China – A Milestone In The Reform Of Oil And Gas Sector

 

6 July, 2019

 

 

On May 25, 2019, the National Development and Reform Commission (the “NDRC”), the National Energy Administration (the “NEA”), the Ministry of Housing and Urban-Rural Development, and the General Administration of Market Supervision jointly published the Measures on the Supervision and Administration of Fair Opening of Oil and Gas Pipeline Facilities (No. 916 [2019] of National Development and Reform Commission Energy Sector, the "Measures"), effective as of the date of enactment and valid for five (5) years. The Measures on the Supervision and Administration of Fair Opening of Oil and Gas Pipeline Facilities (for Trial Implementation)” (No.84 [2014] of NEA, the "Trial Measures") promulgated by the State Energy Administration was simultaneously abolished.

 

This article provides a brief introduction on the background and main content of the Measures, a summary of their major changes as compared to the Trial Measures, an analysis of the key highlights of the Measures and their impact on the fair opening of oil and gas pipeline network facilities, and our preliminary comments on issues to be further clarified in implementing regulations and practice.

 

1. Background 

 

In recent years, the oil and gas industry of China has seen rapid growth, with a diverse body of upstream and downstream entities entering the market. With the increasing willingness of all parties to drive forward market-oriented reform, there has been a growing demand for fairness and openness in the oil and gas sector. Equal access to oil and gas pipeline network facilities is an important step toward the overall reform of the pipeline network system. It is therefore essential for the authorities to issue special regulations to guide, administer and supervise the fair opening of oil and gas pipeline network facilities, in order to ensure the healthy and systematic reform and development of the whole oil and gas industry.

 

The Trial Measures enacted on February 13, 2014 (and valid for five years) was China’s first systematic regulation regarding the fair opening of oil and gas pipeline facilities and third-party access. However, due to issues including the inadequate development and poor interconnectivity of pipeline network facilities, problems with pipeline network operating systems, inadequate platforms for information disclosure, certain companies’ lack of attention to fair opening, and ambiguities in the Trial Measures (for instance, there was no clear definition of “remaining capacity”), over the course of the past five years, the provisions of the Trial Measures had not been properly implemented. As a result, the number of accessible oil and gas pipeline network facilities in China, and the extent of their openness remain relatively limited. 1

 

Nevertheless, in the past years, China has continued to take positive steps towards opening up the oil and gas sector to third parties in the market. In May 2017, the CPC Central Committee and the State Council issued Several Opinions regarding Deepening the Reform of the Oil and Gas System, explicitly proposing to "improve equal access to oil and gas pipelines, so that the oil and gas pipelines, including the provincial and inter-provincial pipeline networks, may all become open to third-party users in the market." On March 19, 2019, the CPC Central Committee on Comprehensively Deepening Reform approved the Implementation Opinions on the Reform of the Operation Mechanism of Oil and Gas Pipeline Network, which require the establishment of a state-controlled pipeline network company with diverse stakeholders in order to construct an oil and gas market system with multi-level and diversified oil and gas sources, and to supply channels in the upstream, efficient and unitized gathering and transportation pipeline network in the midstream, and a fully competitive sales market in the downstream.

 

Prior to the expiration of the Trial Measures, in compliance with the requirements of the CPC Central Committee and the State Council,, and with the benefit of the insights and experience acquired through the implementation of the Trial Measures, the NDRC coordinated various authorities to draft a new regulation, and published the Measures for the Supervision and Administration of Fair Opening of Oil and Gas Pipeline Facilities (Draft) (the “Draft Measures”) on August 3, 2018.

 

However, due to delays caused by the long chain of upstream and downstream industries in the oil and gas sector and the multitude of market players and regulators involved, the final version of the Measures was not published until nine months after the expiration of the Trial Measures. Now that the Measures have finally been published, they will serve as the main legal framework for the mechanism of the fair opening of oil and gas pipeline network facilities in China for the next five years, while the authorities may continue to issue implementing regulations.

