Two new guidelines for wholesale oil product and crude licenses are set to bring about de facto market deregulation. But analysts say reform of the oil-pricing mechanism is crucial in terms of whether new players enter the market.

 

"The two guidelines give maneuverability to the market regulations issued by the Ministry of Commerce (MOFCOM) late last year, deregulating the wholesale oil product industry. Previously, there were only general principles for market deregulation, which were not operational," Niu Li, a veteran economist with the State Information Center (SIC) affiliated to China's top economic planner, the National Development and Reform Commission, told China Daily.

 

The new requirements for private and foreign companies to get licenses are appropriate, according to Niu. "My overall impression about the guidelines and deregulation rules is that they are adequate to free up the market while keeping enough control to ward off speculation," he said.

 

The Ministry of Commerce issued two guidelines recently on how domestic and overseas companies can apply for wholesale crude and refined oil licenses. The application review process takes 40 working days for domestic private companies and four months for foreign firms.

 

"We are proactively preparing for wholesale business in line with the new license criteria," said Liu Junshan, China National Offshore Oil Corporation (CNOOC) spokesman.

 

Liu implied that CNOOC's refinery in Guangdong needed a wholesale license to build up sales channels before it comes onstream in 2008.

 

The guidelines detail MOFCOM's Regulation of Crude Oil Market Management and its Regulation of Refined Oil Market Management released in December. The regulations were designed to open up China's wholesale oil market, traditionally dominated by CNPC and Sinopec.

 

The two regulations stipulate that oil product wholesalers must have one-time annual crude processing capacity of over 1 million metric tons. And all applicants should own an oil product depot with a minimum storage capacity of 10,000 cubic meters. The previous restriction on the number of gas stations a private company must own has been lifted.

 

Although the market has been deregulated to a certain degree, the number of newcomers will depend on their profit-making capacity. China's current oil product pricing mechanism does not guarantee a decent profit margin and therefore is not luring new players, Niu said. The Chinese government keeps a tight grip on the pricing of major oil products, keeping the price below the global level to avoid supply fluctuation and inflation.

 

"China's oil-refining business is plagued by huge deficits because of the high crude price and the low domestic wholesale price. The current oil product pricing system does not encourage new wholesalers. Therefore, there might not be many newcomers in the short term," said a senior media official at Sinopec, Asia's top refiner, on condition of anonymity.

 

But in the long term, Sinopec must be fully prepared for tough competition, as further reform of the oil-pricing mechanism is expected, the official said.

 

"We do not believe a State-planned pricing mechanism would last as the market matures and energy prices are raised to curb consumption. Therefore, we have to be ready for market-oriented competition by figuring out every way to enhance our market share and lower costs," the official said.

 

Who benefits?

 

Given current market circumstances, it is not difficult to see who will benefit from the new guidelines and rules. Private firms cannot afford to enter the wholesale market as long as the current oil price mechanism is in place, restricting profits, said Han Xuegong, a senior consultant at CNPC.

 

Instead, State-owned energy giants, such as top offshore oil producer CNOOC and Sinochem, who are not after instant profits, will be the real beneficiaries, both Han and Niu from the SIC said.

 

"CNOOC will get its Guangdong refinery onstream very soon. Also it has large storage facilities ready. The opening up of the market is certainly positive news for CNOOC," Niu said.

 

Foreign oil firms will be also eager to seek wholesale oil licenses, because they have to feed their filling stations in China. Moreover, it would not be a difficult mission for them to meet market deregulation rules in terms of either storage facilities or refineries, said Dong Xiucheng, vice-dean of the School of Business Administration at China Petroleum University.

 

"But the key is they need time and approval to get these facilities ready. So they won't be as enthusiastic as CNOOC or the other State-owned giants," Dong said.

 

(China Daily April 3, 2007)