Introduction

On 6 September 2018 the State Council issued Several Opinions on Promoting the Coordinated and Stable Development of Natural Gas in order to:

  • accelerate the development and use of natural gas in a coordinated and stable manner;
  • advance the energy production and consumption revolution; and
  • build a clean, low-carbon, safe and efficient modern energy system.

The State Council also issued a strategy on the comprehensive development of the natural gas industry.

The opinions state that efforts will be made to:

  • introduce detailed implementation rules for the oil and gas exploration and exploitation management system reform as soon as possible;
  • implement an exit mechanism for oil and gas exploration areas;
  • adhere to the policy of transferring exploration areas in a competitive way in all instances; and
  • advocate for the market-oriented transfer of mining rights.

In addition, action will be taken to speed up the diversification of import countries (regions), means of transport, import channels, contract models and participants.

Background

Natural gas is a high-quality, efficient, green and low-carbon energy. Although it is a longstanding energy source in China, its use has recently increased significantly.

China's energy industry has developed rapidly since the foundation of the People's Republic of China due to government reform. However, the industry's structure is impractical and coal remains the primary means of energy production, with consumption rates as high as 72%.(1) The amount of coal being burned has caused China's atmosphere to deteriorate, its waters to become polluted and its resources to be wasted. As such, it is imperative that the country develops a clean energy plan and adjusts its energy structure to improve this situation.

In February 2000 the State Council, at its first meeting, approved the West-East Gas Transmission Project, which aimed to construct 4,000km of pipeline (with a capacity of 12 billion m3) per year. This project benefited more than 200 million people and kickstarted an era in which China began to use natural gas on a large scale.(2)

On 14 April 2014 the National Development and Reform Commission (NDRC) published the Circular of the General Office of the State Council on Forwarding the Several Opinions of the National Development and Reform Commission on Establishing a Long-Term Mechanism to Guarantee the Steady Supply of Natural Gas. The policy recommendations put forward at that time were relatively broad, focusing on how to guarantee the supply of gas for people's livelihood with no targeted policy recommendations relating to the reform of the entire industry chain.(3)

On 24 December 2016 the NDRC formally issued a notice on the 13th Five-Year Plan for the development of the oil and natural gas industry. This plan referred to the challenges encountered in China's natural gas development, including:

  • an abundance of domestic natural gas resources, but a low detection rate;
  • insufficient investment in the early exploration stages;
  • gas storage facilities being unable to meet the demands; and
  • difficulties in protecting natural gas pipelines.(4)

Further, the notice clearly highlighted that the main issue that needed to be addressed was "stabilizing oil and increasing gas" to promote the coordinated and stable development of the oil and natural gas industry.(5)

On 23 June 2017 the NDRC promulgated its Opinions on Accelerating the Use of Natural Gas,(6) which proposed to gradually make natural gas one of the main energy sources of China's clean energy system.

After the State Council issued its Several Opinions on Promoting the Coordinated and Stable Development of Natural Gas in September 2018, the person in charge of the National Energy Administration's oil and gas division said that some provincial regions in China had experienced a short supply of natural gas in Winter 2017 and that residents in some areas had even suffered supply failures. As of the beginning of 2018, China's natural gas demand was still growing rapidly. The consumption in the first half of the year was 134.8 billion m3, with a growth rate of 17.5%. The relevant supporting policies must be improved to meet the demand for natural gas consumption.(7) This means that the reform of China's natural gas sector has entered a new stage of development.

Key features of opinions

Clarification of natural gas industry's development  Speeding up the development and use of natural gas, while also promoting its coordinated and stable development, is key if China wants to promote the energy production and consumption revolution and build a clean, low-carbon, safe and efficient modern energy system.(8)

Highlighting of contradictions in natural gas industry's development The opinions clearly highlight that the incomplete system of natural gas production, supply, storage and marketing is a deep-seated problem for the development of China's natural gas industry. This has manifested in the following ways:

  • China's domestic production growth rate is lower than its consumption growth rate;
  • import diversification in the natural gas industry is weak;
  • the industry's consumption structure is impractical;
  • China's natural gas infrastructure is weak;
  • China's gas storage capacity is insufficient;
  • the industry's level of interconnection is insufficient;
  • the market-based price mechanism has not been fully developed;
  • the emergency support mechanism is flawed; and
  • there are security risks in the construction and operation of facilities.(9)

Suggestions based on existing contradictions and new situations and conditions The opinions make suggestions based on existing contradictions to be resolved and new situations and conditions regarding the development of the natural gas industry, including as follows.

Promoting institutional reform In the domestic context, the opinions suggest that China:

  • strengthens its exploration and development efforts;
  • extends its reform of the oil and gas exploration and exploitation management system;
  • fully implements the competitive transfer of blocks; and
  • encourages the transfer of mining rights in a market-oriented manner.

