Gradual Reform across the Value Chain

The Report

The report was jointly created by the Deloitte Energy & Resources Industry and Deloitte Research team. This report analyses China oil & gas reform in three areas: reform opinions and implications, global and China economic fundamental drivers, and the outlook. Over the coming months we will be reviewing each of these reforms in turn.

Viewpoints / key findings

Reform opinions and implications

There is an intertwined relationship between current geopolitics and economics, there are volatile international and domestic market dynamics, and there are different interests of state ownership and private investors. China announced its long-awaited oil and gas reform summary - Opinions on China Oil and Gas System Reform ("the Opinions") - in May.  These Opinions outline eight tasks covering the entire oil and gas industrial chain: Exploration and exploitation, Import and export management, Pipeline reform, Downstream competition, Pricing mechanism, SOE reform, Storage, and Environment & safety.

Global and China Economic Fundamental Drivers

As global oil prices continue to stay at a low level, Chinese oil and gas companies are confronted with more challenges than ever before. Against this backdrop, SOEs are learning how to operate in a lower price environment, returning to a healthier focus on capital and operating under severe cost discipline. At the same time, the as the economy transforms to a consumption-driven model the industry has to quickly adapt its investment strategy which is extremely complex for such a capital intensive industry.  The residential and transport portion of energy demand will grow, while the proportion consumed by industry and the commercial sector will decline.  

Outlook

Based on the above analysis of the macro trends, we see a positive outlook in the oil and gas sector.  We foresee four macro trends: (1) Bigger role of natural gas, and China's natural gas demand grows faster than oil, coal and renewables. (2) With domestic oil production declining, imports and overseas investment will inevitably rise further. (3) China aims to improve supply, efficiency, and product quality.  Technologies will also help oil companies to boost productivity and flexibility. (4) Diversifying SOE's shareholder structure is one of China's key targets in 2017. The state-owned oil companies CNPC, Sinopec and CNOOC will see more re-organization as private investment comes in.