1. What’s the point of a pipeline company?

Almost all developed markets separate oil and gas production from transport to promote a level playing field and encourage new entrants into the market. An independent company also would be more likely, in theory, to decide on new routes based on national need rather than what serves an individual producer. More broadly, it’s part of Xi’s strategy to enhance national energy security by encouraging domestic exploration and multiple sources of supply by ensuring open access to pipeline transport.

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2. What does that have to do with smog?

China has moved millions of homes and businesses from coal to cleaner-burning natural gas as part of Xi’s pledge to protect the environment. But the transition has been hampered at times by a lack of infrastructure. Gas supplies still run short, especially in winter when demand peaks. China National Petroleum Corp., which operates about three-fourths of the gas network, caps supplies, so some cities turn to trucked-in LNG. Sometimes factories are forced to close to keep people from shivering at home.

3. What’s wrong with the current set-up?

China imports about 70% of its crude and half its natural gas. Xi wants to produce more at home to enhance national energy security. He also wants more private capital to get involved in exploration, since the Big Three producers -- CNPC and its listed subsidiary PetroChina Co.; Sinopec, the listed unit of China Petrochemical Corp.; and China National Offshore Oil Corp. and its Cnooc Ltd. unit -- haven’t moved fast enough to meet growing demand. Currently, pipeline access can be blocked or is prohibitively expensive for smaller private or foreign firms. Liberalizing the so-called mid-stream transportation -- out of the hands of the Big Three -- is seen as necessary to attract outside investors.

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4. How big is the network?

As of 2015, China had 64,000 kilometers (about 40,000 miles) of pipelines carrying natural gas, 27,000 carrying crude and 21,000 carrying oil products, according to China’s main economic planning agency. By 2025 its goal is to expand that to 163,000 kilometers for gas, 37,000 for crude and 40,000 for oil products. By comparison, the similarly sized U.S. had 1,984,321 kilometers of natural gas pipeline and 240,000 for petroleum products in 2013, according to the CIA World Factbook.

5. How would a spinoff happen?

The talk has been about a three-step process:

• The major companies transfer assets and employees to the new company and are allotted shares based on the value of those assets, estimated to be around 500 billion yuan ($70 billion). Analysts have modeled other figures, with Wood Mackenzie in October forecasting $80 billion to $105 billion.

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• State and private investment funds inject enough capital for a combined stake of about 50%. That money would be used to fund pipeline expansion.

• Public listing

Analysts at Bernstein said in September after discussions with PetroChina management that this process could take years -- pipelines could be transferred out in 2021 and a potential IPO held in 2023.

6. Who benefits? Who loses?

• For PetroChina, the biggest operator, it depends on the price. Bernstein analysts said the valuation for pipeline transactions could be at a price-to-book ratio of 1.2 to 1.3, citing company guidance. If the assets are sold above book value, it will trigger a special gain for PetroChina, which would result in an extraordinary dividend for shareholders. Over the longer term, though, PetroChina may see a dilution to earnings and free cash flow as it would be losing one of its most important assets, accounting for about 30% of its book value.

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• No. 2 Sinopec might see its stock price improve if the deal means it can spin off its retail business, which includes some crude and refined-oil products pipelines. Disposing of those assets would clear some of the uncertainties that can hold up an IPO.

• Cnooc could benefit by being able to sell more of its offshore gas to inland customers, who right now are out of reach because they can’t access the pipelines.

• Gas distributors, such as ENN Energy Holdings Ltd. and China Gas Holdings Ltd., are expected to benefit from the opportunity to diversify gas supply sources.

--With assistance from Aibing Guo, Feifei Shen and Adrian Leung.

To contact Bloomberg News staff for this story: Jasmine Ng in Singapore at jng299@bloomberg.net

To contact the editors responsible for this story: Ramsey Al-Rikabi at ralrikabi@bloomberg.net, Paul Geitner