Revitalizing China's Petroleum Industry Through Reorganization: Will It Work?

Officials with state entities and private companies have offered cautiously optimistic reactions to the reorganization under way in China's petroleum sector.

The restructuring is meant to enable the sector to catch up with economic reforms and offer a chance for oil and gas companies-notably China National Petroleum Corp. (CNPC) and China National Petrochemical Corp. (Sinopec)-to become true business entities independent of government. These two new major integrated firms will come under the aegis of the newly established State Petroleum and Chemical Bureau.

Some observers within China's oil sector fear that even though these companies have been "corporatized," they are still more or less monopolies. Furthermore, the restructuring will give the State Economic and Trade Commission (SETC), successor to the State Planning Commission (SPC) a more important role to play not only in China's oil and gas industry, but also in some other key industries as it absorbs the functions of six ministries. So there remains some concern as to whether CNPC and Sinopec will simply take their marching orders from SETC or the Petroleum and Chemical Bureau, as they did from SPC under a previous incarnation.

The hope among industry observers in China is that the two biggest state oil companies will stop operating as if they are ministries and move towards more market-driven practices so as to be more competitive internationally.

The restructuring program is viewed by many foreign oil companies operating in China as a necessary step to improve financial and operating efficiencies, but many also expect a more open petroleum market to take shape after the merger.

Analysts believe the restructuring is unlikely to disturb the contracts Sinopec or CNPC have signed with foreign companies, even though some joint venture projects face a change in partners. But it will remain to be seen as to what extent the two groups will enjoy autonomy.

The following is a sample of comments from key executives with foreign companies operating in China:

Stephen Goldman, president of Exxon China

The restructuring looks to be a very positive step. Streamlining of the government and separation of the policy and regulatory responsibilities from business operations should be very beneficial. Of course, the challenge is prompt and effective implementation, and we look forward to learning more about the specific plans. We are hopeful that the streamlining will simplify and expedite approvals.

Tom C. Ing, President of Amoco Orient Co.

The development history of most international oil majors in the past has proven that integration along the whole value chain of oil and gas is the right direction to go. In addition, foreign companies are most interested in open and fair access to quality opportunities, clear rules and regulations, and consistent and efficient approval processes. We hope that the restructuring is not only an assets reshuffle exercise, but also can bring improvements in policies and other aspects as well. The number of Chinese competitors and partners will most likely remain the same, but the players and their roles may have changed. The main focus on merging and splitting CNPC and Sinopec along geographic lines seems to imply that the state wants first and foremost to improve the internal efficiencies of the state oil companies (SOEs) rather than increase competition. If the reform is indeed just a redistribution of assets among SOEs, the impact on Amoco's China operations will be neutral. The reform is unlikely to affect Amoco's projects in China.

Gerard Choux, chief representative of Total China

The reshuffle is going to strengthen China's petroleum industry and improve economics of SOEs. However, as Total is quite a special case, given its downstream involvement represented by the Wepec Refinery Joint Venture (Total owns 20% of the $1 billion in total capitalization of the JV), the company expects no change by the restructuring unless within discussions of the joint venture. As indicated by the reshuffling guideline, the to-be-born two major oil companies will be vertically integrated along a value chain of the onshore E&D, refining, petrochemicals, and retailing, Total wants to be among the Chinese refiners that have free and unlimited access to the country's domestic retailing market, if Chinese refiners are allowed to extend to the retail business. The reform will, in the long term, create two major competitors in the oil and gas industry as a whole. CNPC, one of the world's top crude producers recently involved in impressive overseas operations, looks a strong partner to Sinopec, which is among the industry's top refiners. Nevertheless, competition comes from the market. The key is not how to control the assets but rather how to benefit the consumers in productivity, quality, and service. In the future, development and market competition, which is not geologically based, will have the final say. Apart from being a 20% owner of the $1 billion refinery project at Dalian, Total is also looking to become a major crude supplier to Chinese refineries as well as a keen participant in the proposed coastal liquefied natural gas import projects.

A.R. Hammerli, president of Phillips China Inc.

The restructuring will be positive for the development of the energy and petrochemical industries in China, as it will create more competition. In the long term, this increased competition will create stronger companies, higher growth, and more opportunities. But in the short term, people will be confused about everyone's role and thus may slow down the progress of various projects. We are concerned that we have signed a letter of intent with Sinopec to work with Lanzhou Chemical Industry Corp. to study the feasibility of a joint venture ethylene complex, and we understand this will be transferred from Sinopec to CNPC after the restructuring.

An oil company requesting anonymity

The reorganization will help Chinese companies to become more well-structured and to play more like international oil majors. We hope the operation of the vertically integrated companies will reduce (project) management time. As far as the offshore sector is concerned, none of our projects will be affected, as China National Offshore Oil Corp. is not going to be affected by the restructuring. For the onshore business, as the boundary line is not clear yet, we cannot predict what will happen. Of course we look forward to continuity in business contacts. But we expect the restructuring would slow the negotiation process.

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