focus on china
A louder voice for China’s private
petroleum companies
IT IS -18 °C outside at Shangzhi City,
Heilongjiang Province. 55-year-old
Zhu Jun is struggling to walk through
the knee-deep snow. He is to check
the 130,000 t oil tank, which has
been idle for a long time. Ten years
ago, Zhu Jun was still the president of
a petrol station affiliated to Zhujiang
Lu Feng Petroleum, but now his job is simply
investigates checking and guarding the company’s
oil tank. “It has been two months since
how the
we got paid,” said Zhu Jun. Less than
first 1 km from the oil tank, Kong Linggui
association is very anxious for the oil supply. In
1992, Kong Linggui started up Zhujiang
for China’s
Petroleum Company with 300 workers.
private And to date, he has invested more than
oil firms ¥35m ($4.2m), and owns 1 oil tank
and 14 petrol stations. But since 1998,
is going
his company has been in a downward
to change trend. “The main problem is that our
business oil supplies are low. PetroChina will not
give us oil, since we are competitors.”
PetroChina is designated by the
central government as the sole and
exclusive oil supplier for wholesale and
retail businesses in Heilongjiang. But
as PetroChina itself also has an interest
in retail, that makes state-owned oil
companies and private oil companies
direct competitors in many areas.
China’s private oil and oil products
companies say this is only one example
of the prejudice and discrimination that
China’s private oil companies face from
the three State-owned conglomerates,
50 tce march 2005 wcce7 is coming to Glasgow... see www.chemengcongress2005.com
which, with strong support from the
government, are monopolising the
industry.
But there is hope that this is
about to change, following the
establishment of the first petroleum
association for China’s private oil
firms, the China Chamber of Commerce
for the Petroleum Industry (CCCPI), on
11 December 2004. Nearly 100 private
companies in up-, mid- and down-
streams joined the chamber.
Gong Jialong, president and ceo of
Hubei Tianfa Group and also founder
and president of the association, says:
“We are trying to build a bridge which
will not only connect companies and
government, but also tighten the
relationship between state giants
and private firms.” Analysts believe
that the real purpose of the chamber
is to “boost the fair competition in
China’s petroleum industry”, which
is also stipulated in the chamber’s
constitution.
For a long time, China’s private
companies in the petroleum industry
claim they have all been treated with
prejudice and disrespect from the
three state conglomerates, Sinopec,
PetroChina and CNOOC.
The problems between China’s
private oil companies and state
conglomerates fall into four
categories.
The first is oil supply. Since
the central government granted the
three state giants exclusive rights to
oil exploitation, import, export and
wholesale, oil supply has become the
bottleneck for nearly every Chinese
private oil company. This has left
private companies to beg for supplies
from the three giants. “Natural
resources like oil and gas are passed
down from our ancestors, and should
be jointly owned by all nationals
and companies. So why should those
resources be restricted only to the three
giants?” says an angry Huang Zuping,
general manager at Yantai Bajiao Oil
Company.
In August, the China Chamber of
Commerce granted licences for import
and export of refined oil products to 15
private companies. Two companies even
got the licence for crude oil import and
export. Hubei Tianfa was one of those.
But even with the licence, private
companies find it hard to compete
against the giants.
“With current stipulation, chamber
members cannot exploit crude oil in
China territory. And although a very
few companies won licences for import
of crude oil, they are still annoyed
by the quota limitation, and other
questions like storage and logistics,”
says Xia Lei, a senior analyst at China
Chemical Online (CCO). He adds:
“Although some other members in
the chamber won licences for import

and export of refined oil products,
they are straining under the quota
limitation imposed on them.” In most
cases, private companies will not be
allocated a quota, making the license
a useless piece of paper. Even for
those lucky enough to get the quota,
it is stipulated that the real import
and export job should be handled by
Sinopec or PetroChina (CNOOC is still
weak compared with the other two).
Also, because the petrol retail
market is still dominated by the
two giants, and more importantly,
prices for oil products are completely
regulated and controlled by Sinopec,
PetroChina and the National
Development and Reform Commission
(NDRC), “it’s really hard for Chinese
private petroleum companies to
compete with the state giants,” says
Xia Lei.
The second aspect is price. Since
private companies do not have the oil
supply and the NDRC only advises on
price, they have to accept the final
prices set and controlled by the two
state giants, Sinopec and PetroChina.
For example, the no. 90 fuel, which
is most widely used among Chinese
car drivers, is priced at ¥3427/t
($415) when it comes out of the
refinery, but the price goes up to
¥4348 when private companies buy it
from PetroChina in Heilongjiang. This
27% price increase makes it nearly
impossible for private companies
and petrol stations to make a profit.
“For every ton of oil we buy, we lose
¥100”, said Kong Linggui.
Another bizarre thing is that
sometimes the wholesale price from
the two giants is even higher than
the retail price at the petrol stations.
