Your location:News >> Industry dynamics
Who will have the last laugh when three barrels of oil marches into urban gas?
Release time:2020-9-4

With the establishment of the national pipe network company, the city burning market seems to have become a place of contention.
The stripped three barrels of oil have made moves aimed at better capturing the market.

It was a message that sounded the war.
On April 23, Hong Kong-listed Binhai Investment Limited announced that it had reached a cooperation agreement with Sinopec Great Wall Gas.
Sinopec Natural Gas Branch intends to subscribe binhai investment shares, becoming the majority shareholder with a shareholding of 29.99%, the investment amount of more than HK $500 million.

The "earthquake" caused by the largest investment of Great Wall Gas since its establishment has not yet subsided, but another heavy news has again triggered the "strong earthquake" in the urban gas market. On April 30, media reported that Sinopec is going to reform the management system of natural gas sales.
Its reform measures have been approved by sinopec headquarters and communicated within SINOPEC Natural Gas Branch.


Structural reform is under way

According to the report, in the new reform, sinopec intends to set up China north, shandong, henan, hebei, zhejiang, yunnan, guangxi, anhui eight regional natural gas sales center, and shanxi, hunan, jiangsu, jiangxi, four provincial company merger with China petrochemical gas branch, sinopec Great Wall gas company implement "two brands, a set of people" management.
Through the establishment of regional and provincial sales companies for natural gas sales business layout.

Provincial companies may be set up as joint ventures.
The joint venture company may have more independent management rights than the natural gas sales center directly under SINOPEC Natural Gas Branch.

On April 18 solstice and May 6, xie Dan, deputy general manager of sinopec natural gas branch, went to shanxi, jiangxi, henan, tianjin and other places for investigation, aiming at promoting the natural gas sales system reform.

In fact, since the second half of 2019, Sinopec has been working on the reform plan, which took half a year to finalize.
The reforms are scheduled to be completed by the middle of this year.
However, Sinopec pushed through the reform nearly two years after petrochina.

Since entering the gas terminal market in 2008, CNPC has been hoping to establish a vertically integrated business structure just as it did in the oil market.
In order to better develop its downstream business, CNPC has been continuously restructuring its downstream business of natural gas since 2012.

By 2017, Kunlun Energy Co., LTD., as the financing platform and investment subject of China's oil and gas business, has also become the only management platform of China's oil and gas terminal utilization business, with its main business distributed in 31 provinces, municipalities and autonomous regions nationwide.
The integrated operation pattern of upstream and downstream has basically taken shape.

In October 2018, CNPC issued a notice to further adjust and optimize the natural gas sales management system, set up specialized natural gas sales companies centering on the market, and build integrated operation management platform and investment and financing platform for natural gas sales business.

"The adjustment and optimization of the natural gas sales management system is a systematic and overall reconstruction of the natural gas sales business carried out by the Leading party members' group of CNPC based on the overall situation of high-quality development and based on the industrial development trend and market competition situation.
By further improving the business management structure, organizational control system and business operation mode, it provides organizational guarantee for effectively solving the main contradiction of unbalanced, inadequate and unsustainable development of the industrial chain, and gathers strong potential energy for accelerating the speed of natural gas sales and tackling tough transformation."
"Said Ling Xiao, vice President of Petrochina, party secretary of the natural Gas sales company and chairman of the board of Kunlun Energy.

In 2020, in the face of the epidemic, cnooc, the "third oil", is also promoting the natural gas industry restructuring.
It is said that the corresponding management mechanism will usher in new changes this year.

March into the urban combustion market

Compared with the gradual reform of the natural gas management system, the rapid pace of upstream enterprises entering the terminal urban combustion market has attracted a lot of attention in recent years.

On July 19, 2019, Jinhong Holdings announced that it planned to sell 17 of its urban combustion companies to Petrochina Kunlun Gas Co., LTD., of which 11 would be 100% cleared.
On August 15, 2019, Jinhong Holdings issued a report on the sale of major assets, and finally confirmed that the sale value of 17 urban combustion companies was 1.655 billion yuan.

