Key insights from international experiences and the implications for ChinaMay 2019Gas Market Liberalisation ReGas Market Liberalisation Re Abstract PAGE | 1 IEA.Allrightsreserved.Abstract This report systematically examines the key points for natural gas liberalisation and regulatory re in Europe and the United States over the past decades. It addresses market design, third-party access, capacity allocation, trading centre ation, pipeline tariff setting, and regulatory measures. In addition, the report analyses the transition process itself and identifies the related measures that can help national markets become more openly competitive. Based on these international experiences, the report then looks at the current situation of natural gas liberalisation in the People’s Republic of China, focusing on the importance of designing a suitable framework for the natural gas market by using best-policy tools. The central goal of this report is to allow policy makers in China to benefit from international experiences to effectively promote the current liberalisation, the success of which will also greatly influence the global industrial development of gas. This report is the result of a project involving relevant Chinese, European, and United States institutions under the overall oversight of the International Energy Agency. Gas Market Liberalisation Re Acknowledgements PAGE | 2 IEA.Allrightsreserved.. Acknowledgements This report was prepared jointly by the International Energy Agency IEA and the National Energy Administration NEA of China, under to the IEA-NEA three-year work programme. It was coordinated by YANG Lei, IEA Senior Advisor. The lead authors at the IEA were Jean-Baptise DUBREUIL, LEI Xiang, LI Xiang, YANG Lei and YAN Yilun. Important contributions were also made by Cristina MORILLAS and Aya YOSHIDA. China5e and ExxonMobil assisted throughout the work, contributing valuable s and assistance in drafting sections on international experience and China. The main external authors were KOSHY MASON Akshaya, RAN Ze, SUN Xiaomei, Shelley RUSZKOWSKI, with other contributions from CHENG Yanhong and Kees BOUWENS. Colleagues from the IEA and officials from the China National Financial Office, the National Development and Re Commission, as well as the NEA provided valuable support to this report. They included AN Fengquan, David BNAZRAF, Amos BROMHEAD, Cyril Cassisa, Laura COZZI, DONG Xiang, DING Zhimin, Peter FRASER, Tim GOULD, GU Jun, GUO lei, Lisa Marie GRENIER, Zoe HUNGERFORD, Tae-Yoon KIM, LI jin, LI Fanrong, LI Yinghua, LIU Deshun, LIU Hong, LV Chuanjun, LU Pengyi, MA Ning, Kristine PETROSYAN, QI Shuli, Keisuke SADAMORI , Alan SERAL, Paul SIMONS, SONG Wen, Dave TURK, Laszlo VARRO, WANG Jing, WANG Siqiang, WANG Xiaowei, WEI xiaowei, ZENIEWSKI Peter, ZHANG Junhao, ZHANG Yuqing, ZHU Hongguang, ZHU Xiaohai, and ZUO Gang. Other valuable contributions were provided by experts as part of the review process, and also through a series of four international workshops organized by the IEA and a two-week visit to the United States. They included BAI Jun Beijing Gas, Federica BERRA ExxonMobil, CHEN Gang Huaneng, CHEN Shouhai Petroleum University, DENG Yusong Development Research Center of the State Council, GUO Jiaofeng DRC, DU Daming Huaneng, DU Tina C ExxonMobil, FENG Liwen China5e, FU Shaohua SHPGX, HAN Xiaoping China5e, HE Zhao EPPEI, JING Chunmei China International Economic Exchange Center, LU Yichuan Energy Foundation, Wayne A. LEPIRE ExxonMobil, LI Yalan Beijing Gas, LI Yao SIA Energy, LIU Tairu Ministry of Natural Resources, MA Li ECP, PAN Jiping Ministry of Natural Resources, Todd M SPITLER Exxonmobil, WANG Zhongan CNOOC, CHEN Xinhua Beijing International Energy Club, Jessica HENRY British Embassy, Edward KELLY IHS Markit, Nina PALMER United States Embassy, JIA Maggie Chennier, Maggie JIA Chennier , LEUNG Mabel Exxon Mobil, PENG Ying United States Embassy, John WILLIAMS POYRY, Christian ROMIG POYRY, SUN Juan Minsitry of Natural Resources, Brad WILLIAMS Spitfire, XU Yuchang Xinhua News Agency, WANG Yongxiang Huaneng, XIAO Yang ExxonMobil, YANG Ling SHPGX, YANG Yumin ConocoPhillips, YE Guobiao SHPGX, YUAN Jing Energy Foundation, ZHANG Xiaoru University of Houston, ZHU Baowei Ministry of Finance, ZHU Xingshan CNPC, ZHONG lijin Energy Foundation, ZHOU Xizhou IHS China, ZOU JI Energy foundation, Luis Bertrand RAFECAS IGU, Ana Sophie CORBEAU BP, CHEN Xiaobao Oxford University, Ross E. HODGES ConocoPhillips, Volker KRAAYVANGER Uniper, Michal MEIDAN Energy Aspects, Osmancik NAZIM Centrica, Carolin OEBEL Uniper, Cody MOORE Mercuria, REN Xianfang Shell China, David SANDALOW Columbia University, SUN Gas Market Liberalisation Re Acknowledgements PAGE | 3 IEA.Allrightsreserved.Xiansheng IEF, Laurent VIVIER Total, Richard XU Iron Rock, and ZHAI Yongping Asia Development Bank. The Energy Foundation, ExxonMobil, and Huaneng