 

2. Comparison of the Trial Measures and the Measures

 

2.1 General Comments

 

The Measures comprises eight chapters – General Provisions, Basic Conditions for Fair Opening, Basic Requirements for Fair and Open Service, Information Disclosure, Application and Acceptance Procedures for Fair and Open Service, Execution and Performance of Service Contracts, Supervision and Administration, and Legal Responsibilities – and 42 articles in total.

 

With its more logical arrangement of chapters and carefully considered articles, the Measures focus on key issues of relevance to the fair opening of the pipeline network, such as the planning and construction of pipelines, keeping transportation and sales separate, and the interconnectivity of different pipeline networks. Additionally, by adding certain new provisions, the Measures seeks to address some of the outstanding issues and key obstacles for fair opening, such as the disclosure of information, including information about any remaining capacity, the performance of service contracts, and the measurement of natural gas.

 

2.2 Specific Comparison

 

Comparing the Measures with the Trial Measures, the main differences are as follows:

 

 

Item	Trial Measures (2014)	Measures (2019)
Definition of Oil and Gas Pipeline Network Facilities	“Oil and Gas Pipeline Network Facilities” refers to trunk and branch lines of pipelines for crude oil, refined oil and natural gas (including oil and gas pipeline network for transportation inside a province) as well as supporting facilities of such pipelines (including: terminals, loading and unloading facilities, LNG receiving stations, natural gas liquefaction facilities and compression facilities, oil and gas storage facilities and so on), provided that such facilities are in compliance with the relevant technical requirements and specifications, and have been properly approved, examined or registered in accordance with the relevant national and local regulations,; urban gas facilities shall be subject to other relevant laws and regulations. (Article 3)	“Oil and Gas Pipeline Network Facilities” refers to pipelines for crude oil, refined oil and natural gas, liquefied natural gas receiving stations, underground gas storages and so forth, as well as supporting infrastructure, provided that such facilities are in compliance with the relevant technical requirements and specifications, and have been properly approved, examined or registered in accordance with the relevant national and local regulations. It excludes special gathering pipelines for oil and gas production on land or in sea, special pipelines installed in production and operations areas of refinery and chemical companies, oil and gas pipeline network facilities for the transportation of oil and gas of non-commodity quality, military or classified oil and gas pipeline network facilities, and urban gas facilities. (Article 1)
Basic requirements for fair opening services	With remaining capacity in the oil and gas pipeline network facilities, third-party market entities shall have equal access to such facilities for transportation, storage, gasification, liquefaction, compression, and other services. (Article 5)   Operators of oil and gas pipeline network facilities shall provide access to such facilities to new users in a fair and non-discriminatory manner, in accordance with the order of contract execution, upon the premise of mutual benefit, full use of the capacity of the facilities and ensuring the existing services of the existing users. (Article 6)	Operators of oil and gas pipeline network facilities shall provide services such as oil and gas transportation, storage, gasification, loading and unloading and so forth, to users eligible for access to such facilities, in a non-discriminatory manner; and shall not delay or refuse to enter into service contracts with qualified users without reasonable grounds, or make unreasonable demands. (Article 12)   Prior to the completion of the reform of the operation mechanism of the oil and gas pipeline network facilities, operators of oil and gas pipeline network facilities shall open such facilities to qualified users in accordance with the Measures, provided that there is remaining capacity after ensuring existing services of the existing users. (Article 12)
