China Further Liberalizes the Natural Gas Infrastructure Market—The Management Measures of Natural Gas Infrastructure Construction and Operation took effect as of April 1, 2014

By King & Wood Mallesons’ Energy& Resources Group

The Management Measures of Natural Gas Infrastructure Construction and Operation (National Development and Reform Commission Decree No. 8) (《天然气基础设施建设与运营管理办法》(国家发展改革委员会令第8号)) (the “Measures”) were published by the National Development and Reform Commission (“NDRC”) on February 28, 2014 and took effect as of April 1, 2014. The purpose of the Measures is to regulate the construction and operation of natural gas infrastructure, encourage different types of investment into the natural gas infrastructure market and to further liberalize the market by promoting fair competition. The key features of the Measures are set out below:

1. Scope of the Measures

The Measures attempt to cover the entire natural gas infrastructure market. Under the Measures, “Natural Gas” includes “natural gas, coal-bed methane, shale gas and coal gas, etc.al”,[i]and “Natural Gas Infrastructure” includes “natural gas pipelines, gas storage facilities, LNG receiving terminals, natural gas liquefaction plants, natural gas concentration facilities and other affiliated facilities”,[ii] both onshore and offshore. Relevant enterprises referred to in the Measures include natural gas infrastructure operators (天然气基础设施运营企业), natural gas trading enterprises (天然气销售企业) and urban natural gas retail enterprises (城镇天然气经营企业). The sheer breadth of the Measures reflects the ambitious scale of attempted liberalization of China’s natural gas infrastructure market.

2. Encouragement of Different Types of Investment into the Market

The natural gas infrastructure market is open to several different types of investors. The Measures state that “The Government encourages and supports different types of investors to invest into the natural gas infrastructure market under an integrated plan”.[iii] Different types of permitted investors include state-owned companies, private companies and foreign companies. It is intended that the promotion of fair opportunities for different types of investors will further liberalize and generally improve the natural gas infrastructure market.

3. Approval of Natural Gas Infrastructure Construction Projects

The Measures state that “Projects of natural gas infrastructure construction must be approved, verified or filed for record purposes in accordance with relevant regulations.”[iv]The meaning of “relevant regulations” is not clear from the Measures. Pursuant to the Catalogue of Investment Projects Verified by Government (Version 2013) (《政府核准的投资项目目录 (2013年本)》) (the “Catalogue”):

• construction projects involving imported LNG receiving terminals or gas storage facilities must be approved by the relevant industry managing authorities (e.g. MOFCOM, MLR, etc.) sitting under the State Council (国务院行业管理部门);[v]
• construction projects involving cross-border and cross-province (cross-district, cross-city) natural gas pipelines must be approved by the managing authorities for investment (e.g. NDRC) set under the State Council (国务院投资主管部门),[vi] sponsors of these projects must also seek comments from the relevant industry managing authorities before projects are launched;[vii]and
  • other pipeline construction projects must be approved by the relevant provincial government.[viii]The Measures provide that the relevant provincial government must inform NDRC when granting approvals.[ix]

Note that the rules set out above are only applicable to LNG receiving terminals, gas storage facilities and natural gas pipeline. These rules are not applicable to other types of natural gas infrastructure, e.g. natural gas liquefaction plants or natural gas concentration facilities. Pursuant to the Catalogue, except otherwise provided by the Government, if an enterprise invests into a project which falls outside of the Catalogue, the project must still be filed[x] with the relevant local government managing authorities for investment (地方政府投资主管部门) for record purposes.[xi]

4. Inter-connection of Natural Gas Infrastructure

Inter-connection is one of the most important issues in natural gas infrastructure projects. The Measures state that the Government encourages and supports the inter-connection of natural gas infrastructure. The method of inter-connection will be mainly determined between enterprises based on their negotiations, including in relation to share of investment costs, transportation of natural gas and maintenance of the inter-connected infrastructure. Where there is a “necessity”, NDRC and National Energy Administration (“NEA”) and the managing authorities of natural gas at the provincial level (省级人民政府天然气主管部门) will “coordinate” the situation.[xii] Inter-connection of natural gas infrastructure could reduce operators’ cost, improve the efficiency of gas transportation and promote cooperation between natural gas infrastructure enterprises. However, the terms “necessity” and “coordinate” are not clearly defined in the Measures.