provided generous support for this research. Thanks to the US Department of Energy, the US Embassy in China, the British Embassy in China, the US-China Energy Cooperation Program ECP, the ENN Group, Mercuria, IDG energy, ConocoPhillips, Chenier, Iron Rock, IHS Markit, Baker Hughes, POYRY, Oxford Institute for Energy Studies, Shanghai Petroleum and Gas Exchange Center for their assistance. The Office of Communications and Digital of the IEA has provided strong support for the publication and distribution of this report, with special thanks to Astrid DUMOND, Katie LAZARO, Jad MOUAWAD and Therese WALSH. Thanks to Adam MAJOE for editing the report in English. For questions and comments on this report, please contact YANG Lei Lei.Yangiea.org. Gas Market Liberalisation Re Table of contents PAGE | 4 IEA.Allrightsreserved.Table of contents cutive summary 7 Global trends in natural gas sector 11 Fast-growing Asian markets have become the main driver of natural gas development . 11 Liquefied natural gas development has accelerated the transition to market pricing 12 Gas market liberalisation development in Asia . 13 References 15 Context and status of the Chinese gas market liberalisation 16 General perspective . 16 Gas re in China . 18 Challenges to China’s gas re . 23 References 26 Implications for China’s gas market liberalisation . 28 Common features in gas market opening. 28 China will develop a unique market model . 30 Well-planned market design is critical 32 Enabling third-party access to infrastructure 33 Putting the market at the centre 35 Liberalising the upstream sector 36 The role of the regulator 36 Manage the transition process . 37 Enhancing international co-operation 38 References 39 Annex Key insights of international practices towards liberalised markets . 40 Gas market designs . 41 New project development . 48 Tariff reviews and adjustments 52 Capacity allocation 56 Storage . 61 Gas trading hubs . 62 Contract standardisation . 66 Gas specifications 67 Dispatch and balancing . 68 Transparency requirements and price index publishing 70 Financial tools . 73 Transition management 73 Regulatory oversight . 75 References 77 Abbreviations and acronyms . 79 Gas Market Liberalisation Re Table of contents PAGE | 5 IEA.Allrightsreserved.List of figures Natural gas consumption in selected countries and regions, 2000-40 . 12 Figure 1.Evolution of natural gas pricing by region, 2005-17 . 13 Figure 2.Natural gas production and consumption in China, 2009-18 . 16 Figure 3.Chinas natural gas imports, 2006-18 17 Figure 4.Creating a natural gas hub . 29 Figure 5.NGPL system map . 44 Figure 6.Henry Hub infrastructure should change to the new draw one by PIP without right part . 45 Figure 7.EU process for the development of incremental capacity . 52 Figure 8.Example of entry zones 54 Figure 9.Ascending clock auction. 57 Figure 10.Example of secondary capacity release 59 Figure 11.Map of several key market hubs in the United States . 63 Figure 12.Average daily spot market transactional data from ICE 2017 64 Figure 13.EU virtual hub map 65 Figure 14.System balance signal example 70 Figure 15.List of boxes Box 1. Market re gets a second wind in Japan 15 Box 2. Shanghai Petroleum and Natural Gas Exchange and Chongqing Petroleum and Gas Exchange 21 Box 3. Opinions of the CPC Central Committee and State Council on deepening the oil and gas system re . 22 Box 4. Gas market structure in Guangdong . 33 Box 5. Lessons from other market liberalisation processes . 40 Box 6. Shippers 42 Box 7. Tariff rate modification 55 Box 8. Trading transparency and churn assist market liquidity 66 Box 9. Transition from long-term contracts 74 List of tables Table 1. Natural gas price re process 19 Table 2. Natural gas transmission and distribution price policies 20 Table 3. US and EU market summaries 41 Table 4. Examples of tariff ologies 55 Gas Market Liberalisation Re cutive summary PAGE | 7 IEA.Allrightsreserved.cutive summary Global natural gas supply and consumption are growing rapidly, and this trend is expected to continue for decades. A new round of liberalisation res is also emerging globally, with more and more gas being priced by gas indices. The ongoing natural gas market liberalisation re in the People’s Republic of China’s “China” has attracted global attention. A successful re will benefit not only China’s gas industry, but also global natural gas development. This report examines the key insights into successful gas liberalisation elsewhere and explores the implications and lessons learned for application in China. In terms of market-oriented liberalisation res, there are many lessons to be learned from Europe’s and the United States’ experiences that can help reduce the costs of trial-and-error efforts in the ongoing re in China. China’s gas market re China has already made significant progress in its gas liberalisation