China's downstream gas sector regulatory framework - Summary report

Workshop Summary China's Downstream Gas Sector Regulatory Framework Workshop: China's Downstream Gas Sector Regulatory Framework April 9 and 14, 2002 - Beijing, China Summary Report September 2002 Sponsored by Institute for Economic System and Management, State Council Office for Restructuring Economic System, World Bank, and Private-Public Infrastructure Advisory Facility (PPIAF)  Foreword The workshop "China's Downstream Gas Sector Regulatory Framework" and a high level meeting parallel to this workshop were held in April 2002 in Beijing. Both meetings were organized by the Institute of Economic System and Management under the State Council Office for Restructuring the Economic System (SCORES), the World Bank and the Public-Private Infrastructure Advisory Facility (PPIAF). The purpose was to present the results of the joint study concerning establishment of a downstream gas regulatory framework in China, which was implemented during the past year by the Institute and the World Bank. This report is a summary of themes discussed during the workshop and the high level meeting. The study on "China's Downstream Gas Sector Regulatory Framework" is task for the second stage of the major project "China's Oil and Gas Sector Regulatory System", conducted jointly by the Institute of SCORES and the World Bank. The whole project began in 1999 and the study of the first stage was completed at the end of 2000. An overall regulatory framework for the oil and gas sector was presented and as result of the study, a report with the title "Modernizing China's Oil and Gas Sector: Structure Reform and Regulation" was published in March 2001. From 2001, the focus of the project shifted to downstream gas sector, namely long distance gas transmission and urban gas distribution. The results of the study during this stage are presented in two reports "China: Economic Regulation of Long Distance Gas Transmission and Urban Gas Distribution"(already published in August 2002) and "Preparing The Regulatory Framework For Long Distance Transmission and Urban Gas Distribution"(still under final revision). During the workshop, a briefing to the main components of the two reports was given which led to exchange of opinions in broader scope. Through the publication of the present report, we hope to provide a summary of the problems the gas sector is now facing as well as the alternative reform concepts that could be applicable in China. 2  Contents ACRONYMS AND ABBREVIATIONS.....................................................................................................4 A. BACKGROUND OF THE WORKSHOP..............................................................................................5 CREATION OF A REGULATORY FRAMEWORK FOR DOWNSTREAM GAS .......................................................6 FULL-DAY WORKSHOP...............................................................................................................................6 HIGH-LEVEL MEETING ...............................................................................................................................6 WORKING GROUP DISCUSSIONS .................................................................................................................6 B. CONCLUSIONS OF THE WORKSHOP..............................................................................................8 AREAS OF CONSENSUS................................................................................................................................8 China's Gas Sector System and Status Quo of Its Administration ........................................................8 The Necessity for Reform of Gas Sector in China.................................................................................8 Objectives of Gas Sector Reform in China............................................................................................8 Tasks of Gas Sector Reform ..................................................................................................................8 Separation of Downstream and Upstream Gas Regulation and Legislation.........................................9 Setting Out a Transition Period ............................................................................................................9 AREAS OF DIFFERENCES .............................................................................................................................9 National versus Regional Regulation..................................................................................................10 Downstream Gas Pricing....................................................................................................................10 Is there Any Need for Separation of Gas Transmission from Production?.........................................10 Balance of Upstream versus Downstream Interests............................................................................11 C. PROCEEDINGS OF THE WORKSHOP............................................................................................12 HIGH-LEVEL MEETING: OPENING ADDRESS.............................................................................................12 SECTION 1: PREFACE ................................................................................................................................14 Opening Address .................................................................................................................................14 Welcome Address ................................................................................................................................15 Presentation: Gas Market Development in China...............................................................................16 SECTION 2: REGULATORY FRAMEWORK FOR DOWNSTREAM GAS SECTOR...............................................18 Establishment of Modern Regulatory Framework for China's Downstream Gas Sector ...................18 International Experiences in a Developing Modern Regulatory Framework for Downstream Gas Sector--Rules-Based and License-Based Models ...............................................................................20 Designing a Regulatory Framework for China's Downstream Sector................................................22 Urban Gas Administration--Status Quo and Reform .........................................................................23 Policy Recommendations on China's Gas Market Development and Regulatory Reform..................25 SECTION 3: ECONOMIC REGULATION OF DOWNSTREAM GAS SECTOR .....................................................27 Economic Regulation of the Downstream Gas Sector: Technical Regulation, Price, and Access......27 Reform of Urban Gas Distribution System and Concept of Gas Projects Operating System in Shanghai..............................................................................................................................................29 Reform and Development of Urban Gas System in Shengzhen ...........................................................32 SECTION 4: LEGISLATION OF DOWNSTREAM GAS SECTOR .......................................................................33 Study and Analysis of Issues in Downstream Gas Legislation in China .............................................33 International Experiences in Downstream Gas Legislation................................................................34 Status and Prospect of Chinese Downstream Natural Gas Legislation ..............................................37 China to boost Sustainable and Rapid Development of Natural Gas Industry by Law.......................38 Views on Downstream Gas Legislation...............................................................................................39 APPENDIX 1: WORKSHOP AGENDA ..................................................................................................41 APPENDIX 2: WORKSHOP PARTICIPANTS....................... ERROR! BOOKMARK NOT DEFINED. 3  Acronyms and Abbreviations BCM Billion cubic meters GOC Government of China LNG Liquefied natural gas LPG Liquefied petroleum gas NOC National Oil Company PPIAF Private-Public Infrastructure Advisory Facility SCORES State Council Office for Restructuring Economic System SETC State Economic and Trade Commission SINOPEC China PetroChemical Corporation UGDC Urban Gas Distribution Company WTO World Trade Organization 4  A. Background of the Workshop In 1999, the Government of China (GOC) requested that the World Bank provide assistance in establishing a new market-oriented, modern regulatory framework for its oil and gas sector. Work initially began in 1999 with a joint team of experts (referred to as the "working group") from the World Bank, the Institute of Economic Systems and Management under the State Council Office for Restructuring Economic System (SCORES), and other concerned agencies. As a result of this collaboration, the working group undertook a range of work in regulatory reform summarized and presented in the table below. Work executed Description Recommendations and key issues I. Modernizing China's The report discusses the policy, market Reviewed progress of already Oil and Gas Sector: Structure structure, and regulation of the oil and completed sector reform and Reform and Regulation gas sector. discussed major challenges. Identified need for further reform, set March 2001 out objectives and principles of the reform, and recommended changes in the sector structure, as well as regulatory framework. Outlined need for transition period and legal framework. Provided detailed roadmap for further reform. II. China Oil and Gas Sector The conference provided a forum for Market reform and restructuring is Regulatory Reform Workshop discussions on deepening reforms necessary. within the oil and gas sector to promote Modern regulatory system, based on December 2000 competition and foreign investment and international experience, is key. on modernizing the regulatory system. Regulatory agencies must be independent. III. Economic Regulation of Long- The report focuses on the development Gas regulation should be entrusted to Distance Transmission and Urban of a regulatory framework for China's a specialized commission, whose Gas Distribution downstream gas sector, including the organization, power, and behavior are need for a regulatory commission, and modeled on international practice and June 2002 a study on the principles and techniques subject to general policy direction. of downstream gas regulation. The principles should be based on the franchising of gas distribution, and for the authorizing of "unbundled" transmission pipelines, on a nonexclusive basis, to provide open- access service. IV. Preparing the Regulatory Report discusses the creation of a Recommends Framework for Long-Distance downstream regulatory framework, as