"Such a large-scale transaction is very rare in China's urban gas industry.
Nine of the 17 companies are based in Hunan, making Kunlun, which already has its own project in Hunan, one of the biggest market shares in Hunan.
This will enable Hunan province to take advantage of petrochina's gas source advantage to rapidly expand natural gas consumption, especially to connect the five urban centers of Chenzhou, Yongzhou, Huaihua, Jishou and Zhangjiajie as well as the 65 counties and cities under its jurisdiction to pipeline gas as soon as possible.
Xu Bo, senior economist at the China Academy of Petroleum Economics and Technology, pointed out.

In 2019 alone, 70 new development projects of Kunlun Energy have been put into operation and 58 projects have been registered as companies.
According to the annual performance released by Kunlun Energy in 2019, the number of urban combustion projects in Kunlun Energy has reached 402, covering 31 provinces, municipalities and autonomous regions nationwide.
The number of natural gas users has increased by 1.463 million, including 1.446 million residential users and 16,200 commercial and industrial users. The total number of natural gas users has reached 11.277 million, up 14.9% year on year.
Sales of 28 billion cubic meters of natural gas in 2019, up 27% from a year earlier;
Among them, retail gas volume is 18 billion cubic meters, up 25% year on year.
In retail gas, industrial, commercial, residential and filling stations accounted for 51%, 12%, 13% and 24% respectively, with year-on-year growth rates of 38%, 1%, 31% and 14% respectively.

Compared with CNPC in 2008, which has taken domestic gas terminal sales and comprehensive utilization as a new business development direction and accelerated its advance into the downstream urban gas market, Sinopec has moved a little slowly in the urban gas market.
In October 2017, Sinopec established a wholly-owned city gas company, Great Wall Gas.
Despite its late start, Sinopec is equally determined to push forward the downstream business development of natural gas.

In February 2018, Great Wall Gas and Sinopec Fuel Oil Sales Company established Sinopec (Beijing) Clean Energy Co., LTD., focusing on the utilization of LNG, including LNG refueling stations and water refueling stations.

In May 2018, Puyang Great Wall Gas Co., Ltd. was founded by Puyang Investment Company, Sinopec Natural Gas Branch and Zhongyuan Oilfield, with Great Wall gas holding 40% of the shares.

In July 2018, Great Wall Gas established a joint venture with Nanjing Zhongyang City Gas Co., in which Great Wall gas holds a 49% stake.

On December 14, 2018, Great Wall Gas signed the Joint Venture Cooperation Framework Agreement with Anhui Huishang Group Co., LTD.
Both parties agree to jointly invest in the establishment of Huishang Great Wall Energy Co., LTD.

On August 3, 2019, Great Wall Gas signed a strategic cooperation agreement with Hebei Guoxin Holding.
The two sides agreed to carry out in-depth cooperation in the construction of hebei natural gas branch pipelines, industrial parks and pipelines for direct supply to large users, natural gas power generation, regional cogeneration of heat, power and cooling, distributed natural gas energy and terminal urban gas project development, so as to promote the development of hebei natural gas terminal market.

At the end of 2019, Great Wall Gas established Chongqing Great Wall Natural Gas Co., Ltd. as a joint venture with Chongqing Wulong Industrial Development (Group) Co., LTD.
This is the fifth company under Great Wall Gas.

Until April 23, 2020, Great Wall Gas invested more than HK $500 million in Binhai Investment;
In July, Sinopec Natural Gas Co., Ltd. and Guangxi Guantou Energy Co., Ltd. jointly funded the establishment of Guangxi Gas Group co., LTD., demonstrating their determination to further expand the downstream urban combustion market.

"Cnooc has done some small-scale urban combustion projects in local areas, but it is difficult to push them forward now, because all the good areas have already been encircled by urban combustion enterprises."
Cnooc an insider said.

In addition to the "three barrels", the "fourth barrel" of prolonging oil is also pushing into the urban fuel market.

