Why China’s Putting All Its Oil Pipes in One Company
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 multiple sources of supply by ensuring open access to pipeline transport.
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. China National Petroleum Corp., 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% 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 — CNPC 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 is the spinoff happening?
In two deals announced July 23, PipeChina acquired pipelines, terminals and storage facilities from PetroChina and Sinopec for $56 billion in cash and equity. According to Morgan Stanley, PetroChina will own 29.9% of the pipeline firm, Sinopec 14% and Cnooc 3%. The State-owned Assets Supervision and Administration Commission of the State Council will take a majority 30% stake and will essentially control the company.
6. Who benefits? Who loses?
• PetroChina received about $38 billion in cash and equity, putting a price-to-book ratio of 1.2 on its assets, triggering a special gain that will likely result in an extraordinary dividend for shareholders, according to Bernstein. Over the longer term, though, PetroChina may see a dilution to earnings and free cash flow as it would be losing one of its most important assets, accounting for about 30% 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.
• Gas distributors, such as ENN Energy Holdings Ltd. and China Gas Holdings Ltd., are expected to benefit from the opportunity to diversify gas supply sources.
©2020 Bloomberg L.P.