Deloitte says China oil & gas reform will bring market-oriented changes across the entire value chain

Published: 22 December 2017

China's Oil and Gas Reform is expected to drive the growth of the natural gas market, support local oil companies in their overseas investment, and boost the industry's production and corporate efficiency through adopting smart technology and modern business structures, according to the latest report from Deloitte.

This is the first report as part of the insight series from Deloitte, which aims to review the impact of China's Oil and Gas Reform, and to study emerging industry trends such as reduced commodity prices, rising environmental concerns and the widespread adoption of smart technology.

According to the report, China's Oil and Gas Reform will focus on pushing market-oriented transformation, covering different aspects of the value chain: exploration and exploitation, import and export management, pipeline reform, downstream competition, pricing mechanism, state-owned enterprise (SOE) reform, storage, and environment and safety.

Deloitte China Oil & Gas Sector Managing Partner, Christopher Roberge said, "the reform is going to have a significant impact on this strategic sector in China.  An example of this is the transformation that will be required to propel the growth of the natural gas market – a more affordable and environmental friendly energy source." He added that China plans to increase the proportion of natural gas among all energy sources from 6 percent to 8.3 percent.

Due to the decline in domestic oil production in contrast to the steady growth of energy demand, the report perceives that the Chinese government will remain supportive to overseas investment in oil and gas fields. This also aligns with the Belt and Road Initiative put forward by the Chinese government.

When it comes to business efficiency, the report cites that oil and gas exploration and production is one of the most technology-driven industries. China's Oil & Gas Reform is likely to include measures that promote the adoption of new technologies for improving supply, productivity and flexibility.

"There are a wide range of benefits from technology adoption that reflect the full spectrum of the industry; ranging from overcoming geological difficulties during the drilling process to providing a personalized shopping experience for customers at petrol stations. Concurrently, Chinese oil and gas companies also need to address the new challenges brought by this technology revolution in the context of infrastructure, talent and cyber security," Roberge said.

One of the overarching principles of China's ongoing economic reform is to introduce a modern corporate system for SOEs, with diversifying the ownership base as one of the key targets for 2017. The report highlights that the state-owned oil companies CNPC, Sinopec and CNOOC are expected to see further re-organizations as private investment is encouraged and these companies focus their efforts to optimize corporate value and maintain a reasonable debt level.

"As China has entered the new normal of slower economic growth, policymakers and business leaders will need to manage the prevailing trend of cheaper energy. China's oil and gas reform will be a gradual process that needs to strike a balance between social and economic needs," Roberge concluded.