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Is China Liberalizing Its Oil And Gas Industry At The Right Time?

Foreign oil companies will soon be able to invest in China’s upstream sector through joint ventures with the country’s three major fossil fuel companies, according to a new manifesto by the Central Committee of the ruling Communist Party.

The guidelines lay the groundwork for the liberalization of the Asian country’s energy production game, similar to the initiative spearheaded by Mexican President Enrique Nieto in 2014, which opened the nation’s fossil fuel industry to the world for the first time in nearly eight decades.

Unfortunately for Mexico, just weeks after the country became open for business with foreign companies, oil prices crashed for the first time. Investment in oil exploration and extraction shrunk drastically as the industry’s biggest players published multibillion sales of owned assets.

New funding for oil and gas has been hard to come by since the fall. Last year, global investment in upstream activities fell 23 percent.

But 2017 has been the year of recovery for bearish oil markets. The Organization of Petroleum Exporting Countries’ (OPEC) historic deal to limit output by 1.2 million barrels per day from January 2017 to March 2018 promises slow and steady growth, provided U.S. oil exports do not flood the market and international inventories deplete soon.

A $60 barrel would trigger a new era of investments in the oil sector, which will benefit China in light of its 25 billion barrels in proven reserves.

Beijing will also be opening up its natural gas reserves to foreign companies, causing it to inch closer to meeting its carbon emissions obligations under the landmark Paris agreement of 2015. Allowing joint ventures, pushing for coal taxes and gas subsidies, and capping distributor profits are part of the government’s approach to lower the cost of adopting the “green” fossil fuel.

Even as gas consumption in China rose 22 percent year over year in April, experts are worried an impending drop in coal prices will tempt some major consumers to revert to their coal habit. Related:  What Is Behind The Surge Of Russian Oil Exports To India?

As coal prices look destined to drop to around 500 yuan a ton this year, the conversion to natural gas will stop, and some price-sensitive industrial users may even think of switching back,” Tian Miao, of Beijing’s North Square Blue Oak Ltd., told Bloomberg this week.

China’s communist system allows for Beijing to retain control of the “big three” fossil fuel companies – China National Petroleum Corp. (CNPC), China National Offshore Oil Corp (CNOOC) and China Petroleum and Chemical Corp. (Sinopec) – even as multinationals begin to pick away at the government’s total market share in the upstream sector.

A comparison between Mexican energy reforms and China’s newfound interest in FDI falls apart when the two are measured for overall scope. The gargantuan Asian energy consumer seeks funding and technology to diminish the cost of oil and gas to increase the fuels’ competitiveness against the Chinese industrial world’s favorite: coal. On the other hand, the Mexican economic deregulation program took years to implement, with the latest round of measure sparking deadly protests after the revocation of fuel subsidies caused gasoline prices to spike up 20 percent.

That’s not an outcome likely in the Chinese version of the globalization of an energy sector.

Beijing has yet to offer a clear time line or a description of the procedure for the licensing of foreign companies to participate in drilling activities within its borders. Still, the government is on its way to economically incentivize the adoption of carbon-light fuels, defying expert opinions that said Chinese coal consumption—which made up two-thirds of energy use in 2015—would unlikely be curtailed fast enough to save the planet.

By Zainab Calcuttawala for Oilprice.com

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  • Ronald C Wagner on June 09 2017 said:
    China does not have a communist system. It has a fascist dictatorship. Please think about that and its implications.

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