Oil retail opening to have little impact
(China Daily)
Updated: 2004-12-02 14:17

The upcoming opening up of the oil retail business is unlikely to have a big impact on the domestic market immediately, analysts report.

But the pinch of intensified market competition will surely be felt by PetroChina and Sinopec, China's two largest oil companies, in two years when the wholesale business will be opened to foreign investment.

More significantly, with the market opening up, the government may also reform its pricing mechanism for oil products. The reform may bring about sweeping changes to the oil market, analysts said.

According to China's commitment to the World Trade Organization, China is set to allow foreign investment in building and operating petrol stations beginning December 11. By 2007, the wholesale business will also be liberalized.

At present, there are about 300 foreign-funded petrol stations among the nation's more than 80,000 outlets. Most of them were built before the government banned such investment several years ago.

Now, with the market opening up, foreign oil giants are gearing up to deploy their presence in China's lucrative retail oil market.

So far, the Chinese Government has given the green light for three joint ventures (JVs) one by Royal Dutch/Shell, and two by BP to build and operate service stations.

The JV between Shell and Sinopec will build and operate 500 stations in Jiangsu Province in three years.

BP set up a JV with Sinopec to have 500 similar stations built in neighbouring Zhejiang Province, while another JV with PetroChina will run another 500 outlets in Guangdong Province.

More such JVs are waiting in line for government approval. ExxonMobil and Saudi Aramco plan to build a 600-station JV with Sinopec in Fujian Province. France's TotalFinaElf also wants to crack into the market through a proposed JV with Sinochem Corp, the fourth largest State oil company in China, to build 300 petrol stations in North China, including Beijing.

"Foreign oil giants are trying to increase their share in China's retail oil market, which is now one of the fastest growing markets in the world," said Zhou Dadi, director of the Energy Research Institute with the National Development Reform Commission.

Not only foreign players, but also domestic firms are eyeing the market.

As the market opens to foreign investors, the industry expects domestic firms such as Sinochem and China National Offshore Oil Corp China's third largest oil company will be able to obtain retail licences and build their own service stations.

Analysts said the opening-up will intensify market competition as more players move in.

Still, the new comers cannot shake the dominance of PetroChina and Sinopec.

The two companies now grip more than 50 per cent of the retail market, and 90 per cent of the wholesale market.

"The impact of opening up is almost insignificant because the two domestic oil companies still control the wholesale business to supply oil to the service stations," said Zhang Jiaren, vice-president and chief financial officer of Sinopec.

A Sinochem official agreed, "The two giants have a strong say in the market," said the official who refused to be identified. "It is unlikely for the two giants to support others and shoot themselves in the foot."

Even though more companies are allowed to import oil products to feed into stations, a Sinopec official said petrol stations are dependent on where storage facilities are located, and the "Big Two" have almost all the best locations.

"Even within a JV, Chinese companies still have a strong say in the JVs since they are majority shareholders," said the Sinopec official.

Zhou said the "Big Two" have been working hard to prepare for the competition in the past years by extending their retail networks, slashing costs as well as improving management and services.

"It is very difficult to rock their dominance," said Zhou.

In the past years, the two companies have invested billions of yuan to acquire existing service stations, and build new outlets.

By the end of September, Sinopec had 31,030 petrol stations operating under its brand. PetroChina has 17,159 stations.

The market share of the two companies have increased to more than 50 per cent from 40 per cent three years ago.

Sinopec's Zhang said his company is now investing billions of yuan in building a refined oil pipeline network to cut transportation costs.

The company is constructing a 1,000-kilometre pipeline in the Pearl River Delta in Guangdong Province, a 1,700-kilometre pipeline linking Southwest China's provinces and regions, and another pipeline linking Anhui, Jiangsu and Shandong provinces.

Transporting oil products through pipelines is about 45 per cent cheaper than rail transportation.

Still, Zhang said competition will be much more tough three years later, after the wholesale business opens up.

Liu Gu, an oil analyst with Guotai Jun'an Securities (HK), said she does not expect head-to-head competition overnight.

Rather than heading along by themselves, foreign companies will choose to join hands with Chinese companies for expansion, said she.

Co-operation will help foreign companies take the advantage of the established sales networks and resources of Chinese companies.

Pricing reform

Besides the market opening up, the government is also mulling over reforms to the current pricing mechanism for refined products to cope with the demands for opening up.

Different proposals are under study including: regulating factory prices and CIF (Cost Insurance and Freight) prices, while freeing wholesale and retail prices; regulating retail prices while liberalizing wholesale prices; and liberalizing retail and wholesale prices completely.

The government is also likely to introduce price hearings a system that has been used in other monopolized industries like aviation and railway sectors to ensure fair prices in two years, sources said.

In the longer term, the government also plans to establish an oil futures market to accurately reflect domestic demand and supply as well as oil prices.

Allowing oil companies more freedom in determining retail prices could prove a reasonable method of price reform.

At present, the government sets benchmark retail prices for diesel and petrol based on the average rates of oil products on the Singapore, New York and Rotterdam markets.

PetroChina and Sinopec are allowed to raise or drop as much as 8 per cent from the government-set benchmark.

Guotai Jun'an Securities' Liu believes reform may allow the companies to fluctuate more from the government-set benchmark prices.

Critics said the problem of the current system is of little transparency as the government adjusts prices only when it feels necessary for maneuvering economic performance. The price does not realistically reflect the market situation.

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