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Research Report

10/01/2020 17:40

China opening up of oil and gas sector increases competition

[ET Net News Agency, 10 January 2020] China's opening up of oil and gas exploration and
production (E&P) will increase market participation and competition in the upstream
segment, according to S&P Global Ratings.
However, the credit rating agency sees limited impact of the new regulations on China
National Petroleum Corp. (A+/Stable/--), China Petrochemical Corp. (A+/Stable/A-1), and
China National Offshore Oil Corp. (A+/Stable/--) over the next two to three years.
That is given the dominant domestic market positions of these three big national oil
companies (NOCs), with most of the acreage being held by them.
S&P believes the opening up of the sector will increase the number of market
participants, in the long run, raising China's oil and gas production. The move is
consistent with the Chinese government's aim to raise domestic oil and gas production.
China currently imports 70% of the crude oil and 40% of the natural gas that it
consumes, posing an energy security risk. In 2018, the government had asked the three NOCs
to increase their domestic E&P activities to enhance national energy security.
The new regulation will also enhance the transfer of oil and gas acreage among E&P
companies, improving resource allocation efficiency. Currently, the NOCs hold most of the
acreage, and they may not invest in exploring all of it.
The new regulation stipulates that exploration rights will last for five years. These
rights can be renewed four times for five years each, but the acreage will be reduced by
25% upon each renewal based on the first exploration rights. S&P believes this will boost
E&P companies' exploration efforts and speed up asset turnaround.
The agency expects the NOCs to still hold most of the exploration acreage in an expanded
and more competitive market. Moreover, if they have to relinquish the acreage, they will
most likely hand over those areas with less promising prospects. As such, that acreage may
not be attractive enough for new entrants.
Today the Ministry of Natural Resources announced that companies registered in China
with a net asset value of more than Chinese renminbi 300 million are eligible to obtain
oil and gas mining rights. Companies engaging in E&P activities should comply with
regulations, including safety and environmental protection, and have the relevant
technical capability. (KL)

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