (NOCs), to help improve efficiency, lower cost and innovate new technology.
The policy changes are attracting “significant interest from both new and existing upstream investors, such as BP, Total and Shell.”
A spokeswoman for oil major Shell says: “Recent “progress in the opening-up in the upstream sector” in China is “very encouraging.
“It means more choices and more options for us to invest in the sector and in the country” she adds.
The changes follow a number of other policy developments in upstream regulation earlier in the year, including a new subsidy model designed to reward companies that annually increase unconventional gas production, Zhang explains.
Nonetheless, “the new mechanism is based on a total subsidy pool set annually rather than a fixed per-unit subsidy, which may limit its attractiveness to international investors looking for certainty when planning investments,” says Toya Latham, oil and gas analyst at GlobalData.
In addition, the impact of the new measures might be limited until new regulatory changes are implemented, analysts say.
“We do not expect these changes will have a significant short-term impact on the Chinese upstream sector, or the Chinese portfolios of foreign upstream players” as “clarification is required, and more regulatory changes will have to be rolled out to specify how these rules will work in practice,” Zhang says.
“The ‘negative list’ is a high-level piece of legislation. The related current laws and regulations governing investments in the sector have not yet been revised, therefore it is still uncertain how this change will be implemented at the project level,” agrees Latham. “E&Ps have made significant investments in China previously, but it is difficult to predict the extent to which these reforms will attract new investment, given that the regulatory framework has not been set.”
China produced 13.7 billion cubic feet per day of gas and 3.7 million barrels per day of oil in 2018. Gas production is set to grow 6 per cent year-on-year in 2019, while oil production is expected to remain stable or decline slightly, analysts have said.
Another reason why the impact of the reforms might be limited in the short term is that “the most geologically promising acreage is still unavailable to non-NOCs,” Zhang argues. “Currently, NOCs are retaining acreage in the key basins and are endeavouring to avoid relinquishing these areas, preferring instead to hand-back blocks in more marginal areas, circulate the blocks internally or cooperate with another NOC.”
Efforts to develop the domestic upstream sector in China have also intensified amid the US-China trade war which is “exacerbating fears of energy supply disruptions,” says Michal Meidan, director of the China Energy Programme at the Oxford Institute for Energy Studies (OIES).
“Even though domestic production cannot offset the need for imports, it can reduce somewhat China’s external dependence.” she says, adding that the new rules “combined with changes to the unconventional subsidy scheme could spur renewed interest in China’s unconventional development.”
The main driver behind increased domestic production is, however, likely to remain “majors capex, which is increasing already,” she says. “The biggest question is whether shale and tight gas would develop more rapidly, with prospects for more tight gas output looking rosier with the new regulations and subsidies, suggesting small upside” to production.”
On the other hand challenges remain, limiting the extent of the upside, including the fact that reforms do not currently affect third party access to pipelines and to end user prices. “These are part of the governments reform agenda but will take time,” she says.
In addition “concerns about IP protection continue to plague foreign companies”, particularly in unconventional upstream.
Meanwhile, the fact the city gas distribution segment has also been excluded from the “negative list” in June is likely to create further opportunities for foreign companies, commentators said.
The new policy removes restrictions on foreign shareholding in Chinese city gas companies in cities with a population of more than 500,000 “opening the door for stiff competition between foreign and domestic gas companies” SP Global Platts reports.
This is expected to increase M&A activity in the gas sector, with global energy companies seeing China’s gas distribution business as a potential outlet for their global LNG portfolios, the company says.
