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Reforming the Role of State-Owned Enterprise in China’s Energy Sector

About the Project

What are the prospects for reform of the Chinese energy sector? This question is the subject of much debate both inside and outside China. Since coming to power in November 2012, China’s new government has issued a series of statements on reform, clearly an important part of the country’s continuing ‘great revival’. Despite this, some experts have been unconvinced by the pace of economic reform. What reform means for the energy sector is even less clear. There are competing views on how, and to what extent, the energy sector and energy policy will be reformed, but they all share various potential biases resulting from incomplete data and “not knowing what we don’t know”.

We approach this policy question by addressing the decision-making process about whether or not to open up the upstream oil and gas market in China to competition from small, private enterprise. We examine two related aspects:

- the appetite for policy reform that would allow private enterprise to more fully compete in China’s energy sector; and

- the appetite for direct reform of the Chinese National Petroleum Corporation (CNPC), limiting its market dominance to complement such reforms so as to allow smaller companies to utilize the competitive space opened up in the sector.

To analyze the direction of policy in these two aspects, we apply a framework for modeling collective decision-making processes (CDMPs): the KAPSARC Toolkit for Behavioral Analysis (KTAB). KTAB is not a model, but a platform for building models. It is a CDMP simulator that can generate insight into policy decision-making. It allows the researcher to apply a set of rules of engagement on a question and then simulate the CDMP to understand how the advocacy and influence of actors may evolve to influence the range of plausible policy outcomes. As such, KTAB enables analysts to bring a quantitative approach to what has traditionally been a qualitative field. This technique draws on the insights of experts regarding the advocacy and interactions among decision makers and influencers, capturing expert knowledge in a methodical, consistent manner.

In this paper, we examine the interactions of actors’ interests that may be driving China to reform its energy sector policies and, in particular, the structure of CNPC. The question is important. Many commentators and policy makers have suggested that adjustments are needed to reduce the constraints on the involvement of private enterprise in the Chinese upstream oil and gas sector.

Data for the KTAB model used in this paper were gathered through interviews with several experts, inside and outside China, both directly and indirectly involved in the Chinese energy sector. We combined their individual responses into a consensus expertbased view of the interests and opinions of the relevant decision makers. KTAB provides a framework to evaluate the implications of different sets of expert views (the data). Our use of what we call the consensus view data should not be taken to imply that the data provided by the experts are “objective facts” regarding the actors. Instead we argue that these data represent an informed understanding of the decision makers and therefore allow KTAB simulations to identify plausible policy outcomes, rather than predicted or forecasted outcomes, given the embedded insights of our experts.

In the case of private companies’ entry into the energy markets in China, the KTAB simulations suggest that little substantive reform is likely, which would come as a surprise to many of the experts who provided data for this analysis. During the interviews with our set of experts, most anticipated substantive reform. Our analysis using KTAB, on the other hand, suggests that the inertia of key actors within the decision-making sphere holds back the potential for a significant opening up of the energy sector. In addition, despite the possible erosion of CNPC’s political clout, there does not appear to be consensus among the critical decision makers in China in favor of major reform of its market position.

These insights appear robust. Scenario analysis around the baseline KTAB simulation results suggests institutional inertia limits the effectiveness of unilateral initiatives by any of the key leaders— unilateral attempts to drive reform are not sufficient to alter the outcome. Attempts to push through a wholesale reform of CNPC appear to require more concerted action by a coalition of interests than is likely to come together at present. Despite a political environment in China where significant reform appears in rhetoric, there does not appear to be much credible space for meaningful reform of private sector involvement in the Chinese energy markets.

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