The effective implementation of these measures will help to change past phenomena, such as a lack of market players, lack of competition, insufficient investment and inadequate supervision.

In the international context, the opinions propose to:

  • accelerate the diversity of importing countries (regions), modes of transport, import channels, contract models and participants;
  • adhere to efforts regarding both long-term contracts and spot commodities;
  • strengthen multi-bilateral cooperation with key natural gas exporting countries; and
  • accelerate the implementation of major projects for international cooperation.

These measures not only solve the dilemma caused by over-reliance on a few countries, but also reflect the considerations necessary to protect China's overall interests and achieve market-oriented development in the natural gas field.(10)

Building a multi-level reserve system The opinions suggest that a multi-level gas reserve system be established, which mainly includes underground gas storehouses and coastal liquefied natural gas (LNG) receiving stations. This should be supplemented by large-scale inland intensive LNG storage tanks in key areas and supported by pipe network interconnection.

The NDRC, the Ministry of Housing and Urban-Rural Development, the National Energy Administration and the provincial people's governments are responsible for:

  • allocating duties;
  • accelerating the liberalisation of the right to use geological gas storage structures; and
  • encouraging qualified market players to use depleted oil and gas reservoirs, salt caves and other resources to construct underground gas storage houses.(11)

Strengthening construction and interconnection of natural gas infrastructure The Ministry of Natural Resources will be responsible for issuing the oil and gas pipeline network system reform plan as soon as possible and promoting the fair opening up of infrastructure, such as natural gas pipeline networks, to third-party market players. The opinions stipulate that the ministry will simplify and optimise the pre-examination and approval of prerequisites, as well as actively implement parallel examination and approval and other methods to shorten the cycle for project construction and examination and approval.(12)

Establishing a comprehensive coordination mechanism for natural gas development The opinions:

  • recommend the full implementation of the natural gas purchase and sale contract system;
  • encourage the signing of medium and long-term contracts; and
  • actively promote the signing of inter-annual contracts.

The NDRC and the National Energy Administration will be responsible for researching whether the central government's subsidy policy for unconventional natural gas can be extended to the 14th Five-Year Plan period and including tight gas within the subsidy policy's scope. They will also:

  • grant a central budgetary investment subsidy for the construction of emergency gas storage facilities in key regions;
  • study the central government's support policies (eg, subsidies for gas exceeding the reserve target volume); and
  • research the supporting policies for bottom gas based on accurate measurements and identification.

Further, they will study the policy of the proportional return of value added tax according to the actual receiving volume of LNG receiving stations.(13)

Comment

The Several Opinions on Promoting the Coordinated and Stable Development of Natural Gas were formulated based on the current landscape of China's energy industry, as well as future trends and the direction of energy industry development. The opinions mainly constitute a guide for regional governments and enterprises to promote the coordinated and stable development of the natural gas industry and the reasonable exploitation and storage of natural gas. Compared with previous laws and regulations, the opinions are clearer and more specific and have more practical guiding significance, particularly as they set out which departments are responsible for specific tasks. Further, it is likely that the opinions will be implemented more actively than prior laws and regulations on this matter.

For further information on this topic please contact Libin Zhang at Broad & Bright by telephone (+86 10 8513 1818) or email (libin_zhang@broadbright.com). The Broad & Bright website can be accessed atwww.broadbright.com.

Endnotes

(1) Zhang Guobao, former National Energy Administration director, gave a speech at the International Natural Gas Cooperation and Development Forum on 13 September 2018 entitled "The road to the development of China's natural gas—concentrating power to achieve great things, and all kinds ownership promoting development". This speech was published on the Economic Network on 20 September 2018.

(2) ?Ibid.

(3) Liu Manping, "What is the intention of the State Council to promote the coordinated and stable development of natural gas?", China Energy News, 11 September 2018.

(4) On 24 December 2016 the NDRC issued its Notice on the 13th Five-Year Plan for Oil and Gas Development (Development and Reform Energy [2016] 2743).

(5) "Stablizing Oil and Increasing Gas—Interpretation of the 13th Five-Year Plan for Oil and Natural Gas Development", Xinhua News Agency, 19 January 2017, available here.

(6) The NDRC formally issued the Opinions on Accelerating the Use of Natural Gas on 23 June 2017. The opinions are available here.

(7) "The National Energy Administration interprets 'Several Opinions on Promoting Coordinated and Stable Development of Natural Gas'", Xinhua News Agency, 5 September 2018, available here.

(8) See Guo Fa [2018] 31, "Several Opinions of the State Council on Promoting the Coordinated and Stable Development of Natural Gas", 30 August 2018.

(9) Liu Manping, Id.

(10) See Bai Jun, "Promoting the coordinated development of natural gas is not just a matter of seeking stability", Sino-foreign Energy Observation, 11 September 2018.

(11) Guo Fa, Id.

(12) Ibid.

(13) Ibid.

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