China Petroleum & Chemical Corp, also known as Sinopec, said on Wednesday that it will sell half of its stake in the Sichuan-to-East-China gas pipeline for an undisclosed fee, in an attempt to increase short-term profits and to deal with the Chinese government’s initiative to restructure the oil and gas sector.
In an investor note released on Wednesday, Guan Bin, research analyst at China International Capital Corp Guan Bin, said the asset could be worth $6 billion (40 billion yuan). Similarly, analysts at research firm Bernstein believe the asset value could range up to 29 billion yuan.
Moreover, analysts also opine that the sale of the natural gas pipeline stake will generate 14 billion yuan in profits for Sinopec, which will be vital for dividend payments. Sinopec also said that the 50% stake in the natural gas pipeline will be sold to 15 investors at most. The Chinese state-owned oil and gas giant said: “The proceeds will be used to expand the Sichuan-East China pipeline and build gas storage facilities.”
Moreover, other important content of the company’s replenishment program includes:
- The investors’ participating in the asset sale would have to invest at least 1 billion yuan.
- The investment will be treated as external capital and such asset sales would continue in the future as fundraising for the development of natural gas pipeline projects.
- The sale would only be made to qualified investors, who have at least 4 billion yuan in equity.
The latest announcement made by the company comes just before the new guidelines for the oil and gas sector are issued by the Chinese government, which is likely to weaken the hold of state-owned companies over China’s energy sector. Such changes could upgrade third-party access to China's pipelines, which could support more exploration and drilling activities. However, it is costly for private Chinese producers’ to-tap natural gas reserves in Southwest and Central China.
According to Chinese newspaper People’s Daily: “Sinopec started operating its Sichuan to eastern China gas pipeline that links to the Puguang gas field in 2010. It can transport as much as 12 billion cubic meters of the fuel annually. The company invested 63 billion yuan ($9.4 billion) to build the 2,170 kilometer (1,348 mile) pipeline.”
Moreover, public investment will also push the establishment of the pipeline. This would thus increase the usage of natural gas, which is good news for China as its pollution crisis is choking the economy. Last year, the country issued more than two red smog alerts in space of just one month, citing the presence of poisonous particles in the air of major Chinese cities. The shift towards natural gas from dirty energy sources, such as oil and coal, picked up pace since then.
The Chinese government is also keen on boosting natural gas consumption in the country, for which more gas pipelines need to be installed. The development of gas pipelines needs massive investment. Given the present economic outlook of China, with its Gross Domestic Product (GDP) dropping to 6.7% for the first time in 25 years, implies that third-party investment is essential if the government needs to boosts its oil and gas sector.