At noon on September 20, 2019, Shaanxi Natural Gas issued an announcement that Shaanxi State-owned Assets Supervision and Administration Commission of Shaanxi Province and Shaanxi Gas Group signed an agreement on capital and share increase with Yanchang Petroleum, and Yanchang Petroleum increased capital and share increase with Shaanxi Gas Group in the form of asset implantation.
Upon completion of the capital and share increase, Yanchang Petroleum will hold 52.45% of shaanxi Gas Group and become the controlling shareholder of Shaanxi Gas Group.
In addition, Yanchang Petroleum will indirectly control 55.36% of Shaanxi Natural Gas through Shaanxi Gas Group, becoming the latter's indirect controlling shareholder.

"More than 60 per cent of China's gas consumption is in sectors such as industry and power generation, mainly supplied directly by upstream companies, while less than 40 per cent of the remaining gas is distributed by urban companies.
These enterprises are small and scattered, the foundation is weak, and the upstream enterprises enter many advantages.
This is why upstream companies can grow quickly in the urban combustion sector."
Baijun of research institute of Group of Beijing gas thinks.

The purpose is clear: to build the whole industrial chain

Throughout the upstream enterprises in the terminal market, the purpose is very clear: to build an integrated upstream and downstream industry chain, hedge operational risks.

"Three barrels of oil owns a lot of natural gas, but a lot of it doesn't make them a good profit.
On the contrary, as China's natural gas market price system has not been improved, their natural gas sector has been in the deficit for a long time, so they have a strong desire to reverse this state."
Beijing Jingtian Hongyuan energy Technology Yu Tianlei pointed out.

China's natural gas resource endowment is poor, the output cannot meet the rapid growth of consumption.
From 2007 to 2018, China's natural gas consumption grew at an average annual rate of 19.07 billion cubic meters, while its natural gas output grew at an average annual rate of 8.28 billion cubic meters. The supply gap continued to widen, and its natural gas imports grew at an average annual rate of 10.79 billion cubic meters.
However, the price of imported natural gas in China and the sale price of domestic natural gas have serious inversion phenomenon.

CNPC has been losing money ever since it imported pipeline natural gas, especially the wholesale of natural gas, while the terminal direct supply and urban combustion business has not developed yet.
Natural gas procurement contracts signed at the beginning of the 20th century were expensive and had a large deficit with the current end consumer price, which led to an embarrassing situation of more import losses.

On June 28, 2019, Ling Said at the 2019 Open Day for Enterprises that the country's natural gas price marketization mechanism is taking shape and is not yet perfect.
While playing the role of resource supply "anchor" and market volatility "ballast", Petrochina has paid a huge economic price for this.

Since 2011, PETROCHINA has lost more than 230 billion yuan in imported gas alone.
In 2018 alone, subsidies for gas supplied to Beijing amounted to about 6 billion yuan, or about 0.33 yuan per side.

Ling Xiao said that PETROCHINA actively integrated into local economic and social development, actively sought in-depth cooperation with various market entities, and jointly built an "ecosystem" of mutual benefit and win-win results for the natural gas industry, so as to truly spread the dividend of "tax reduction and fee reduction" policy to end users and promote the reasonable return of resource value.

CNPC is not the only one who wants to do so. Other upstream companies are also committed to building a complete natural gas industry chain and hedging resource costs.

In recent years, the expansion of oil has raised the importance of the natural gas business.
Its 13th five-year plan aims to produce 8 billion cubic meters of natural gas and 10 billion cubic meters of production capacity by 2020.
But the lack of distribution channels means that almost all of the gas used to extend the oil is liquefied and sold elsewhere.
On the one hand, the cost increases, on the other hand, it needs to face the competition from other regions of natural gas production enterprises.
In this case, the extension of the oil and gas business development has been limited.

Through the integration of Shaanxi natural gas, the oil will extend the intermediate pipe network and the downstream assets into the bag, thus creating the whole industrial chain mode of natural gas production, transportation and sales.
The whole industry chain model of natural gas business will undoubtedly add a lot of luster to its future development.

