Change in China

Patrick Crow
Washington, D.C.
[email protected]

Two major Chinese oil firms have announced plans to cut about 976,000 jobs over the next 5 years in order to reduce costs and better compete in the global market.

China National Petroleum Corp. (CNPC) will cut its work force to 1 million by 2004 from the current 1.5 million. China National Petrochemical Corp. (Sinopec) plans to reduce staff to 714,000 from 1.19 million by 2003.

As a result of the government's policy of full employment, both of China's major oil concerns have been grossly overstaffed, even by the bloated standards of other national oil companies.

CNPC and Sinopec would cut back more and faster except for the fact the oil industry is one of China's major employers, and the economy couldn't bear the stress.

Liu Yan, petroleum division director of the State Administration of Petroleum and Chemicals Industries, explained, "China's petroleum industry faces very serious challenges today. Our state oil companies have many inefficient units and very high costs of operations."

Reorganizations

The changes are being driven by China's desire to join the World Trade Organization.

It must build a lean oil industry before it drops tariffs and opens its energy markets to potentially cheaper imports.

The government began preparing the oil industry in March 1998 when it ordered a wholesale reorganization and asset swap.

CNPC and Sinopec were given control of all main offshore fields, with the former taking over operations in the north and west and the latter in the south and east. Since the revamp, CNPC, Sinopec, and China National Offshore Oil Corp. have continued internal restructuring aimed at shedding unprofitable operations (OGJ, Aug. 10, 1998, p. 33).

Earlier this year, the government said it was satisfied with their progress and dropped tentative plans to dissolve them into even smaller companies.

Although better integrated now, the oil firms still burdened with far too much refining capacity. CNPC and Sinopec recently were operating their plants at only 60% of capacity, on average.

Last year, China announced plans to close about 200 small refineries with capacities less than 100,000 tons/year, reducing the nation's capacity by 10%. But that process is moving slowly.

Oil decontrol

Meanwhile, the plunge in world oil and petrochemical prices during the last 12 months has forced China to slow its oil-decontrol schedule.

Last June, the government launched a program that would have scaled domestic oil prices down to international levels by late this year.

Recently the government delayed full decontrol until sometime next year to keep its oil companies in the black this year.

Liu said, "Domestic companies still face a lot of problems, so we can't free the market as quickly as we would like.

"The impact on our domestic companies will be immense. We have to tread carefully and slowly, because earnings at state petroleum and petrochemical industries account for about 40% of all the earnings of state-owned enterprises."

Liu said faster oil price decontrol also could damage the health of China's overall economy.