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Chinese O&G pipeline sector shows signs of recovery after three-years of stagnation

Happier days are in the pipeline for Chinese oil and gas pipeline suppliers as the sector is projected to pick up after a three-year slump.

The industry has been suffering from falling order numbers, industry reforms, and China’s tightening programme on weeding out corruption, which has thrown the management teams of some of the country’s largest oil and gas producers into disarray.

But according to Chen Chang, chairman of Guangdong-back Chu Kong Petroleum and Natural Gas Steel Pie, early signs of recovery are already visible in the market.

“There has been a pick-up in activities, and Sinopec especially may be recovering faster than others. We view that as a prelude to what may be coming,” Chang told the South China Morning Post.

Chu Kong has been shortlisted as a potential supplier for a 200 billion yuan (€27.1bn) Sinopec project to build an 8,972km natural gas pipeline from the Xinjiang Uygur autonomous region to Zheijang and Guangdong.

The pipeline is projected to become one of the main gas pipelines in China’s 2016-2020 five-year industry development plan, published in mid-January by the National Development and Reform Commission (NDRC).

According to Sinopec, the project was approved in late 2015 after feasibility studies were completed, but no exact date for the start of construction has been set due to the introduction of new domestic industry reforms.

The regulatory changes will separate China’s three state-owned oil and gas companies’ – PetroChina, Sinopec, and China National Offshore Oil – pipeline operation from their upstream production businesses, which the government hopes will increase efficiency and bring down consumer energy costs.

The companies were asked in October to separately report the financial performance of their pipeline operations, calculate operating costs, and whether they could open their pipeline assets for third-party usage.

Beijing considers access to pipelines key to attracting investments by companies other than the three state-sponsored giants, and hopes that increased investment would introduce more variety into the market and promote greater operating efficiency.

The industry reforms’ goal is to break up the dominance of the state-owned companies, but it caused oil and gas pipeline orders to plummet.

Chu Kong’s revenues dropped from 2.86 billion yuan in 2012 to 1.67 billion yuan in 2013, 1.31 billion in 2014, and 1.19 billion in 2015.

In the first half of 2016, the figures sank even lower to 348 million yuan, marking a 23% decrease year on year.

Shengli Oil & Gas Pipe, based in Shandong, also saw its domestic and overseas sales dive from 1.43 billion yuan in 2012 to 445 million in 2015.

The withering pipeline market left Beijing short of reaching its 2015 national pipeline targets of 29,400km for oil and 40,000km for gas, as only 8,000km of oil and 21,400km of gas pipeline were added in the preceding five years.

The current five-year plan is calling for 17,000km of oil and 40,000km of gas pipelines to be built by 2020.

This article was written by Ilari Kauppila, editor at Fluid Handling International