Is it Time for China’s Oil Monopoly to See its First Crack?

Is it Time for China’s Oil Monopoly to See its First Crack?

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China’s three oil majors, likely still nervous from Beijing’s recent crackdown on CNPC and corresponding executive investigations and resignations, may feel even a little more anxious after more troubling news broke last Friday.

Industry experts said they wanted China to establish a separate and independent company to operate the oil wholesale business and manage the supply to retailers; effectively breaking up what calls “the de facto monopoly of the three state-owned large oil companies, especially the two onshore oil giants.”

Even Xu Baoli, director of the research center of the State-owned Assets Supervision and Administration Commission (SASAC) (a special commission directly under the all powerful State Council) joined in, stating that a good way to form fair market competition in the petroleum sector is to make some adjustments in the oil retailing field by stripping away the oil station business from the three main state-owned oil enterprises (SOE) and set up another SOE specialized in the operation of oil stations.

Xu is referring to Sinopec (the second largest refiner in the world) and CNPC along with its publically listed subsidiary PetroChina. The two oil majors account for 46% and 31% of China’s refining capacity, respectively. Sinopec and PetroChina run the lion’s share of China’s retail fuel stations, accounting for 80% market share. CNOOC is the smallest of the three oil majors and is more focused on offshore exploration and production but also runs retail gas stations as well.

This is big news for several reasons. First, breaking up any part of China’s oil industry monopoly may be easier said than done. Sinopec, CNPC and CNOOC have yearly combined revenues of nearly $1 trillion and are listed on the Fortune Global 500, wielding enormous political and economic power domestically and worldwide.

However in light of CNPC’s recent graft allegation problems and President Xi Jinping’s new crackdown on corruption within the country’s SOEs, there is more of a chance of a monopoly breakup now than ever before.

In fact, on Friday Want China Times reported that China’s National Development and Reform Commission (NDRC) is considering putting CNPC’s sprawling natural gas pipeline network under the direct jurisdiction of the central government or spinning it off into an independent company.

A CNPC official said his company is under heavy pressure to restructure its operations, following the outbreak of the major scandal. An NDRC official said the spinoff of the natural gas pipeline network could break the market monopoly and facilitate the reform of natural gas prices. Just a few months ago this would have been unthinkable.

Second, the retail gas station industry in China is growing and finally starting to catch up to the country’s stellar three-decade GDP growth run.

China’s Ministry of Public Security reported that passenger car ownership in China reached 120 million by the end of 2012 and is projected to increase to 200 million by 2020, while total vehicle population was approximately 240 million at the end of 2012. Consequently, China has become the world’s largest car producer and the largest new car market.

As the Middle Kingdom’s economy grows, still at around 7.5% (which is considered sluggish for the country but is impressive compared to anemic growth in the EU, projected at 0.3% to 0.4% for Q2 2013, and lackluster GDP growth in the US in recent years averaging around 2%), its rising middle class (more in number than most countries’ populations) are taking to the highways, with a corresponding increase in oil consumption and oil imports.

Some data to digest in relation to future car usage in China: In a May report The Diplomat said by 2022, China’s middle class should number 630 million, three-quarters of urban Chinese households and 45% of the entire population.

China has already surpassed the US as the world’s largest net oil importer, in large part due to increased automobile ownership. Energy consultancy Wood Mackenzie said in August that China is on track to spend $500 billion a year on crude oil imports by 2020. For a country that has seen decades of cash flowing into its coffers, this reversal should be cause for concern for policy planners in Beijing.

Filler her up, please

IBISWorld said in a report last year that revenue for China’s gas station industry was expected to hit $204.9 billion by the end of 2012, up more than 12% from the year earlier, with annualized growth of 17.5% over the last five years. At the end of 2011 there were nearly 100,000 gas stations in the country, employing 870,000 people with an estimated payroll of $3.35 billion. According to recent government statistics, the number of gas stations in China has increased by more than 1,400 in the first half of 2013.

However the retail stations are not dispensing only gasoline. According to an August report from China Scope Financial, China has seen an unprecedented growth in the number of retail gas stations supplying liquefied natural gas (LNG) and compressed gas (CNG) since the beginning of this year.

This may mitigate China’s continual rise in oil consumption due to increased automobile usage – but will likely offer just a small respite for the country in its feverish scramble to secure as much oil as it can get both domestically and worldwide.

Industry barriers reported that although foreign companies own some retail oil stations and private investors also exist, they have marginal significance in terms of market share. Private and foreign companies planning to enter the fuel station sector still face rigid market restrictions.

Xu said he believes that the oil station business should be independent from CNPC, Sinopec and CNOOC and more encouragement should be given to foreign and private investors to create more price competition, quality and services. “Since CNPC, Sinopec and CNOOC own the franchise of oil exploration,” he added, “we can’t exclude the condition that they discriminate against downstream enterprises at the oil refining and retail segments, taking advantage of their control of the industrial upstream.”

In the measured words of government officials in China this is indeed ominous for the three big oil companies.

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