China's "fourth barrel of oil" to compete for natural gas market, can it make a leap?

In addition to "three barrels of oil", there is also a local state-owned enterprise located in Shaanxi Province. It is Shaanxi Yanchang Petroleum Group (hereinafter referred to as Yanchang Petroleum), known as China's "fourth barrel of oil."

In the past year, the action of extending oil in the natural gas field has been continuous.

On December 25 last year, Shaanxi Yanchang Oil and Natural Gas Co., Ltd. was officially listed in the Western Equity Exchange, trading 30% equity. After that, five investment companies were introduced to diversify the shareholding structure.

At the end of March this year, Yanchang Oil announced that its subsidiary Shaanxi Yanchang Oil and Natural Gas Co., LTD. (hereinafter referred to as Yanchang Natural Gas Company) was officially established.

The predecessor of Yanchang Natural Gas Company is Shaanxi Yanchang Oil and Natural Gas Co., LTD. The company was established in November 2015, wholly owned by Yanchang Petroleum, under the administration of Linzhen, Ansai, Yangjiawan, Yanchuan and Zhidan five natural gas liquefaction plants, production capacity of 1.1 million tons/year, is the country's largest LNG production and operation enterprises.

Yanchang Petroleum told interface news that Yanchang Natural Gas Company will rely on Yanchang Petroleum's natural gas resources, extend the natural gas industry chain, form an upper, middle and downstream industrial development model, and lay the foundation for the next step of integrating LNG resources.

In addition, Yanchang Petroleum is also carrying out preliminary studies on coastal LNG terminals and LNG trading business.

Compared with the "three barrels of oil", the development rate of extended oil in the natural gas industry was slightly slower. Now, it's starting to change.

Bet on natural gas

As a century-old oil company, Yanchang Oil is a rookie in the field of natural gas.

It was only in 2014 that it got the impetus to develop natural gas. That year, the international oil price ended its five-year high, falling from $100 / barrel to $55 / barrel, and continued to fall, and the performance of oil companies fell to the freezing point. During the year, Yanchang Oil's natural gas production was only 600 million cubic meters.

In 2015, Yanchang Oil suffered its first loss in a decade, with a net loss of 1.119 billion yuan and a net profit of 8.1 billion yuan less than the previous year. But that year, gas production from Yanchang Oil rose 183 percent to 1.7 billion cubic meters.

At this time, the domestic natural gas industry ushered in a golden period. "Three barrels of oil" have begun to lay out the natural gas industry, CNPC completed the integration of Kunlun Energy (00135.HK) and Kunlun Gas, and determined the only development platform in the field of comprehensive utilization of natural gas terminals.

In 2016, Yanchang Petroleum formally proposed to create a "gas based, oil and gas development, multi-resource exploration" situation. It is the first time that Yanchang Oil, which has been focusing on oil, has prioritized natural gas development.

In May 2017, The State Council issued Several Opinions on Deepening the Reform of the Oil and Gas System. At the end of the year, the civilian "coal to gas" vigorously promoted, the domestic natural gas industry rapidly set off a development boom, the annual natural gas consumption increased by more than 17%.

But the proportion of natural gas production of extended oil is still small. Last year, its natural gas production was 4.8 billion cubic meters, accounting for only 3 percent of the country's total gas production of 173.6 billion cubic meters. The company aims to produce 5.5 billion cubic meters by 2020.

picture

Source: Yanchang Petroleum 2017 Social Responsibility Report

Since the previous natural gas production is small, the natural gas from the extended oil production is generally used to meet the municipal gas around the Yan 'an area after liquefaction.

In 2012, Yanchang Petroleum put into operation two natural gas liquefaction plants in Linzhen and Yangjiawan; In 2014, another natural gas liquefaction station was built in Yanchuan, Zhidan and Ansai respectively.

Thanks to this, Shaanxi is one of the provinces with the largest number of LNG liquefaction plants in China, 70% of which live in northern Shaanxi.

However, it is difficult to extend the development of the oil and gas industry, and if you want to open up the market, you must solve the problem of long-distance transportation and sales channels of natural gas.

In addition, the international oil price in recent years has always been low, and the profit space of enterprises based on upstream production has been squeezed. Advancing into the natural gas consumption terminal has become a new profit growth point for oil companies.

Expanding the oil and gas industry chain has also become necessary to prolong the survival of oil.

In this context, Shaanxi Gas Group (hereinafter referred to as Shaanxi Gas) has become the most suitable "marriage" object for extending oil.

In September last year, Yanchang Petroleum increased capital and shares to Shaanxi Gas by means of asset placement, thereby holding 52.45% of Shaanxi Gas shares and becoming its controlling shareholder.