Basic conditions for fair opening	Interconnection and interoperability of oil and gas pipeline network facilities shall be encouraged; operators of such facilities may negotiate matters regarding opening the facilities to one another on equal basis, considering their actual needs and capacities. (Article 12)	The State encourages and supports all types of capital to participate in the investment and construction of oil and gas pipeline network facilities that are integrated into the unified plan, and that enhance oil and gas supply capacity. (Article 7)   In the relevant planning on the development of the oil and gas industry at a national or local level, it is necessary to fully consider factors such as the interconnection and interoperability of oil and gas pipeline network facilities and the supply of resources, as well as any mid- and long-term changes in market demand. (Article 8)   The State encourages and supports the interconnection and interoperability of, and fair access to oil and gas pipeline network facilities, and shall gradually achieve flexible deployment of oil and gas resources among different pipeline network facilities. Operators of oil and gas pipeline network facilities shall not impede access to other pipeline network facilities that meet the planning requirements, and shall facilitate such access. (Article 9)   Operators of oil and gas pipeline network facilities shall not refuse to open oil and gas pipeline network facilities in the name of centralized purchasing and sales. (Article 11)
Application and acceptance of fair opening services	When upstream users may apply for access to the oil and gas pipeline network facilities to operators of such facilities, the operators shall reply within 30 business days to confirm whether they agree to grant access to the applicants. In case of denial of access, the operators shall explain reasons for the denial, copying the NEA or its dispatched agencies. (Article 10)   When downstream users may apply for access to the oil and gas pipeline network facilities to operators of such facilities, the operators shall reply within 30 business days to confirm whether they agree to grant access to the applicants. In case of denial of access, the operators shall explain reasons for the denial, copying the NEA or its dispatched agencies. (Article 11)	Oil and oil pipe network facilities operators can accept user applications in a centralized or decentralized manner. If using a centralized approach, operators of oil and gas pipeline network facilities shall publicly issue the opening service announcement, and the results of the applications shall be disclosed to all applicants and submitted to the NEA or its dispatched agencies.   If using a decentralized approach, operators of oil and gas pipeline network facilities shall provide their response as to whether they will provide opening services within 15 business days from the date of receiving the application. (Article 22)   Operators of oil and gas pipeline network facilities shall promptly provide the list of users that have not been accepted, together with reports on the corresponding circumstances, to the NEA or its dispatched institutions. (Article 29)
Requirements for information disclosure and reporting	Oil   and oil pipeline network facilities operators shall, on a quarterly basis, disclose the access standards, transportation   (storage, gasification) prices, conditions for application for access,   acceptance procedures, and other information regarding oil and gas   pipeline network facilities through websites or the information platform   designated by the NEA. (Article 20)   Operators   of oil and gas pipeline network facilities shall disclose the status of   operation of the relevant facilities, the location where the oil and gas can   be received or distributed, the remaining capacity for transportation   (storage, gasification, liquefaction and compression), plans of production   restriction (suspension) for maintenance, and other information, to upstream   and downstream users applying for access to the facilities. The upstream and   downstream users shall abide by their responsibility and obligations regarding   confidentiality to the aforementioned information in accordance with law, and   shall assume the corresponding damages and legal liabilities for consequences   arising from leakage. (Article 20)	Operators of oil and gas pipeline network facilities shall disclose the basic information, remaining capacity, service conditions, technical standards, price standards, application and acceptance procedures, checklist of requirements for written submissions by users, confidentiality requirements, and other information of oil and gas pipeline network facilities through the information platform designated by the NEA or its dispatched agencies, as well as the operators’ portal websites. The operators shall promptly update the relevant information in case of changes. (Article 17)   Upon reasonable requests from users for disclosure