re, including some price deregulation, third-party access TPA, and an ongoing approach to unbundling infrastructure. The core objective of the natural gas market re is to increase competition among natural gas suppliers and consumers in the market, thus ensuring that resource allocation is more efficient. China has also established pilot gas exchange centres aimed at instituting a market price index. Because a fully market-oriented system has yet to be established in China, the price of natural gas is still heavily subject to the regulated city-gate price. Upstream competition remains limited, and the interconnections of the infrastructure system pipeline and liquefied natural gas LNG terminals also impede full TPA. The complexity of the local pipeline systems remains another challenge to the gas re. Similar to the gas liberalisation res in the United States and the United Kingdom, long-term contracts and other reallocations of benefits will need to be managed during the transition to an open market. The opening of natural gas markets has unfolded at different rates in different countries, and countries have different market fundamentals – from being self-sufficient to net-importing countries, and from mature to growing markets. However, such processes have all proceeded from the same common objective to foster competition and market liquidity to the benefit of end users. China can learn from the experiences of other countries, especially in the development of policy tools to overcome obstacles that may impede the establishment of a fair and functioning market. Proper market design is crucial Proper market design will help to more quickly establish a fair and effective market. China’s current gas market conditions and scale are unique; there is no ready-made experience that can be directly copied. That said, the physical United States-based trading centre and the virtual Europe-based trading centre frameworks have been successfully Gas Market Liberalisation Re cutive summary PAGE | 8 IEA.Allrightsreserved.developed and may offer important lessons that can be applied to China’s re efforts. For instance, ulating several provincial-level virtual centres could be a “low-hanging fruit” for the ongoing grid unbundling re. The successful design of the market structure and market arrangements is as important as the establishment of an independent natural gas pipeline network company. Piloting local market centres should be encouraged. This is a situation in which it would be important to “cross the river by feeling the stones” in order to further market-oriented liberalisation res. By initially piloting market centres in major consumption or supply provinces, China can learn valuable lessons that can be appliedfor developing market centres across the country and ing an internationally acceptable, market-oriented price index. As demonstrated by international markets, the pace of development is likely to be uneven across sectors and regions. Enabling third-party access to infrastructure The separation of regulated gas transportation and commercial sales activities is a precondition to TPA to natural gas pipelines and LNG terminals. China is currently undertaking the ownership unbundling of this infrastructure, which can pave the way to fair TPA with the utilisation of proper policy tools. Defining distinct “shipper” and pipeline transportation service roles enables the fair and efficient use of pipeline infrastructure and increases market participation. Anchor shippers could help solve existing long-term contract problems and also help to accelerate the construction of new pipelines. Shippers should be licensed and directly supervised by the regulator. Establishing capacity allocation mechanisms CAMs and congestion management procedures CMPs is important. Moreover, certain open-season capacity should be allocated to newcomers to the market to foster competition. CAMs are needed to define the rules of primary access. A secondary capacity market can also be introduced to optimise the use of the transmission system capacity, with a view to granting system users the right to freely trade gas transmission capacities. Tariff-setting rules, standard contracts, gas specifications, and dispatching arrangements will need to be developed. CMPs also need to be introduced to manage not only physical capacity issues but also contractual congestion whenever a shipper does not use the capacity it booked in the network. Creating a simple and clear pipeline tariff will help to encourage more new-entrant shippers. A mix of US and EU European Union s in China may be more suitable, such as trunk line tariffs that are distance-based and a single tariff for the local regional market. A tariff review mechanism and related regulatory guidelines will also need to be established. Pipeline interconnections are important for facilitating TPA. Consi