China's two largest oil producers will team up with the country's top aviation oil dealer to establish a new shareholding aviation oil company to introduce more competition into China's jet fuel market.

China National Petroleum Corp (CNPC), and China Petroleum and Chemical Corp (Sinopec Corp), parents of Hong Kong-listed PetroChina and Sinopec respectively, will set up a joint venture with China Aviation Oil Holding Company (CAOHC).

The new firm will supply jet fuels to mainland airports, according to an official from the Beijing-based aviation oil company, which now holds a near-monopoly over the country's jet fuel market.

"It is a restructuring of the aviation oil company by introducing more shareholders," CAOHC's spokesman told China Daily yesterday.

According to the aviation oil company, CAOHC will take 51 percent of the new joint venture, CNPC will own 21 percent, and Sinopec Corp will control the remaining 29 percent.

Officials at CNPC and PetroChina said they were unaware of the new company, although Sinopec Corp officials confirmed the news. They said the move was a small step for Sinopec Corp and will not affect its core businesses, which are focused on petrochemical production and oil and gas exploration.

The CAOHC spokesman said the idea for the new venture was raised as early as 2002 by the General Administration of Civil Aviation of China (CAAC) in an attempt to produce a more consolidated and competitive industry.

He said the merger had nothing to do with the futures trading scandal at its Singapore-based affiliate, China Aviation Oil Corp (Singapore), which lost US$550 million in speculative trading last year.

The spokesman declined to give details of a timetable for the venture's establishment.

But some local media outlets reported that the new company will be established by the end of this month.

When asked about the specific management arrangements that might result in the change of some senior officials within the three oil giants, the spokesman declined to comment, saying "that is too sensitive for the moment."

According to a new industrial policy initiated by the CAAC, the country is encouraging various investors to participate in China's jet fuel market. The new policy, passed in April by the CAAC and aimed at introducing competitive investors into the country's aviation sector, is to take affect from August 15, according to the CAAC website.

Inspired by the new policy, industry sources said the country's fourth-largest airline, Hainan Airlines Group, is also mulling over a link up with CNPC and Sinopec Corp to set up a new jet fuel supply firm.

A Hainan Airline official surnamed Huang yesterday said her company had not yet produced a detailed plan.

"There are still a few days left before the new policy comes into effect, and we have not devised concrete objectives from the new government document," Huang yesterday said.

CAOHC currently supplies most of the jet fuel consumed by the mainland's airports, with a small proportion sold by local oil dealers, according to Gong Jinshuang, a senior analyst with CNPC.

CAAC statistics show costs for China's airlines, money mainly spent on jet fuel, reached 27.8 billion yuan (US$3.4 billion) in the first quarter of this year, up 17.3 percent year-on-year.

Industry analysts said the merger will help break the current monopoly held by CAOHC, and will help fend off fierce competition from the end of next year when the government frees up the wholesale refined oil market by allowing foreign companies to participate into the business.

"It (the merger) will make the Chinese jet fuel company more competitive on the world stage, but the market will not show a great change following the government's new policy and more mergers," Gong yesterday told China Daily.

The CNPC analyst attributed the above argument to the special conditions in the jet fuel sector, which has a limited market based only at the country's airports.

"It (the jet fuel service station) is not like a common gasoline or diesel service station, where you have plenty of cars queuing up," Gong explained.

Han Xuegong, another CNPC analyst, said it was still difficult for independent oil dealers to get involved in the jet fuel industry because large investment was needed for what is a risky business.

(China Daily August 9, 2005)