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China opens up oil and gas to foreign investments

The new "negative list" contains fewer restricted areas. Beijing intends to continue reforming its economy.

by Alessandra Spalletta
25 July 2019
6 min read
byAlessandra Spalletta
25 July 2019
6 min read

China is reducing market restrictions and opening up the oil and gas sector: from July 30, the government will ease the constraints on foreign investments in advanced manufacturing, particularly in the mining, transport and entertainment sectors. The announcement was made jointly by the Ministry of Trade and the National Development and Reform Commission (NDRC), with the publication, on June 30, of the “2019 Negative List”. This annual document lists the areas of the economy that are closed to foreign capital. The new list is 20 percent shorter than previous editions, with the number of sectors subject to restrictions cut from 48 to 40 (there were 180 in 2011). A signal that Beijing intends to continue opening up and reforming the economy, and to speed up negotiations with Washington in order to avert a trade war between the world’s two largest economies. In particular, the Chinese government has removed the obligation for foreign companies to have a Chinese partner in the exploration of gas and oil. Among the sectors removed from the list are, in addition to the operation and development of oil and gas fields, the supply of natural gas to cities over 500,000 inhabitants; the exploration and extraction of minerals such as molybdenum, used for the production of steel alloys.  The list, explains the Italy-China Foundation’s Study Center, applies to investments both throughout the country and in the Free Trade Zone (free trade areas, from Shanghai to Chongqing) in the fishing and publishing sectors. In addition to this change there is another reform taking place: the list of encouraged operations in China, especially in the less developed areas of the West, is being revised. With this document, the government is also promoting investments in highly technological sectors, from 5G to robotics to electric vehicles, in addition to the pharmaceutical sector and services. But the degree of China's economic openness, the Foundation says, is still lagging behind the OECD average. Moreover, there are concerns among foreign companies about the saturation of some sectors of the market, as in the case of cinema, although it is the subject of new concessions.

The China model

Since the approval last March of the New Law on Foreign Investments, which confirmed Beijing's positive attitude towards globalization, Xi Jinping's China has continued to reform the economic model, from an industry based on low added value to becoming future technology leaders.. At the same time, growth is affected by the repercussions of the current tariff dispute with the United States. GDP in the second quarter of 2019 slowed to 6.2 percent, its lowest level since the first quarter of 1992. Figures released by the National Statistics Office, which reported growth of 6.3 percent in the first half of 2019, are nevertheless within the growth targets set by the government of between 6 and 6.5 percent for the current year. There were also some signs of stabilization of the economy in June, when industrial production grew by 6.3 percent on an annual basis compared to 5 percent in May. Tensions with the United States, after the meeting at the end of June between Chinese President Xi Jinping and US counterpart Donald Trump, on the sidelines of the G20 in Osaka, are again in a truce phase and awaiting a resumption of negotiations to resolve the trade dispute.

A new oil&gas giant

The reform of the energy market announced by Xi Jinping in July 2018 is also proceeding quickly, with the announcement last March of the creation of a national pipeline network by the end of 2019. The new organization that will emerge from integrating the assets and employees of the three oil&gas giants: Sinopec, CNPC and CNOOC, will be a state entity but will also involve private investors. A few figures. China has overtaken the United States as the world's largest oil importer: in 2017, Beijing imported 8.4 million barrels a day, while the US bought 7.9 million, according to EIA data. The new refining and storage capacity, together with the fall in domestic production, have both contributed to the increase in imports. China is the  fifth biggest oil producer in the world (after the United States, Saudi Arabia, Russia and Canada), while in 2016 it was in second place after the USA in terms of oil consumption, at 13 percent, explains the US Department of Energy agency. According to forecasts, by 2030, China will be importing 80 percent of its total consumption.

Focus on gas

Gas distribution is also a central objective for investors in light of the favorable policies implemented by the Chinese authorities, although the opening of the sector “is a gradual long-term process and is not likely to have a significant impact on the industry in the short term while state-owned oil and gas companies dominate the sector”, Everbright Sun Hung Kai Co. Ltd. analyst Tian Miao  told Bloomberg in Beijing.

Based on the “Gas 2019. Analysis and forecasts to 2024” published last month by the International Energy Agency (IEA), the driving force behind the growth of diversified energy demand in 2018 was natural gas, which grew by 4.6 percent in 2018, thus recording the highest annual development rate since 2010. Gas accounted for almost half of the increase in the global primary demand for energy and is predicted to  increase by no less than 10 percent over the next five years to reach a record figure of 4.3 billion cubic meters by 2024. This increase is supported above all by demand in the US, which is trying to abandon coal for gas, particularly to limit the increase in CO2 emission.  A decisive contribution has also been made by China, where demand for natural gas has grown by 18 percent. Even though coal will continue to be the dominant energy source, the Agency expects China, at the forefront of improving air quality, will account for over 40 percent of the growth in the global demand for gas until 2024. Not only that, but in the next five years the Asia-Pacific region will support 60% of the demand for gas globally.