China's latest guideline on the oil and gas industry will open up a sector largely monopolized by state-owned enterprises to private players.
A plan announced on Sunday outlines eight tasks, covering various links in production and supply chains to give the market a decisive role in the industry.
In the upstream sector, private companies will be permitted to take part in oil-gas exploitation and gradually build a system that is led by state firms and jointly participated by various organs, according to the plan.
Currently, exploration and exploitation rights are largely confined to four state-owned heavyweights: China National Petroleum Corp (CNPC), China Petrochemical Corp (Sinopec), China National Offshore Oil Corp. and Shaanxi Yanchang Petroleum Co. Ltd. This "elite club" has given rise to inefficiency in resource allocation, which the government is trying hard to correct.
In October 2015, public bidding was allowed on the exploration rights to five oil and gas blocks in Xinjiang Uygur Autonomous Region and attracted dozens of applications from private companies. The second batch consists of 29 blocks.
"China should push reforms in entry thresholds...to enable competitive and qualified businesses to join in," said Dong Xiucheng, professor with China University of Petroleum.
For the midstream, the plan encourages oil-gas companies to split gas sales from pipeline business in a step-by-step manner for more efficient allocation of resources.
Private capital may also invest in and run oil and gas storage facilities, a step that could be critical in securing China's energy supply. The plan demands improvements to the regulation of oil-gas exports and imports, with an aim of managing crude import licenses.
In 2015, China gave private refineries the right to directly import crude oil then drastically increased the quota for non-state crude imports in 2016.
The Ministry of Commerce announced earlier that the quota for non-state crude oil imports will stay unchanged at 87.6 million tonnes for 2017, equivalent to around 23 percent of last year's crude imports.
"Regarding the imports and exports system, China needs to open up to private business in a gradual manner," said Lin Boqiang, director of the Energy Economics Research Center at Xiamen University.
The plan encourages eligible enterprises to diversify their shareholder base and introduce mixed-ownership. The prime goal of mixed-ownership is to create a flexible, efficient, market-oriented mechanism to improve the management of state-owned companies.
State oil heavyweights have begun to take action. Sinopec Group plans to cooperate with private companies in sales of refined oil, while CNPC said it will allow private companies to hold up to 49 percent of its oil exploration businesses.
Downstream, the pricing mechanism of fuel and diesel should be more market-oriented, and government should step in only when abnormal price fluctuations occur.
Huatai Securities estimate that a market worth one trillion yuan (about 145 billion U.S. dollars) will open up with the measures in the guideline.
China aims to increase domestic crude oil output to 200 million tonnes by 2020, while supply capacity for natural gas should exceed 360 billion cubic meters.