In Jiangxi province, where Sinopec
owns over 65% of petrol stations, the
prescribed wholesale price of
no. 90 fuel has been at ¥4400/t since
November 2004, while the retail price
is fixed at ¥3.6/l. This means that an
independent petrol station would lose
¥0.25–0.3 for every litre it sells. For
no. 93 petrol, the wholesale price is
¥4900/t, and petrol stations would
lose ¥0.1 per litre sold. As a result,
most private petrol stations have
stopped selling those types of fuel.
Sinopec explains: “International oil
prices are rocketing and supply is very
tight. We are doing this out of fear of
agents stocking up on oil and making
the market unstable.”
The third problem is petrol
stations. Regulations issued by the
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State Council state that no private
petrol station can be set up without
Sinopec or PetroChina holding
or buying shares in it. Although,
according to the Provisional Decision
on Market Management of Refined Oil
Products issued by the Chamber of
Commerce in December 2004, from the
beginning of 2005 it is not necessary
that the two giants hold or buy shares
in newly-built private petrol stations,
some places, however, have passed
rules or amendments which deter most
private companies.
In addition, since China’s wholesale
market for refined oil products will only
be opened up to foreign companies at
the end of 2006, private petrol stations
will need to source their supplies from
the Chinese national giants until then.
The fourth bone of contention is oil
reserves. China plans to build a 90-day
strategic oil reserve, which is meant
to insulate the country’s economy
from interruptions in imports. (In
the first ten months of 2004, China
imported almost 100m t of crude oil,
and is expected to exceed 120m t for
the whole year.) As private firms are
excluded from building or operating
the four reserve bases, they fear that
Sinopec, PetroChina and CNOOC could
abuse their control should there be a
major crisis such as a war or a natural
disaster.
Compared to the enthusiasm from
the CCCPI, Sinopec and PetroChina
appear to be giving the new chamber
the short shrift. Neither of them
sent representative to attend the
establishment ceremony, nor did they
comment on it. Officials explain that
the establishment of the new chamber
is more a symbolic gesture. Zhou Chun,
deputy director of the Petroleum and
Petrochemical Department at the
China Chamber of Commerce of Metals,
Minerals & Chemicals Importers &
Exporters (CCCMC), says: “It’s a sign of
progress, but the role it’s going to play
I think is very minor.” Xia Lei added:
“In the short term, I don’t see a great
future for the new chamber, since in
respect to both government support
and its own strength, the chamber
is in a disadvantageous position. It’s
more of a symbolic gesture than of real
importance.”
But Wang Degang, spokesman of
CCCPI, says that if the two giants look
down on them, “they [Sinopec and
PetroChina] are totally wrong.” He says,
compared to international oil giants,
Sinopec and PetroChina are really not
focus on china
so big. “If they chose to cooperate with
us, we could all benefit,” he said.
In sharp contrast to the two giants’
coldness was the extreme warmth from
some oil exporters. Ambassadors from
countries including Malaysia, Saudi
Arabia, Iraq, Yemen, Bahrain and
Egypt attended the ceremony, pledging
to cooperate with CCCPI. The Iraqi
ambassador Mohammad Ismail said
that China’s private companies were
welcome to cooperate with the Iraqi oil
and gas industry, and would enjoy the
same treatment as companies from other
countries. Malaysian ambassador Datuk
Abdul Majid Ahmad Khan, representing
all present ambassadors, said they would
help institutions and related companies
in their own country cooperate with
Chinese private oil companies.
CCCPI is even more ambitious. It
aims to not only fight for its rights in
the domestic sector, but has also set
up a fund with ¥10b for overseas oil
exploitation. However, analysts have
doubts. Xia Lei said: “¥10b is too small
an amount in oil exploitation. It would
be better for this money to be used
in the capital market and invested in
oil-related financial products.” In fact,
this is a view shared by many possible
investors, such as the Zhejiang Haiyue
Company, which hesitates to invest in
the fund in light of its small scale.
Some others also doubt how far the
chamber can go, believing it to be a
misplaced initiative. An anonymous
official from the NDRC says, “Currently,
the most important task for the chamber
is to struggle for a better market
environment, vigorously protect their
own rights and try to break up the non-
market-oriented manipulation of the
system, instead of talking about this oil
fund thing, which is unrealistic for them
to do now.”
In any case, CCCPI seems to
understand its current status and
commission clearly, and has repeated
many times that its relationship to
the state giants is not competitive
but cooperative. Now many of them
are anxiously awaiting the coming
of December 2006, when China has
promised to open up its wholesale
market for refined oil products. “Then
foreign oil giants will invade China
more ferociously, which scares them
[the state giants] a lot, but we view the
foreign companies as life-savers. Let’s
persist into 2006, I really can see a
bright future,” says Guo Yuzhu, general
manager of a private oil company in
Heilongjiang. ■
march 2005 tce 51