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Door to oil sector opens slightly

China Daily

The government's recent move to allow private firms to act as wholesale marketers of refined oil products will not particularly rock the sector which is still largely dominated by the largest two oil firms in China, experts and traders say.

But the green light to opening what until now has been a tightly controlled market indicates that PetroChina and Sinopec will face some stiffer competition.

Local major companies may be helped in preparing for what is ahead by the door left ajar to increasing the number of domestic players before the market is completely exposed to foreign giant firms in 2006 as part of China's commitment to the World Trade Organization.

Earlier this month, the domestically listed Hubei Tianfa Group, a refined oil products trader, announced it had obtained a wholesale licence for its refined oil products. It was the first wholesale licence granted by the government in four years.

In a market overhaul in 1999, the government recalled thousands of wholesale licences for refined oil products and consolidated the business into just a duopoly featuring PetroChina and Sinopec.

The government hoped the move would help the two companies get a better grip of the market and control prices to sustain the revenues at their lumbering refineries that absorb millions of workers and contribute millions in tax revenues to the government.

Tianfa, which operates more than 100 filling stations, said the licence-call-off has virtually paralyzed its oil storage facilities - which absorbed an investment of more than 10 billion yuan (US$1.2 billion)  - and sent its profits plummeting.

As a result, the company suffered heavy losses for two consecutive years, and was on the verge of being delisted on the stock market.

To rescue the flagship private firm in Central China's Hubei Province, Yu Zhengsheng, Communist Party secretary of the province, lobbied hard to get the central government to help the company regain its licence.

With a wholesale licence in hand, company officials say they plan to occupy half of the wholesale market for refined products in Hubei Province, which is now being dominated by Sinopec.

According to its blueprint, Tianfa also plans to expand its retail network to 3,000 gasoline stations and become the third largest retailer in five years.

But experts said Tianfa's participation is not likely to reshuffle the market, since PetroChina and Sinopec still control the oil supply at the wholesale level, and most storage facilities.

"The two giants have a strong say on the market," said an official with Sinochem, a major State-owned oil trader. "It is unlikely for the two giants to support others to beat themselves."

As for the retail network, an official with Sinopec said petrol stations are dependent on where storage facilities are located, and the "Big Two" have occupied almost all the best places.

"How could you compete without storage?" the official asked.

Another source with the  China National United Oil Corp, a State-owned oil trader, said: "The government would like to see competition in the market, but not too much competition.

"The development of Tianfa may be restricted to Central China, rather than develop nationwide."

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