Niu Li

 

The Ministry of Commerce has issued the "Regulation of Crude Oil Market Management" and the "Regulation of Refined Oil Market Management" in an effort to further open China's petroleum market to the outside world and promote market-orientated reform in oil distribution.

 

This is set in the context of China's WTO transitional period having drawn to an end.

 

The regulations indicate that the government is serious about fulfilling China's WTO obligations.

 

They also signify the end of the era when the State monopolized the distribution of oil resources, with the State-owned China National Petroleum Corporation (CNPC) and China Petroleum and Chemical Corporation (Sinopec) as primary players.

 

The situation will now arise in which State-owned petroleum giants, transnational oil corporations and privately owned oil businesses are involved in competition.

 

Some people have long been crying "wolf" as the deadline approached for China to fulfill its WTO commitments to open the domestic crude and refined oil wholesale markets by December 11, 2006, arguing that transnational super players would have an overwhelming impact on the country's oil industry.

 

True, it is unavoidable that once the State monopoly in the oil market is ended, competition gets increasingly fierce and foreign players snatch a share of the domestic oil market. However, it takes time for overseas oil giants to set up their petrol stations, purchase Chinese gas stations and establish oil storage facilities across the country.

 

In addition, foreign players must abide by China's industrial policy and regulations on the management of foreign invested companies.

 

Chinese oil enterprises have enough time to make progress and enhance their competitiveness, thus absorbing much of the impact from external forces.

 

While overseas oil heavyweights are eager to enter the Chinese market, privately owned oil enterprises in the country are also yearning for the opening of the monopolized oil market.

 

In the late 1990s, when the Asian financial crisis negatively impacted the Chinese economy, the State released a package of policies to straighten up the mess in the domestic market. Small privately owned refineries, for example, were targeted, and control of the circulation of refined oil was tightened. The right to distribute oil was concentrated in the hands of CNPC and Sinopec.

 

Private oil businesses no longer had access to wholesale refined oil or petroleum sources.

 

Now the door is being opened to private businesses as a result of China's WTO membership.

 

Private businesses, including those operating in the petroleum field, are gaining wider living space. For example, by the end of November 2006, non-State-owned companies in wholesale oil made up 33.4 percent of the total and non-State-owned petrol stations accounted for 56.3 percent of the total.

 

Private businesses have entered into all links along the chain of refined oil retail sales in China.

 

As for market access, in the general context of China's abundant supply of capital, currently private businesses have no funding problems.

 

Moreover, restrictions, such as the minimum number of petrol stations a private business must have, are not imposed by the two Commerce Ministry circulars. This helps remove a major barrier for private businesses.

 

It should be noted, however, that the requirement of oil storage facilities of at least 10,000 cubic meters is still too high for some private oil players. This indicates that private oil companies have been given opportunities but not golden ones.

 

The opening of the oil market also facilitates the development of State-owned petrol companies.

 

Over many years, the State-owned oil companies grew up largely dependent on government support and protection.

 

Now the basic goal is to channel various kinds of capital into the Chinese oil market and cultivate a competitive market marked by transparency, competition and order.

 

The opening of the oil market is bound to bring competitive pressure on CNPC, Sinopec and other State-owned giants which are now flanked by two competing groups, transnationals and domestic companies.

 

On one hand, transnational oil super players have abundant capital, advanced technology and rich managerial expertise and offer good service. On the other hand, domestic private oil businesses, whose ownership is clearly defined, boast flexible operational mechanisms and high efficiency.

 

In the short run, however, neither transnationals nor domestic private oil businesses will be able to have much impact on the State-owned giants, because both have to readjust their operational strategies.

 

CNPC and Sinopec are already equipped with all necessary operational elements. In addition, the competitive edge of the State-owned oil corporations has been sharpened in recent years.

 

Currently, the companies that can really impact the CNPC and Sinopec giants are State-owned oil companies specializing in single product operations and the reorganized large-scale State oil corporations.

 

China National Offshore Oil Corporation, for instance, is emerging as a promising player, setting up large joint venture refineries in the south of the country. Their presence is bound to intensify competition in the petrol arena.

 

The author is an economist with the State Information Center

 

(China Daily January 17, 2007)