China's Oil Price Reforms A Major Step In Deregulating Its Petroleum Sector

Table 1 - China's marker curde prices, June 1998 [7,975 bytes]

The sweeping and revolutionary decision China made in June to peg oil prices to international standards represents a significant and long-anticipated step to integrate China's oil industry with that of the world.

Effective in June, both crude and petroleum products came under a new pricing system that is modeled after accepted international practice. The system was outlined in the Crude and Oil Products Pricing Reform Package initiated by the State Development Planning Commission (SDPC) in late May.

Under the reforms, the newly restructured integrated state conglomerates China National Petroleum Corp. (CNPC) and China National Petrochemical Corp. (Sinopec) enjoy much more freedom to manage the whole spectrum of the business chain-from crude production to oil products marketing.

They are also the only two authorized entities to set ex-plant prices, wholesale and retail, for oil products (based on the SDPC-set marker prices). In products marketing, they now act as the first-stage wholesalers to supervise the business operations of provincial petroleum companies, which, as the second-stage wholesalers, will oversee retail service stations. Refiners are not allowed to directly sell products to provincial companies or service stations.

Crude pricing will follow a formula that industry observers consider to be more reasonable and open than the two-tier price system in practice in China until the end of May 1998. The old system allowed CNPC, then the only onshore crude producer, to sell 80% of its production at government-regulated prices and the rest at a higher price that was still subject to government guidelines. The practice, which has come under criticism since 1995, caused heavy financial losses at CNPC.

Crude price methodology

Under the new system the price of Chinese crude oil is formulated by a marker price plus a premium.

Set by SDPC, the marker price is based on the fob price of foreign crude of a comparable grade, plus a tariff currently set at 16 yuan/metric ton.

CNPC and Sinopec monitor the price movements at the Singapore market, based on published price assessments, and submit to SDPC on the 27th of every month the daily strike prices of different crudes monitored from the 26th of the preceding month through the 25th of the current month.

SDPC, in turn, works out a marker price for the month by averaging the month's strike price plus the premium. The marker price, set on a monthly basis, is then disclosed at the end of the current month and becomes effective throughout the next month.

The premium is determined by crude transportation cost and price differentials among the various crude grades.

Crude price categories

In terms of crude quality, China's domestic crudes are classified into four categories: Light Crude, Intermediate Crude I, Intermediate Crude II, and Heavy Crude.

Where pricing is concerned, the Chinese crude categories are compared with four Indonesian export crudes: Light Crude is compared with Tapis crude; Intermediate I with Minas; Intermediate II with Cinta; and Heavy Crude with Duri.

In China, Daqing crude and some Liaohe crudes are classified as Light; those from Huabei, Zhongyuan, Jianghan, Tarim, Yanchang, Shengli, and Dagang are Intermediate I and II. Gudao crude, from the Shengli area and some crudes produced from Liaohe and Huabei belong to the Heavy Crude category.

In June, SDPC set the marker price for Light Crude at 975 yuan/metric ton ($16.86/bbl); Intermediate I at 810 yuan/ton ($14.01/bbl); Intermediate II at 788 yuan/ton ($13.62/bbl) and Heavy Crude at 744 yuan/ton ($12.86/bbl).

SDPC stresses that domestic crude prices should be in line with those of foreign crudes by the time those crudes reach the refinery gate. But, at the same time, SDPC says domestic crude should be priced a bit lower than that of foreign crude in order to encourage refineries to buy domestic crude.

Oil products prices

In stead of fixing the prices, SDPC sets "guiding" prices, or retail marker prices for what it calls standard products, which it has designated as gasoline No. 90 and diesel No. 0. Every 2 months, CNPC and Sinopec are authorized to set ex-plant prices, wholesale prices, and service station retail prices. The two companies have the latitude to move the marker prices 5% up or down at the service station. If CNPC and Sinopec need to adjust the retail prices within less than 2 months, they have to approach SDPC for approval. CNPC and Sinopec are expected to report to SDPC their service station retail prices for each province 10 days before taking effect.

