OPEC decision good for China's businesses, not for oil companies

Dec 10, 2014 12:00 AM

Global oil prices dove immediately after the Organization of Petroleum Exporting Countries (OPEC) announced in late November that it will not be changing its production levels and leave the daily output ceiling at 30 million barrels, reports the China Entrepreneur.

In response, China has raised its consumption tax on gasoline to 1.12 yuan (US$0.181) from 1 yuan (US$0.162) per liter, and its consumption tax on diesel to 0.94 yuan (US$0.152) from 0.8 yuan (US$0.13) per liter.

China is a big oil consumer. On any given day in the past two years, an average of 63 oil tankers are headed to mainland China. On Oct. 18, it was as high as 80.

OPEC's decision will have a negative impact on upstream enterprises that engage in the petroleum business or its processing, but for the downstream enterprises, especially the small and medium firms, the news is welcome.

China's big three petroleum monopolies, namely China National Petroleum (CNPC), China Petrochemical (Sinopec) and the China National Offshore Oil (CNOOC), will not be among those glad to hear the announcement, said the report.

Among the three, CNOOC will be hit the hardest because most of its revenues are dependent on upstream businesses. It can only consume a portion of the oil it produces and has to sell the remainder. Oil price cuts mean its oil revenues will also suffer.

The cut is most favorable for Sinopec because most of its crude oil is bought externally, including imports from other countries, or bought them from CNPC or CNOOC.

Sinopec has a strong downstream refining business, which along with finished product sales account for more than 70% of its revenues.

The price for Sinopec's refined products is set by the government, so oil price cuts mean it can cut costs but will not make any additional revenue.

The impact on CNPC will be mixed. Earlier on in its history, CNPC was much like CNOOC, with its focus on upstream business operations. This made it more susceptible to oil price fluctuations. In recent years, it has tapped into downstream refineries, which has helped it cut losses stemming from the slump.

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