China’s Developing Gas Industry: Policy, Institutional and Regulatory Requirements

The years 2001 and 2002 have been momentous for China's gas industry. In March 2001 the government announced that BP had been selected to participate in the construction and operation of China's first LNG terminal. In June of the same year four consortia were chosen to tender for partnership with PetroChina in the construction of the West-to-East gas pipeline and in the development of gas fields in the Tarim Basin. These consortia were led by Shell, BP, Exxon-Mobil and Gazprom respectively. In July 2002 a 45-year framework agreement was signed which provides the basis for Shell, Exxon-Mobil and Gazprom to join PetroChina in the construction and operation of the West-to-East gas pipeline. The following month the gas supply contract for the first LNG plan was awarded to an Australian consortium using reserves on the North-West Shelf, and the supply contract for a second LNG plant was provisionally awarded to BP to import gas from Indonesia.

These are major steps for a country in which natural gas has traditionally played an insignificant role and has accounted for less than 2% of commercial energy consumption. Only in the 1990s did the government start to pay attention to the potential for developing domestic gas resources. The driving forces have been the increasing demand for energy and the desire to reduce the level of atmospheric pollution.

The coming ten years are certain to see a dramatic rise in the level of natural gas consumption in China and a proliferation in the sources of supply of this gas. But for this expectation to be realised, substantial investments have to be made: in gas field development, in long-distance transport, in local distribution networks, and in consumption appliances. The nature of the gas industry requires that these investments be made in a coordinated manner if investors are to see reasonable returns. Field development and pipeline construction have no value unless the local distribution networks and consumption appliances are put in place at the same time, and unless transparent and predictable payment structures are set up with creditworthy parties. In order that this range of investors can indeed make rational and coordinated decisions in the expanding gas industry, the government needs to formulate and put in place a stable framework of policy, institutions and regulation. In 2002, ten years after the development of the domestic natural gas industry was identified as a priority, little progress has been made in these matters.

by Philip Andrews-Speed and Stephen Dow

The full text of this article will appear in the journal "Minerals and Energy"

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