Why China’s Putting All Its Oil Pipes in One Company

From Bloomberg

Chinese President Xi Jinping has a plan to help meet the country’s growing energy needs and clear its dirty air: Spin off the tens of thousands of miles of pipelines held by three state-owned oil and gas giants and merge the networks into a new company. The resulting “China Pipelines Corp.” would aim to attract private investors to help expand the $74 billion network and ease supply crunches in some parts of the country. Such an overhaul, announced at the National People’s Congress in Beijing in March, would radically reshape China’s energy sector although it leaves central planning power in a single, albeit different, pair of hands.

1. What’s the point of a pipeline company?

Almost all developed markets separate oil and gas production from transport to promote a level playing field and encourage new entrants into the market. An independent company also would be more likely, in theory, to decide on new routes based on national need rather than what serves an individual producer. More broadly, it’s part of Xi’s strategy to enhance national energy security by encouraging domestic exploration and reducing imports.

2. What does that have to do with smog?

China has moved millions of homes and businesses from coal to cleaner-burning natural gas as part of Xi’s pledge to protect the environment. But the transition has been hampered at times by a lack of infrastructure. Gas supplies still run short, especially in winter when demand peaks. CNPC, which operates about three-fourths of the gas network, caps supplies, so some cities turn to trucked-in LNG. Sometimes factories are forced to close to keep people from shivering at home.

3. What’s wrong with the current set-up?

China imports about 70 percent of its crude and half its natural gas. Xi wants to produce more at home to enhance national energy security. He also wants more private capital to get involved in exploration, since the Big Three producers — China National Petroleum Corp. and its listed subsidiary PetroChina Co.; Sinopec, the listed unit of China Petrochemical Corp.; and China National Offshore Oil Corp. and its Cnooc Ltd. unit — haven’t moved fast enough to meet growing demand. Currently, pipeline access can be blocked or is prohibitively expensive for smaller private or foreign firms. Liberalizing the so-called mid-stream transportation — out of the hands of the Big Three — is seen as necessary to attract outside investors.

4. How big is the network?

As of 2015, China had 64,000 kilometers (about 40,000 miles) of pipelines carrying natural gas, 27,000 carrying crude and 21,000 carrying oil products, according to China’s main economic planning agency. By 2025 its goal is to expand that to 163,000 kilometers for gas, 37,000 for crude and 40,000 for oil products. By comparison, the similarly sized U.S. had 1,984,321 kilometers of natural gas pipeline and 240,000 for petroleum products in 2013, according to the CIA World Factbook.

5. How would a spinoff happen?

The talk has been about a three-step process:

• The major companies transfer assets and employees to a new company, provisionally named China Pipelines Corp., and are allotted shares based on the value of those assets, estimated last year to be around 500 billion yuan ($74 billion). Analysts have since been modeling other figures.
• State and private investment funds inject enough capital into China Pipelines for a combined stake of about 50 percent. That money would be used to fund pipeline expansion.
• China Pipelines could then do an initial public offering.

6. Who benefits? Who loses?

• For PetroChina, the biggest operator, it depends on the price. Bernstein analysts last year valued its pipeline assets at 619 billion yuan for a price-to-book ratio of 1.4. If it made that much in the transfer, that’d be a big boost for PetroChina’s stock. However, the 500 billion yuan figure mentioned for all assets would amount to a ratio of only around 0.8, according to some analysts. On top of that, PetroChina would be losing one of its most important assets, accounting for about 30 percent of its book value.
• No. 2 Sinopec might see its stock price improve if the deal means it can spin off its retail business, which includes some crude and refined-oil products pipelines. Disposing of those assets would clear some of the uncertainties that can hold up an IPO.
• Cnooc could benefit by being able to sell more of its offshore gas to inland customers, who right now are out of reach because they can’t access the pipelines.