China's private oil enterprises eye group sales to foreign companies

China's private oil companies are increasingly resorting to group sales to become more appealing to foreign companies, which would have a better chance of challenging the monopoly held by China's state-owned oil giants, industry analysts said.
The Guangdong Oil & Gas Association announced that 15 private Chinese oil companies will be sold as a group to a foreign oil enterprise for $ 10 mm.

In addition, earlier it was reported that 80 private enterprises from Hebei, Fujian, Shandong and Xinjiang provinces are negotiating with a foreign company to seek ways to be sold as a group.
"The main reason behind this decision by these enterprises [to be sold as a group] is due to the monopoly held by China's oil giants in the wholesale market," Wang Junjie, secretary-general of the China Chamber of Commerce for the Petroleum Industry (CCPI), China's major trade organization for the oil industry, told. China's state-owned oil companies have enjoyed preferential treatment for a long time, Wang added.

According to Jin Peizhe, an analyst from Shanghai Continent Futures Co., selling these companies as a group will make it easier to challenge the state-owned oil giants.
"As most private enterprises focus on running gas stations, the purchase [of them as a group] will increase the number of foreign-owned gas stations, which could pose a big challenge for China's oil giants," Jin said.

China currently has 93,879 gas stations. About 19.4 % are owned by PetroChina, the listed arm of the China National Petroleum Corporation, and 30.7 % are owned by the China Petroleum & Chemical Corporation (Sinopec), while the remaining 49.9 % are owned by private and foreign enterprises. Jin added that such sales may be a risk to China's energy security, but they could also help form a healthier market.
In 1999, the central government issued a policy to allow two state-owned oil companies, PetroChina and Sinopec, to monopolize the oil market. According to the policy, oil refineries should give these two companies priority when selecting buyers for their oil products. PetroChina and Sinopec subsequently dominated nearly all parts of the country's oil production chain, from the exploration for and purchase of crude oil to downstream retail and wholesale industries.

After China entered the World Trade Organization, the central government began to open the oil market to foreign and private enterprises. At the end of 2006, China's Ministry of Commerce (MOFCOM) issued a new regulation that allowed private oil enterprises into the wholesale oil market, beginning at the start of 2007. However, a list issued by MOFCOM in May shows that out of the first eight oil companies this year to obtain entry criteria for access into the wholesale market, only one private enterprise was included.
"Since it is difficult to meet the entry criteria, only a limited number of private enterprises can gain access," Wang said.

According to statistics from MOFCOM, there are currently 2,512 oil enterprises that have wholesale businesses and 1,654 of them, or 65.8 %, are wholly owned or partly owned by the two state-owned oil giants.
"The opening policy issued last year doesn't change the monopoly situation that exists in much of China's wholesale market. Private oil enterprises don't have many wholesale channels, except to buy oil from PetroChina and Sinopec," Wang said.

Because of their limited options, private enterprises sometimes face unfair wholesale prices. An article reported cases of No. 97 gasoline being sold for RMB 5.20 ($ 0.68) per litre to gas stations owned by the oil giants, while privately-owned enterprises had to foot RMB 5.30 ($ 0.69) per litre.
The monopoly has resulted in huge profits for the two state-owned giants. Statistics issued by Xinhua show that in the first half of 2006, the combined profits of PetroChina, Sinopec and China National Offshore Oil Co. (CNOOC), another other state-owned enterprise, amounted to RMB 118.2 bn ($ 15.2 bn).

Wang said that private enterprises will not seriously upstage the state-owned giants anytime soon.
"It's hard for private enterprises to compete with state-owed enterprises, even when the policy is opened more widely. There's no need to worry that private enterprises will rise over state-owned ones in the near future," Wang said.