2019.06.25 LIAN, Jing、DU, Lijing、LUO, Ce、 TU, Haoxue
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  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  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.
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.
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.
Comparing the Measures with the Trial Measures, the main differences are as follows:
Compared to the Trial Measures, the Measures are more detailed and practical. We provide a commentary on the key provisions as follows:
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.
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.
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.
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.
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.
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)
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.
Should you need any further clarification or wish to discuss any of the issues covered in this article, please feel free to contact us.
1. The NEA’s press conference on June 4, 2019, http://www.nea.gov.cn/2019-06/04/c_138116127.htm