Shaanxi Gas listed company Shaanxi Natural Gas Co., LTD. (hereinafter referred to as Shaanxi Natural Gas, 002267.SZ) announced that after the completion of the above capital increase and share expansion, Yanchang Petroleum indirectly holds 55.36% of the shares of Shaanxi Natural Gas Company to achieve control of the company.

Shaanxi Natural Gas Company has 12 control and equity enterprises, with an annual allocation of 18.6 billion cubic meters of resources, more than 40 long-haul pipelines, a pipeline network mileage of 3,466 kilometers, a daily gas transmission capacity of 47.36 million cubic meters, and an annual gas transmission scale of 16.5 billion cubic meters, making it the provincial natural gas company with the longest pipeline network mileage, the largest gas transmission scale and the widest market coverage in China.

Shaanxi City Gas Industry Development Co., LTD., a wholly-owned subsidiary of Shaanxi Natural Gas Co., LTD., is a city gas enterprise with the broadest business scope in Shaanxi Province, mainly engaged in residential gas, industrial and commercial gas, gas station and gas station construction and operation.

Yanchang Petroleum told interface news that the integration of Yanchang Petroleum and Shaanxi Gas is progressing as scheduled, the approval has been completed, Shaanxi Gas has been fully included in the management of Yanchang Petroleum, and the management of major issues of the company has been fully docking.

The only "integration"

Holding Shaanxi Gas means that in addition to owning upstream resources, Yanchang Oil also owns midstream pipelines and downstream city gas.

In December last year, the National Oil and Gas Pipeline Network Group Co., Ltd. was established, and the oil and gas pipeline network assets belonging to the "three barrels of oil" were allocated to the company.

This also means that Yanchang Oil will become the only integrated upper, middle and downstream oil and gas producer in China.

Yang Jianhong, chief researcher of Beijing Shichuang Energy Consulting Company, believes that extending oil integration, from the point of view of Shaanxi Province, is conducive to the overall integration of oil and gas resources in the province and the development of provincial oil and gas industry, and improve the scale, intensification and specialization of its gas industry.

Together with Shaanxi Gas, it can greatly improve the supporting capacity of the pipeline network for extending oil to the consumer market, and can realize the balanced sales and consumption of natural gas produced by extending oil.

Shaanxi Gas can also rely on Yanchang Petroleum's self-produced natural gas as a stable supplementary gas source for Shaanxi province and the Fen-Wei Plain, and can rely on Yanchang Petroleum's entity industry investment and operation capacity to promote the construction of natural gas supporting branch pipe network and other infrastructure.

For the two sides "marriage", happy to see its success and the Shaanxi provincial government.

As a major energy province, petrochina Changqing Oilfield and Yanchang Petroleum are distributed in Shaanxi. However, with the increase of natural gas demand in recent years, Shaanxi has frequently experienced "gas shortage" in winter.

Only about 45 percent of Shaanxi's locally produced natural gas is for domestic use, while 55 percent needs to be exported. Its external market is mainly concentrated in North China, of which 82 percent of the gas supply to Beijing comes from Shaanxi.

Shaanxi Gas insiders have told the interface news that during the peak of winter gas use, petrochina sometimes cannot supply gas sources in accordance with the contract volume.

For a long time, CNPC is the largest gas source of Shaanxi gas, and the gas source of Yanchang Petroleum only accounts for about 20% of its total share.

After Shaanxi Gas is incorporated into Yanchang Petroleum, it will have a stable supplementary gas source, which is conducive to the realization of natural gas supply guarantee and regulation objectives in Shaanxi Province.

In recent years, CNPC has also expanded its territory in the urban gas market, which is bound to form a competitive relationship with Yanchang Petroleum.

A CNPC insider, who did not want to be named, told the interface news that LNG prices have long been market-oriented, and pipeline gas price control has been canceled, and after extending oil integration, higher profit growth will be achieved in the natural gas field, and the impact on CNPC's market share in Shaanxi.

In December 2018, petrochina set up the Shaanxi Branch of petrochina Natural Gas Sales (Kunlun Energy) in the Shaanxi city fuel market. At a symposium in September last year, Shaanxi Natural Gas said it hoped that CNPC natural gas Sales Shaanxi Branch would support the resource allocation of the Longnan sub-transmission station on the Sino-Guizhou liaison line and the capacity expansion of the Gaoling sub-transmission station on the second line of the West-East gas transmission.

Guo Jiaofeng believes that after the extension of oil integration, whether it can have an impact on the Shaanxi natural gas market pattern depends on the operation capacity of the two sides after integration.

"At present, it is only the restructuring of the industrial chain after the reform of Shaanxi state-owned enterprises, and the results of the integration advantages of the extension of oil still need to be observed." Guo Jiaofeng said.