of other relevant information, operators of oil and gas pipeline network facilities shall disclose such information to the requesting users. (Article 17)   The NEA shall separately issue relevant regulations on information disclosure in relation to opening of oil and gas pipeline network facilities. (Article 17)   Before December 5 each year, operators of oil and gas pipeline network facilities shall disclose the remaining capacity of the oil and gas pipeline network facilities for each month of the next natural year through the information platform designated by the NEA or its dispatched agencies and on the operators’ portal websites, and before the 10th day of each month, update the remaining capacity of the facilities for each month for the rest of the year. Should circumstances allow it, operators of oil and gas pipeline network facilities shall disclose the remaining capacity of their facilities in real time. (Article 18)   Operators of oil and gas pipeline network facilities shall disclose through the information platform designated by the NEA or its dispatched agencies and the operators’ portal websites, on a quarterly basis, information with respect to services of the oil and gas pipeline network facilities, such as the recipients of services, such as service objects, facilities in service, service hours, and total volume of the services, and so forth, provided that such information does not involve trade secrets. (Article 19)
Performance of service contracts regarding opening of oil and gas pipeline network facilities	Operators of oil and gas pipeline network facilities shall report to the NEA on an annual basis regarding purchase and sale or transportation, storage, gasification, liquefaction, compression, and other services service contracts in connection with opening of oil and gas pipeline network facilities. (Article 14)   The relevant market entities shall strictly adhere to the contract, and in case of disputes, shall resolve the disputes through negotiations in light of the principle of equality, voluntariness and integrity, and if no agreement can be reached, the disputes can be resolved through coordination and mediation by the NEA. (Article 18)	Operators and users of oil and gas pipeline network facilities shall file (register) their service contracts signed in accordance with the relevant provisions of the State on the "Credit China" website. (Article 24)   If users fail to fully use the capacity of oil and gas pipeline network facilities in accordance with provisions of service contracts, they shall pay service fees in accordance with relevant state regulations and the service contracts; in case of serious violations, operators of such oil and gas pipeline network facilities shall promptly report the violations to the NEA or its dispatched agencies, and report the users to the relevant authorities for inclusion of the defaulting users on a list of Dishonest Persons in the oil and gas sector. (Article 26)   Users shall perform obligations in relation to balanced operation of oil and gas pipeline network system in accordance with service contracts. If users fail to comply with the relevant obligations, operators of oil and gas pipeline network facilities may adopt mandatory balancing measures pursuant to the service contracts and national standards. (Article 27)
Requirements regarding natural gas energy measurement	Not applicable	When operators of gas pipeline network facilities receive natural gas and deliver the same on behalf of natural gas production and sales companies to users, they shall measure the heat value, volume and quality in a scientific manner, and accept the authorities’ supervision and inspection with respect to the measurement. (Article 13)   The State shall implement energy measurement and pricing for natural gas, and establishes a natural gas energy measurement and pricing system within 24 months from the date of implementation of these Measures. (Article 13)
Pricing of services of oil and gas pipeline network facilities	The prices determined by the competent pricing authorities in accordance with the relevant regulations for transportation (storage, gasification, and so forth) services shall apply to opening of oil and gas pipeline network facilities. (Article 17)	The price for services of oil and gas pipeline network facilities shall be subject to government pricing or government guidance prices. Operators of oil and gas pipeline network facilities shall charge service fees to users in accordance with prescribed pricing policies; for market-oriented pricing, the fee standards shall be determined through negotiations between the parties. (Article 17)