"Both pure resources and pure market resilience are inadequate, while upstream and downstream synergies can hedge risks."
An insider of CNOOC said, "Cnooc Gas and Power Group takes LNG receiving station as the core and the integrated operation mode of industrial chain, which constitutes the differentiated competitive advantage of CNOOC's natural gas business.
Having a relatively sound natural gas industry chain has also become the performance of the current core competitiveness of g&E Group."

There is no doubt that the boundary between the upstream and downstream of China's natural gas industry has been broken.
Owning the gas source, infrastructure, terminal market and integrated operation service capability will be the future development direction of large enterprises.

Causes the city to burn the market to shake

In 2008, when CNPC pushed into the downstream urban gas market, the whole urban gas industry began to feel uneasy and worried in the face of this behemoth holding the upstream core resources.
At that time, it caused quite a shock inside and outside the industry, and relevant news reports even appeared on the national media platforms such as People's Daily Online.

10 years later, when Kunlun Energy positioned the downstream gas market as the "golden terminal", reshaped the wholesale profit model comprehensively, gave full play to the synergies of "wholesale and zero integration", and strongly promoted the terminal market development;
When one city gas enterprise is owned and controlled by the upstream enterprise, and the gas market in one region is included in the influence range of the upstream enterprise, the downstream market is repeatedly shaken, and the shock is more and more intense, and the opposition is rising for a while.

"China's natural gas upstream resources are highly concentrated and monopolized. About 95 percent of the natural gas is supplied by 'three barrels of oil'.
In their opinion, the distribution of the interests of the whole industry chain is unreasonable, with less distribution of the upstream interests and more distribution of the downstream interests. Therefore, they propose to exchange resources for markets and gas sources for equity, and use the earnings of the downstream to make up for the losses of the upstream.
But city gas profits are determined by local governments.
No local government will allow city utilities to make excessive profits.
There can be no excess profits downstream, it is impossible to make up for the upstream losses.
From a profit margin point of view, from a total profit point of view, from a policy point of view, it is impossible to use downstream to make up for upstream."

"Upstream companies and their affiliates control the air source and long term pipelines, and once they enter the downstream they can easily gain market dominance.
In the implementation of the "resource-for-market" strategy of upstream enterprises, there is a great risk of abusing the dominant market position.
If there are no constraints, their scale, scope and power in the downstream market will expand rapidly in the future, and the 'free of both ends' will fail, which is not conducive to the vigorous development of competitive market."

Li Yalan, executive director of China City Gas Association, said bluntly in the forum of "Energy + Finance" in lujiazui in 2019, "Upstream enterprises take advantage of resources and enter the downstream market strongly, which has caused great panic to the whole industry.
The rivalry between upstream and downstream is getting worse..."
It not only breaks the long-standing dark tide of "opposition" between upstream and downstream enterprises, but also points the finger directly at upstream enterprises.

Ms. Li, who heads the China City Gas Industry Association, said she had received many complaints from local combustion companies.
She expressed clear opposition to the direct supply of "three barrels of oil" to gas power plants and other downstream users when a complete city gas supply system has been established.
She pointed out that under the current pricing mechanism, if upstream take away the low cost and reasonable price of direct supply part, downstream enterprises will not be able to survive.

Petrochina, as the largest supplier of natural gas resources in China, has been at the forefront of the opposition since the implementation of the natural gas marketing system reform.
In the society, negative and skeptical voices continue to be heard, such as the "monopoly of petrochina" again resurfaced, and its marketing strategy was also accused of "abusing the dominant position of the market".

Reasonable and legal

"After the establishment of the National pipeline network company, the upstream enterprises' development model of integrated production, supply, storage, sales and transportation has been broken, and the original pipe-centered natural gas sales model can no longer meet the development needs of the new situation.
"New marketing tools must be established to ensure the need for gas sales."
Li Wei, natural gas strategy research center of Sinopec Petroleum Exploration and Development Research Institute, said.