Multiple gate

In order to use the advantages of integration to achieve a leap in the natural gas industry, the extension of oil still needs to cross multiple thresholds.

Yang Jianhong believes that from the perspective of the company, the integration model is more conducive to the company's operation than the specialization (non-bundling), but the extension of the oil integration model is a case and is not representative. Under the current oil and gas system "X+1+X" reform idea, "control the middle, open the two ends" is the direction, and the development mode of extending oil integration is facing the pressure and risk of reform and restructuring.

At present, the natural gas pipeline in Shaanxi Province is not within the scope of asset allocation of the national pipeline network company, and the provincial pipeline network company has room for existence, but according to the idea of "one national network", the provincial pipeline network company may also be integrated into the national pipeline network company in a market-oriented way.

The natural gas pipeline in Shaanxi Province is not yet within the scope of asset allocation of the national pipeline network company, but according to the idea of "national one network", there are few provincial pipeline network companies that can truly exist alone in the future, and provincial pipeline network companies may also be integrated into the national pipeline network company in a market-oriented way.

Guo Jiaofeng, Research Institute of Resources and Environmental Policy Research Institute of the Development Research Center of The State Council, believes that even if the Shaanxi pipe network can exist alone for a long time, to extend the advantages of oil integration to full play, still need strong synergies.

The natural gas production of Yanchang Oil is concentrated in northern Shaanxi, and the gas market is mainly in central Guanzhong area such as Xi 'an and southern Shaanxi. The distance between resources and markets is relatively far, and some local pipelines cannot cover it.

In order to integrate the upper, middle and lower reaches, resources, pipelines and markets need to play a good synergistic effect. Therefore, prolonging oil will face investment and management pressure.

Limited resource exploration area is another dilemma for the extension of oil development and natural gas industry.

Yanchang Petroleum has a total registered oil and gas exploration area of about 80,000 square kilometers in 38 cities (counties) and 10 provinces including Shaanxi, Inner Mongolia and Ningxia, of which about 10,700 square kilometers are in the province and about 69,600 square kilometers are outside the province.

Such oil and gas bottom still can not be compared with "three barrels of oil". CNPC's Changqing oilfield alone spans Shaanxi, Gansu, Ningxia, Mongolia and Shanxi provinces (regions), with a total exploration area of 370,000 square kilometers.

In addition, the natural gas recovery rate of Yanchang Oil is about 20%, and the recovery rate of Changqing oil field is 50%. This means that if a well has 1 million square meters of gas, Yanchang Oil can only produce 200,000 square meters under existing technology conditions, and Changqing oil field can produce 500,000 square meters.

To increase production, it is necessary to continuously increase the number of drilling Wells and expand the range of resources.

There have been many disputes between Yanchang Oil Field and Changqing oil field because of resource competition. According to the data provided by Changqing Oilfield to Jiemian News, from 2007 to the beginning of 2018, Yanchang Petroleum infringed 150 Wells and infringed drilling sites within the scope of mineral rights of Yulin Gas field, Zizhou gas field and Shenmu gas field, the core blocks legally registered in Changqing oilfield.

Yanchang also has a presence in shale gas. In 2011, it was drilled into China's first continental shale gas and fractured to produce gas.

Up to now, Yanchang Petroleum has initially implemented shale gas geological reserves of 160 billion cubic meters, but the cumulative production capacity of shale gas Wells is only 500 million cubic meters, accounting for about 5% of the total output of shale gas in the country.

In Guo Jiaofeng's view, if the Yanchang oil and gas sector wants to achieve great development, marketization is the only way out and direction.

Guo Jiaofeng suggested that Yanchang Oil should carry out a more thorough mixed reform of the newly established Yanchang Natural Gas Company, take out more equity to introduce private capital, stimulate its development vitality, and provide a breakthrough for the play of integration advantages.

Secondly, through the extension of the Natural gas Company holding Group's upstream and downstream business of the natural gas sector. "In this way, it is possible to benchmark large urban gas companies such as ENN Gas and China Resources Gas in the natural gas sector." Guo Jiaofeng said.

Yanchang Oil has its own agenda.

During the "14th Five-Year Plan" period, Yanchang Oil hopes to strive to form 10 billion square gas fields in the upstream field, and increase the acquisition of oil and gas resources outside the province and overseas resources. In the field of midstream storage and transportation, it is necessary to improve the layout of the provincial pipeline network, promote the interconnection with the national gas transmission trunk line and the gas pipeline network of neighboring provinces and cities, and plan and construct related gas storage projects around the gas regulation and gas transmission guarantee of Shaanxi province.

In terms of the downstream gas market, Yanchang Petroleum said that it will deepen cooperation in downstream gas business, lay out the network of filling stations, and expand the gas market around Shaanxi.