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Editorial comment

China must change

The government of Canada has purchased the Trans Mountain pipeline, hoping to use nationalisation as a way to secure the expansion project’s survival. Kinder Morgan was no longer prepared to take on the risk the project represented, when fierce opposition continued to stall progress.

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It has also been suggested that the buyout was motivated by a wish to avoid conflict with China, a prospective customer of the expanded pipeline. Writing in The Guardian in June, Brian Livesey argued that Canada-China relations played an important part in the decision for the pipeline purchase.1 An agreement made in 2014 (the Canada-China Foreign Investment Promotion and Protection Agreement – FIPA) sought to ensure that China saw a pipeline built from Alberta to British Columbia, among other things. China has invested heavily in oilsands development in Canada because it needs the oil to help fuel its industrial growth. Chinese state-owned CNOOC even bought Canadian oil and gas company Nexen in 2013. Livesey speculates that the bilateral investment treaty signed by the two countries binds the Canadian government into pushing through pipeline projects such as Trans Mountain. He posits that Canada is vulnerable to lawsuits brought by Chinese corporate interest, via a clause called Investor State Arbitration. Did the Canadian government buy the pipeline to avoid paying millions in compensation to China? Livesey reminds us that TransCanada sued the US government in 2016 when the Keystone XL pipeline was cancelled, so we know it can happen.

In China, where the switch to gas from coal power is an ongoing endeavour, there are plans to create a giant national pipeline company – dubbed China Pipelines Corp. – that would combine the pipeline divisions of PetroChina Co., China Petroleum & Chemical Corp. (known as Sinopec) and CNOOC Ltd. The new company would become the world’s largest pipeline operator. It is hoped that this new enterprise would reduce the monopoly that currently exists: where pipeline assets are owned by mostly state-owned companies and there is no separation between pipeline ownership and gas supply. This setup has long stifled competition and prohibited third party producers from accessing pipeline capacity.

China is seeking to cut down emissions from coal-fired power and in order to do this it must boost existing pipeline capacity, build more pipelines and encourage investment. Gas supply is key in helping China keep up with the pace of domestic energy demand, while also meeting pollution targets. According to research from Shell and the Development Research Center (DRC) of the state council, pipeline infrastructure needs to ramp up from the current 72 000 km of pipe to 150 000 km in 2020, and 250 000 km in 2030, in addition to increased storage capacity.

China’s introduction of the ‘2+26’ cities air pollution policy in 2017 called for restricted use of coal for both residential heating and industrial purposes. This has significant ramifications for the Chinese winter season where demand is usually high, particularly in northern cities such as Beijing, Tianjin and Hebei. Last winter, China suffered from gas supply crunches when the ban on coal-fired heating, combined with a lack of gas storage, drove China to expensive LNG imports.

Chinese regulators are hoping to make an announcement about a new national pipeline company before the end of the year, as part of President Xi Jinping’s commitment to overhaul state-owned enterprises and make the most of industrial capacity. It is expected that state-controlled and private investment will bring enough capital to the new company so as to lower the combined stake held by the three majors to about 50%.

With domestic pipeline reform and a little help from Canada, China is set to replace decades of highly regulated buying and selling with something that mirrors the free market practices in the US and Europe.

Harmonisation of gas pricing will also change things up, so that all users (commercial or otherwise) will pay the same price. Residential gas prices will rise gradually by 20% by June 2019, incentivising domestic gas production and imports as the gas market opens up. In this huge Chinese push to revolutionise Chinese oil and gas, everyone must play their part. Isn’t that right, Mr Trudeau?


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