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Oil industry well-greased for post WTO competition
2002-01-25
China Daily
The government is teaming with domestic oil companies to sharpen their competitive edge so they can hold their own against international oil giants now that China is a member of the World Trade Organization (WTO).
In late October, the State Development Planning Commission linked the domestic refined oil price, which used to be pegged to the Singapore market only, to the average price on the Singapore, Rotter Dam and New York markets.
Analysts have said the move is expected to raise the profitability of domestic refineries, most of which are under the control of China's two largest oil companies, Sinopec and PetroChina.
The average price of the three markets is 5 per cent to 10 per cent above that of the Singapore market alone.
The two companies are allowed to fluctuate the benchmark retail price set by the government by 8 per cent, rather than the 5 per cent used in the past. That gives the two companies more freedom to decide their retail price.
As required by the WTO, China's tariff on gasoline will be lowered to 5 per cent from this year's 9 per cent. The tariff on diesel, kerosene and fuel oil will remain unchanged at 6 per cent, 9 per cent and 6 per cent respectively.
This year China plans to allow companies other than the four State-designated traders to import 7.2 million tons of crude oil and 4 million tons of refined oil.
The new importers will be allowed to increase their crude oil imports by 15 per cent a year for the next 10 years. Their refined oil imports will also be allowed to rise by 15 per cent until 2004, when the import quota on refined oil is eliminated.
But insiders worry that the gradual opening of the market may trim the profitability of China's two largest refined oil retailers.
To cushion the impact, the government stipulated in October that only Sinopec and PetroChina could build new petrol stations.
Private companies now control half of the petrol stations in China, with the other half dominated by Sinopec and PetroChina.
An official from the commission has said the move will help the two companies gain enough of a stronghold before China opens its retail business three years later and its wholesale business five years later. The two companies regard petrol stations as the bottom line for their survival.
"If we control the retail market, the only way for foreign companies to enter the market is to co-operate with us," said Li Yizhong, Sinopec's chairman.
The two companies claim they will invest billions of US dollars to acquire or build petrol stations within five years.
But they will run into difficulties as foreign companies flood in.
Overproduction on the domestic market sent the price of refined oil downward by almost one-third, with stockpiles lingering around 10 million tons.
The worse market condition forced the two monopolists into a price war in some retail markets. The cost of some goods fell below the level set by the government.
Later, PetroChina and Sinopec agreed to join hands to control their production of refined oil to push the prices back to normal. But the situation has barely changed because of weak market demand.
Analysts predict market conditions will deteriorate even further.
A flash point of the oil sector this year comes from the China National Offshore Oil Company (CNOOC), the third largest oil company. It was finally listed on the overseas markets in February.
The company sheltered its first initial public offering attempt in 1999 because of the adverse market condition at that time.
CNOOC raised about US$8.7 billion by selling 1.6 billion new shares.
The biggest three oil giants have been listed on major overseas stock markets, with PetroChina raising US$3.1 billion and Sinopec raising US$3.7 billion last year.
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