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Foreign Oil Firms Boost China Operations

China's oil boom is drawing a new wave of foreign companies to open offices on the Chinese mainland or boost their Chinese business from Singapore to grab a slice of the world's second-largest oil consumer.

China is soaking up nearly 40 percent of incremental global oil demand to feed double-digit growth in domestic consumption, and is starting to open up its multi-billion-dollar State-dominated retail market.

Brazilian oil and gas firm Petro-bras, European trader Trafigura and Singapore trader Hin Leong are the latest to set up operations in China to market crude and trade oil products.

The prime minister of Kuwait, which is keen to sell more crude oil to China, is in Beijing this week and officials from Kuwait Petroleum Corp. have said the state-run firm was poised to set up an office in Beijing soon.

"China is in dire need of both physical oil supplies and risk management to cope with surging demand and price volatility," a Beijing-based Western trader said.

"Being physically close to them means you have a better and deeper understanding of their needs."

Though China is not fully ready for derivatives trading, global investment banks are building China teams based in Singapore, Asia's oil trading hub, while keeping tabs on the re-launch of fuel oil futures in Shanghai next month.

U.S. banks Morgan Stanley and Goldman Sach's J.Aron, French banks BNP Paribas and Societe Generale, and Deutsche Bank are among the most active houses selling risk management expertise to China.

China is expected to open its retail petroleum sector to foreign players from the end of this year, followed two years later by the more competitive wholesale business, as a commitment to the World Trade Organization.

State oil companies Sinopec Corp. and PetroChina together control almost 90 percent of the wholesale market and about 60 percent of the retail sector.

But early birds such as BP Plc. and Royal/Dutch Shell Group have been building marketing teams in eastern and southern China to run hundreds of petrol stations through strategic alliances with the two Chinese giants.

"It's like crossing the river by feeling the stones. You've definitely got to be here to understand the rules," said an Asian trader recently posted to one of China's largest import terminals, quoting a phrase used by late leader Deng Xiaoping.

Oil majors and traders are streaming into the eastern seaboard to build or rent oil depots, essential assets for trading and distribution.

BP, in a tie-up with a local firm, is expected to start up a 360,000-cubic-meter tank farm in Guangdong by the end of this year, its first such investment.

BP's US$86-million investment came after ChevronTexaco Corp., Shell and trader Glencore leased storage in Guangdong in 2002.

Independent oil services firm Titan (Holdings) Ltd., founded by Tsoi Tin Chun, a former small-town oil dealer from Fujian Province, is pumping more than US$60 million into oil and petrochemicals storage in Shanghai, Guangzhou and Quanzhou.

Banking sources said global institutions were waiting for the Shanghai Futures Exchange to establish a fuel oil benchmark market before setting up offices in China.

In preparation, international banks had hired Western-educated Chinese nationals in their early 30s experienced in oil trading, industry sources said.

"The amount of oil China is buying is going to have a greater impact on the global market. No one can afford to miss that market," an energy risk management manager at a European bank said.

(Shenzhen Daily July 7, 2004)

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