In June, CNPC and Sinopec have agreed to set ex-plant diesel No. 0 at 1,900 yuan/ton and gasoline No. 90 at 2,100 yuan/ton.

The marker prices do not apply to non-standard gasoline and diesel-those grades other other than No. 90 and No. 0. SDPC authorizes CNPC and Sinopec to set prices for the non-standard products by basing them on the SDPC-set quality ratio (Table 2 [19,301 bytes]).

Setting marker prices

The marker prices are based on the after-tax cost of imported No. 90 gasoline and No. 0 diesel, which is determined by their fob cost plus freight, freight insurance, tariff (9% for gasoline, 6% for diesel), consumption tax (277.6 yuan/ton for gasoline and 117.6 yuan for diesel), value-added tax (17%), and port charges.

In addition to the after-tax cost, the marker prices also consist of refinery-to-service station transportation fee and operating differentials between wholesalers and retailers. In June, the national marker price for gasoline No. 90 averaged 2,650 yuan/ton and for diesel No. 0 at 2,400 yuan/ton. But this marker price varies by region.

Accordingly, for June, CNPC set gasoline retail prices at an average of 2,705 yuan/ton, representing an increase of 2.5% from the marker, while the average for diesel was set at 2,450 yuan/ton, up 2.1% (Table 3 [23,204 bytes]and Table 4 [19,500 bytes]). Sinopec's average retail price for gasoline in June was 2,774 yuan/ton, up 4.01% from SDPC's marker price, while that for diesel is 2,468 yuan/ton, up 2.67% from the marker (Table 5 [26,452 bytes] and Table 6 [25,747 bytes])

SDPC will readjust the marker prices when the strike prices in the Singapore market fluctuate by more than 5% up or down. When deemed necessary, SDPC will submit the adjusted marker prices to the State Council for approval.

Control of service stations

According to the geographic division of assets, CNPC controls service stations in 12 provinces and municipalities: Liaoning, Jilin, Heilongjiang, Inner Mongolia, Shaanxi, Gansu, Ningxia, Qinghai, Xinjiang, Sichuan, Tibet, and Chongqing.

Sinopec controls service station operations in 19 provinces and municipalities: Beijing, Tianjin, Hebei, Shanxi, Henan, Shanghai, Jiangsu, Anhui, Zhejiang, Fujian, Jiangxi, Shandong, Hubei, Guangdong, Hunan, Hainan, Guizhou, Yunnan, and Guangxi.

The Sinopec or CNPC-set retail prices also apply to non-Sinopec, or non-CNPC service stations, such as those owned by foreign companies and the private sector. No price distinctions are allowed between urban and rural areas, as long as they are in the same province.

Sinopec and CNPC, although their retail prices can be different and vary from province to province, have to stick to one price within the same province or municipality.

Pricing other products

The new system does not apply to LPG, illuminating kerosine, heavy fuel oil (not used for fertilizer production), and chemical-grade light fuel oil.

SDPC has authorized CNPC and Sinopec to set the prices for these products under a separate SDPC regulation, which is still being formulated. SDPC will continue to set ex-plant prices for fertilizer-grade heavy fuel oil and jet fuel (Table 7 [8,374 bytes]).

Despite the liberalization of oil and products prices, a holdover from central economic planning requires that transportation, railroad, civil aviation, and other critical sectors, such as the Xinjiang Production and Construction Corps, enjoy special prices, which are now higher than the ex-plant price and lower than the posted retail price. SDPC will soon work out a separate pricing system for products sold to these sectors.

Oil products for military and national strategic reserve purposes will come under a different pricing method, which SDPC is working on. Products sold to foreign-funded enterprises are based on fob prices, and these enterprises will receive an export rebate.

CNPC and Sinopec are also able to set prices for chemicals other than fertilizer and plastic films for agricultural applications.