 

3. Our Comments

 

Compared to the Trial Measures, the Measures are more detailed and practical. We provide a commentary on the key provisions as follows:

 

3.1 Convergence with urban gas facilities

 

The Measures clarify that "urban gas facilities" do not fall within their scope, and are generally subject to concession. We will continue to track any convergence of the urban gas facilities and oil and gas pipeline network facilities subject to fair opening in terms of supervision, administration and operation, and publish our follow-up comments in our public WeChat account. 

 

3.2 Remaining capacity and existing services

 

Similar to the Trial Measures, the Measures require operators of oil and gas network facilities to ensure the provision of “existing services for existing users” before making “remaining capacity” of the facilities accessible to third parties. However, the Measures limit the application of this condition to the period "prior to the completion of the reform of the operating system of oil and gas pipeline network facilities." Strictly speaking, "completion of the reform" is not actually a legal concept, but more of a policy judgement to be further clarified or confirmed by the authorities through future directives. Additionally, we believe the terms, “remaining capacity” and “existing services for existing users”, may still need to be interpreted on a case-by-case basis.

 

Pursuant to the explanation given by one of the heads of the NEA in an interview on June 4, 20192, operators of oil and gas pipeline network facilities must provide services to all eligible users in a fair and non-discriminatory manner; and this is the most important requirement of the Measures, and a key to the reform of oil and gas pipeline network facilities system. However, given the current state of market practices, and the rate of progress of reform, the Measures also include various transitional provisions. Article 12 of the Measures imposes two requirements: firstly, in light of the reform, it mandates the complete and fair opening of oil and gas pipeline network facilities to all eligible users in a fair and non-discriminatory manner; secondly, considering the status of the reform, this article allows, in the transition period prior to the reform being fully achieved, the operators to only open up the currently remaining capacity (after having ensured the existing services to existing to users) of the oil and gas network facilities. 

 

3.3 Natural gas energy measurement

 

In China, natural gas is at present usually measured by volume, whereas many other countries use an energy measurement method that is able to take into account differences in quality of natural gas, and thereby achieve more accurate measurement. New provisions in the Measures require natural gas to be measured by heat value, volume and quality, which should improve the accuracy of measurement, help promoting fairness and minimize commercial disputes. However, given the reality of the current situation in China, it is likely to take some time to make the necessary changes to measurement equipment, and in order to effectively implement the requirements of the Measures, the authorities will need to formulate the corresponding technical standards and administrative policies. 

 

3.4 Performance of service contracts

 

The Measures have introduced the requirement to register service contracts on the “China Credit” website. By allowing users to balance operations of oil and gas pipeline network through negotiation of contract terms, and to agree to and “ship-or-pay” transportation fees and other newly-introduced terms,, the Measures leave more room for contracting parties to negotiate and arrange for their own specific contractual terms and obligations, and thereby help alignment with the market-oriented reform of the oil and gas sector.

 

3.5 Pricing of Facility Services

 

In contrast to the single government pricing method stipulated in the Trial Measures, the Measures allow operators of oil and gas pipeline network facilities to decide among various methods, namely government pricing, government guidance prices and market-based pricing, how to price their facility services. The inflexibility of the single government pricing method may discourage market players from participating in the opening of oil and gas pipeline network facilities. Market-based pricing, by contrast, may incentivize participants to actively engage in the reform. However, for any parties to service contracts who are lacking in the relevant experience and capability, reaching a market-based price through bargaining and negotiation may prove to be challenging, and it is inevitable that they will soon need to reform the terms of the contracts, such as to include price adjustment mechanisms and to change terms regarding damages and liabilities.

 

3.6 Specific Provisions Regarding Information Disclosure to be Separately Enacted

 

By eliminating information asymmetry, the disclosure of information should enable users to apply for open services of oil and gas pipeline network facilities. The NEA issued the Notice on Promoting Information Disclosure in Relation to the Opening of Oil and Gas Pipeline Facilities on September 6, 2016, and since then has gradually established an information disclosure system for oil and gas pipeline network facilities. However, in practice, the supervising authorities have identified various issues with respect to information disclosure, such as some companies’ lack of interest and motivation for information disclosure, the need for more systematic disclosure procedures, a lack of information disclosed, differences in the formats, standards and contents for information disclosed, the need for more effective platforms and accessible channels for disclosure, and the need to improve and refine supervision and administration policies for disclosure.

 

In response to these issues, the Measures outline the scope of the information to be disclosed, and additionally require the NEA to separately promulgate more specific regulations regarding information disclosure. (Article 17)

 

4. Conclusion

 

To sum up, the release of the Measures represents an important step in strengthening supervision and administration procedures, facilitating the fair opening of oil and gas pipeline network facilities, and promoting overall reform in the oil and gas sector. On the basis of the legal framework stipulated in the Measures, China will gradually tackle key issues and obstacles to fair opening reform and achieve an efficient utilization of oil and gas pipeline network facilities.

 

JunHe's Energy and Infrastructure Projects Group has for many years actively engaged in development, construction, investment, financing, implementation, and dispute resolution in the areas of energy and infrastructure. We have represented many SOEs, Fortune 500 multinational enterprises and private companies in the oil and gas industry in various greenfield development projects and equity and asset acquisitions, in restructuring and dispute resolution. We will continue to pay close attention to the implementation of the Measures and the supporting rules, and will strive to provide our customers with real-time, high-quality and efficient legal services.