Energy & Resources

Reforms in the pipeline

Telecoms model set to be replicated in a bid to reshape oil sector

Sinopec-w

Soon to be spun-off as China Pipe?

Many commentators questioned China’s commitment to opening up its telecoms market when the State Council said in 2014 it would create a new company by combining the tower operations of the country’s three main carriers.

The result was China Tower: a new enterprise designed to avoid wasteful overlaps in infrastructure spending by taking over the responsibilities for the construction and operation of millions of wireless communication towers.

China Tower’s three major shareholders – China Mobile, China Unicom and China Telecom – are also its bread-and-butter clients. That looks incestuous, although analysts described the plan as “a monopoly designed to break up the monopoly” because of ambitions to introduce new shareholders to the roster after China Tower was listed last year.

A series of sovereign wealth funds, hedge funds and Chinese financial institutions bought into China Tower’s IPO last summer. Whether that constitutes a genuine shake-up is debatable, though: together, the three founding shareholders own more than 90% of the company and contribute almost the entirety of its revenues.

However, another powerful trio is reported to be planning a pooling of their infrastructure assets in a model mirroring China Tower’s. Last month Chinese Premier Li Keqiang told Beijing’s Two Sessions parliamentary gathering that in cases where the central government identified “naturally monopolistic industries” (such as telecoms and energy), it would be asking firms to spin-off part of their operations and make them more responsive to market forces.

The latest reorganisation involves the so-called “three oil buckets”: CNPC (better known by its listed arm, PetroChina), Sinopec and CNOOC, with a report from state broadcaster CCTV in late March claiming that efforts to create a national oil and gas pipeline company are set to accelerate.

Citing a high-level meeting chaired by President Xi Jinping, CCTV said that private sector investors will be encouraged to take stakes in the new company. “A national pipeline company has been talked about for a very long time. This time it is for real, finally,” China News Weekly added.

According to the Xinhua-run magazine, the country’s oil and gas transmission pipelines (excluding the last-mile network supplying fuel to homes and office buildings) totalled more than 133,100 kilometres at the end of 2017, of which nearly 70% is owned by CNPC. The magazine also calculates that the pipeline assets are collectively worth at least Rmb400 billion or $59.5 billion (for its estimate it used a 2016 deal in which Sinopec sold a 50% stake in a Sichuan-based pipeline project to other SOEs including China Life).

China Tower’s experience may be encouraging the “oil buckets” to endorse the overhaul more readily. The market value of the tower monopoly has climbed more than 53% to $43.6 billion since going public in Hong Kong last August and WallStreet.cn said the pipeline assets could enjoy a similar revaluation.

The query is whether asset reshufflings like these amount to fundamental reforms, with WallStreet.cn mentioning concerns that a new pipeline firm would become another “natural monopoly” akin to State Grid, which controls China’s electricity network, except for in Guangdong.

All changes take time, CCTV reminded its audience, claiming that the creation of “a fourth oil bucket” would represent the boldest reform yet in the energy sector. “No other countries have allowed a company to dominate both the upstream and downstream of the energy market,” it explained of the proposed separation. “Therefore spinning off the ‘mid-stream’ [long-distance oil and gas supply networks] and opening it to all players as a public infrastructure is the most effective way to introduce competition.”

Other players in the fuel distribution business, including foreign firms such as Gulf Oil (see WiC427) will be watching these developments with interest.


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