CERAWeek 2014 - China's New Third Plenum Reforms: What it Means for Chinese and Global Energy

The Third Plenum of the Chinese Communist Party's (CCP) 18th Congress put economic reform on center stage. Based on the road map, economic reforms will accelerate, with a focus on setting boundaries for the state's involvement in the market and allowing private enterprise a more prominent role.The roadmap raises many critical issues for energy market reforms.

1. How will price reforms continue for key energy products including natural gas, electricity, and oil products and will they converge with global prices?
2. What will be the impact on natural monopoly segments such as national pipelines and transmission networks?
3. Will there be more opening in China's upstream gas sector to non-NOCs as well as international companies?
4. What do these reforms mean for global markets?

Xizhou Zhou, Director, China Energy, IHS, chaired the Strategic Dialogue "China's New 'Third Plenum' Reforms: What It Means for Chinese and Global Energy." Joining him were Jing Ulrich, Managing Director and Vice Chairman of Asia Pacific JP Morgan Chase & Co.; Sun Xiansheng, President, CNPC Economics & Technology Research Institute; and Ping Lee, President and General Manager, BG Group-China. The panel discussed the implications of the reform roadmap set during the Third Plenum of the Chinese Communist Party's 18th Congress on China's economy and energy sector.

Jing Ulrich, Managing Director and Vice Chairman of Asia Pacific JP Morgan Chase & Co., noted the global importance of China as the world's "single most important and largest consumer of energy." Ms. Ulrich explained the importance of coal to the Chinese economy (coal accounts for 69% of total primary energy demand) and China's role in global energy trade (China accounts for 30% of global oil consumption growth). Ms. Ulrich also highlighted the key structural changes driving Chinese economic growth and shaping the evolution of the energy business in China. She explained that the country's leadership is looking to move China's economy away from its dependence on heavy manufacturing and toward more consumer- and service sector-driven growth, which would make it less energy intensive over the next 5 to 10 years. Ms. Ulrich stressed that it is the "quality not the quantity of growth" in energy demand that will be important for China. She cited urbanization as a key trend that will continue to drive energy consumption, explaining that the share of China's population living in cities is expected to grow by 1% per year over the next few decades, rising from 53% today to an eventual plateau of around 80%.

Sun Xiansheng, President, CNPC Economics & Technology Research Institute, discussed the historical importance of the recently proposed Third Plenum reforms. In light of their scale, Mr. Sun noted that implementing the reforms will be challenging. But he also pointed out the surprising speed at which some important steps have already been taken, citing the policy released in late February to allow third-party access to China's oil and gas pipeline network. In addressing the possibility of a potential independent third-party pipeline operator, Mr. Sun said that he believes that it is not yet time for such a major reform, stressing that China's pipeline infrastructure is still underdeveloped (the length of China's gas pipeline system is roughly one-tenth that of the US system) and thus needs to be expanded further before it is ready to stand on its own. More generally, Mr. Sun noted that in the future, through pricing reforms and the decentralization of decision making, he expects the market to play a more prominent role in the allocation of energy resources in China.

Ping Lee, President and General Manager, BG Group-China, agreed with Mr. Sun that the goals in the Third Party plenum document are very ambitious. The key with ambitious plans, he stressed, is implementation. Dr. Lee highlighted the reforms he believed were the most important. First are structural reforms that would create a more level playing field between a range of stakeholders including state-owned enterprises, private companies, and state and local governments. Second, he said that further price reforms, especially for gas, are needed to allow markets to allocate resources more efficiently. He said that oil price reforms that link refined product prices to a basket of international crude benchmarks have already gone quite far, and that coal prices are already market driven. Gas price reforms, he said, still lag behind. Dr. Lee explained that downstream and midstream reforms will only be effective following reform in the upstream, stressing that three national oil companies currently control all onshore and offshore acreages. Finally, Dr. Lee discussed the current restrictions on energy imports into the country, saying that although LNG imports are allowed, licenses for the necessary infrastructure are still restricted to a limited number of companies. Only four companies currently hold import permits. He closed by pointing out that oil imports are similarly restricted.

During the question and answer session, the panel discussed challenges in developing shale resources in China. Both Ms. Ulrich and Dr. Lee said they believe underinvestment may slow the pace of this development. To stimulate the growth of shale exploration and production, they said, it is important for China to provide independents and international oil companies with more opportunities for investment. Contrarily, Mr. Sun said that challenging geology-both above and below ground-was the key obstacle to development of shale gas in China.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.