After the establishment of National Pipe Network company, the natural gas sales business and pipeline business were separated, which made the loss of China's oil and gas wholesale business more prominent and required more solutions, so as to avoid greater losses of state-owned assets.
Because at the same time, the natural gas business of CNPC as a whole is a big account, and the cost of pipeline transportation can make up part of the wholesale losses.
So at the end of the year, the balance sheet is profitable.
After the split, the wholesale gas business losses will become more and more obvious.

General Secretary Xi Jinping has repeatedly stressed that "state-owned enterprises must be made stronger, better, and bigger with a straight mind, constantly enhance their vitality, influence, and anti-risk capability, and realize the preservation and appreciation of state-owned assets".
To maintain and increase the value of state capital is the original intention and ultimate goal of Kunlun Energy as a central enterprise to promote terminal business.
At the same time, as an enterprise, there are economic attributes, in accordance with the national laws and regulations under the premise of the pursuit of profit is perfectly normal.

The entry of multiple actors into the upstream and downstream sectors is in line with the general direction of the national oil and gas system reform and the market-oriented reform of oil and gas.
The general principle of China's oil and gas system reform is to "control the middle, free both ends", that is, to build the upstream oil and gas resources multi-subject multi-channel supply, the middle of the unified network of efficient gathering and transportation, downstream sales market fully competitive oil and gas market system, so as to achieve the end market price reduction.

"We can't say who owns the market. The market serves the consumer.
As long as it is beneficial to the interests of consumer subjects, it is very normal and reasonable for more market subjects to enter the market.
Moreover, the entry of new market players is conducive to breaking the inherent monopoly pattern in local areas and solving the problem of excessively high prices in the terminal market."
Guo Jiaofeng, deputy director of the Institute of Resources and Environmental Policy at the Development Research Centre of the State Council, said.

China has been opening up upstream and downstream.
In July 2019, the Special Administrative Measures for Foreign Investment Access (Negative List) (2019 edition) issued by the National Development and Reform Commission and the Ministry of Commerce lifted the restrictions on oil and natural gas exploration and development limited to joint ventures and cooperation, which means that the upstream exploration and development of oil and natural gas will be open to foreign and private enterprises.
At the same time, the restriction that the Chinese side must hold the gas and heat in cities with a population of more than 500,000 will be lifted, which means that foreign capital can also hold and participate in the gas sales business in large and medium-sized cities in the future.

The trend of urban combustion enterprises to enter the upstream and build the whole natural gas industry chain through the layout of LNG receiving stations and international LNG trade is increasingly obvious.

On July 9, ENN announced the signing of a natural gas purchase and sale contract with BP.
The previous day, April 17, FLG signed a natural gas purchase and sale contract with BP.
The dapeng receiving Station, the first LNG receiving station in China, is an important shareholder of Fo-Gen Energy and BP.
Enn invested in the construction of China's first private large LNG receiving station - New Aozhoushan LNG receiving and filling station;
Beijing gas LNG project will also be located in Tianjin Nangang Industrial Zone...

"The reform should treat all competing entities fairly. There is no reason why the lower reaches should move up, the upper reaches should not move down, and there is no reason why the lower reaches of the market should be open to foreign investment rather than Chinese capital.
As long as it complies with national laws and regulations and relevant policies, there is no reason to blame CNPC or other oil and gas giants for promoting urban gas business."
Industry experts said.

In a market economy, it is the fundamental purpose and meaning of a market economy that a large country or a small enterprise can take advantage of its own advantages to compete on a level playing field, optimize the division of labor, improve efficiency, reduce costs and improve quality so as to benefit the public and strengthen its industry.

Petrochina and downstream companies are independent market players.
Although our wholesale business is dominant, we have no pricing power. For many years, we have paid huge economic costs to fulfill the guarantee task and serve the national strategy, not to mention "using the control position to obtain high monopoly profits".
We give full play to our resource advantages to enter the terminal field, striving to increase the happiness of the residents and enhance the competitiveness of the industry, which is legal, reasonable and reasonable.