5. Management of Operation of Natural Gas Infrastructure

The Measures also regulate various issues relevant to natural gas infrastructure operation. Key points are set out as follows:

• The business of natural gas infrastructure operation should be subject to an independent accounting procedure. This is applicable for those enterprises which not only have a natural gas infrastructure business but also other types of natural gas business.

These enterprises should set up an independent accounting procedure to ensure that the costs and revenues of gas transportation, storage, gasification, liquidation and concentration are true and accurate.[xiii]

• NEA and its agencies are responsible for supervising and managing the natural gas infrastructure market to promote openness and fairness. Natural gas infrastructure operators should provide services and products to end users in a fair and just way, rather than “taking advantage of their dominant position to expel other enterprises”.[xiv] The purpose of these provisions is to further encourage different types of investment (especially by private companies) into the market. However, we consider that NEA’s further clarification is required before the promotion of openness and fairness within the market can be ensured.
• Natural gas infrastructure operators must follow the pricing rules set out by the managing authorities for pricing (in this case the NDRC) and sign natural gas infrastructure service contracts with end users.[xv]NDRC sets the basic upstream price of natural gas, based on which enterprises can negotiate prices with end users under downstream natural gas sales contracts.
• If the operation of certain natural gas infrastructure needs to be terminated, operators must notify: (a) the original approval or filing authorities; (b) the applicable supra-county level authorities; and (c) affected natural gas trading enterprises and end users.[xvi]

6. Adjustment of the Supply of Natural Gas by Relevant Enterprises

To ensure the secure and sustainable operation of natural gas infrastructure, the Measures seek to create a mechanism for the adjustment of natural gas supply in the event of emergencies. For this purpose, relevant enterprises are required to comply with the following rules:

• Interruptible natural gas sale and purchase contracts: the Government encourages end users who have available alternative fuels or raw materials to sign an interruptible natural gas sale and purchase contract.[xvii] This means that if an end user has alternative fuels available to replace natural gas, they could agree with relevant gas enterprises upon special (i.e. discounted) fees for interruptible services and agree to suspend purchasing natural gas purchases under pre-agreed emergency situations.
• Distinctive pricing policies: the natural gas industry may apply distinctive pricing policies, such as graduated pricing (based on the amount of used gas) (居民用气阶梯价格), seasonal distinctive pricing (季节性差价) and interruptible supply pricing (可中断气价).[xviii] Relevant enterprises must adopt flexible prices (both peak price and base prices), following price adjustments by NDRC. In this way, the total amount of gas usage can be adjusted to better serve the overall demand for natural gas in the market, especially at peak times.  
• Responsibilities for peak supply: the Measures differentiate the responsibilities of peak supply for natural gas trading enterprises and urban natural gas retail enterprises, as well as the responsibilities for seasonal (including monthly), hourly and daily peak supply:
  • The Measures impose responsibilities for seasonal (including monthly) peak supply on natural gas trading enterprises.
  • The Measures impose hourly peak supply responsibilities on urban natural gas retail enterprises and require urban natural gas retail enterprises to establish natural gas storage of not less than 10% of their yearly sales amount by 2020.
  • As to responsibility for daily peak supply, the Measures state that it should be allocated between natural gas trading enterprises and urban natural gas retail enterprises based on their negotiated natural gas sales and purchase agreements.[xix]

Conclusion

The Measures set out various measures to encourage different types of investment into the natural gas infrastructure market, striving to perfect the mechanism of fair competition in the market. The natural gas infrastructure market is gradually undergoing liberalization. However, the Measures also impose a significant number of obligations and responsibilities on natural gas infrastructure operators, natural gas trading enterprises and urban natural gas retail enterprises. Furthermore, the Measures contain a number of certain unclear provisions that require further clarification through official interpretation.