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Natural Gas Market in China

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Natural Gas Market in China MASTER IN MANAGEMENT - GRANDE ECOLE RESEARCH PAPER Academic Year 2017 - 2018 Natural Gas Market in China Current State and Prospects of Development for Trading Activities Liuning CHEN Under the supervision of Prof. Jean-Pierre FRANCOIS Jury: < > < > PUBLIC REPORT CONFIDENTIAL REPORT Abstract This research paper comprehensively analyzes the natural gas market in China (“this market”), focusing on this market’s current state and prospects for trading activities. For better understanding, the paper also summarizes the historical evolution and reforms of this market and then refers to the US and the UK practices. Main findings include: at present, (1) this market is growing fast driven by policies; (2) the Chinese government plays a pivotal role in this market but is attempting a hands-off approach; (3) physical trading is limited due to state monopolies and the regulated pricing; (4) financial trading is foreseeable but depends on the progress of the ongoing market and pricing reform. Since market liberalization is inevitable, major suggestions for developing this market include: (1) to participate more in the international gas market; (2) to introduce more competition in the upstream market; (3) to accelerate the construction of gas infrastructures and unbundle transportation from sales; (4) to push more trading activities into gas hubs. As marketization deepens, either physical or virtual gas hubs are feasible in China. 2 | P a g e Acknowledgements I would like to extend my deepest and wholehearted gratitude to my thesis supervisor Professor Jean-Pierre Francois, who gave me directions, suggestions, and knowledge in the first place with kind and patience. This research paper would not have reached its level without Professor Francois’s help and guidance. My profound appreciation also goes to the faculty members at HEC Paris, who have taught me invaluable business knowledge and skills. These knowledge and skills crossed my mind heaps of times when I did the research and wrote the paper. I hope I have practiced them well. 3 | P a g e Table of contents Abstract ......................................................................................................................................................................2 Acknowledgements ....................................................................................................................................................3 Table of contents ........................................................................................................................................................4 List of tables and figures ...........................................................................................................................................5 Part I. Introduction ..................................................................................................................................................7 1. Research orientation ...........................................................................................................................................7 2. Literature review ..............................................................................................................................................12 Part II. Current state of the natural gas market in China ..................................................................................15 3. Development policies .......................................................................................................................................15 4. Demand, supply, and infrastructure ..................................................................................................................21 5. Market structure................................................................................................................................................33 6. Pricing system ..................................................................................................................................................38 Part III. Development analysis of the natural gas market in China ..................................................................46 7. Main features of the development ....................................................................................................................46 Part IV. Prospects for natural gas trading activities in China ...........................................................................51 8. International experience of market reform .......................................................................................................51 9. Trading hubs .....................................................................................................................................................62 Part V. Conclusion..................................................................................................................................................76 10. Conclusions and suggestions ..........................................................................................................................76 Appendices ...............................................................................................................................................................80 Acronyms, abbreviations, and units of measure .....................................................................................................86 Bibliography ............................................................................................................................................................88 4 | P a g e List of tables and figures Tables Table 1. Air pollutants produced by different kinds of primary energy ....................................................................................... 7 Table 2. Energy efficiency comparison between coal and natural gas ........................................................................................ 7 Table 3. Competitive analysis of the four countries in Asia Pacific in terms of establishing a natural gas hub ........................ 14 Table 4. Political targets of the natural gas industry in China towards Year 2020 .................................................................... 16 Table 5. Tasks and obstacles of the Chinese natural gas system reform .................................................................................... 18 Table 6. Proven rates and recovery rates of gas reserves in China by the end of 2016 ............................................................. 28 Table 7. Cross-border gas pipelines in China ............................................................................................................................ 31 Table 8. Top 5 domestic pipelines in China at the end of 2015 ................................................................................................. 32 Table 9. Pipeline gas and LNG market structures and players in China .................................................................................... 34 Table 10. Companies with the state-approved qualifications to explore or exploit natural gas in China .................................. 35 Table 11. Evolution of natural gas pricing in China .................................................................................................................. 42 Table 12. Evolution of gas transmission pricing in China ......................................................................................................... 43 Table 13. Pricing mechanisms by different gas sources ............................................................................................................ 45 Table 14. Reforms of the US natural gas market ....................................................................................................................... 52 Table 15. British Gas’s market share in 1990 - 1996 ................................................................................................................. 56 Table 16. Reforms of the UK natural gas market ...................................................................................................................... 57 Table 17. Chinese policies about TPA ....................................................................................................................................... 61 Table 18. Trading rules in SHPGX and CQPGX ....................................................................................................................... 68 Table 19. SWOT analysis of the natural gas market in China ................................................................................................... 76 Table 20. Recommended strategies for China’s natural gas market based on SWOT analysis ................................................. 78 Appendix 4: Table 21. IGU types of price formation mechanisms ........................................................................................... 83 Appendix 5: Table 22. Key unbundling models ........................................................................................................................ 84 Figures Figure 1. Changes in the world primary energy demand by fuel from Year 2016 to 2040 .......................................................... 8 Figure 2. Structure of this research paper .................................................................................................................................. 11 Figure 3. Chinese natural prices vs. Brent oil price ..................................................................................................................
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