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Gaurav Agnihotri

Gaurav Agnihotri

Gaurav Agnihotri, a Mechanical engineer and an MBA -Marketing from ICFAI (Institute of Chartered Financial Accountants), Mumbai, is a result oriented and a business focused…

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China To Create An Oil Supermajor Twice The Size Of Exxon?

China To Create An Oil Supermajor Twice The Size Of Exxon?

China, the fourth largest oil producer in the world (behind the U.S., Saudi Arabia and Russia) is undoubtedly one of the biggest stakeholders in the global oil and gas markets. Low oil prices and slowing domestic economic growth have compelled the second biggest global consumer of oil to accelerate its economic reforms.

In an interesting move that can be seen as a part of Chinese president Xi Jinping’s ongoing efforts to reform China’s bloated energy sector, the Chinese government is reportedly planning to separate the $300 billion pipeline assets from its biggest state owned energy companies - PetroChina and Sinopec. 

TopTenNetImporters2014

Why spin off Sinopec and PetroChina pipelines?

China’s energy policies have been mostly dominated by the country’s growing appetite for oil and its reliance on oil imports. Its ‘big three’ state owned oil companies (Petrochina, Sinopec and China National Offshore Oil Corporation) have dominated the domestic oil and gas sector for decades. Related: New Silk Road Could Change Global Economics Forever

As China’s consumption rate is growing way ahead of its production rate, the Chinese government is compelled to encourage competition and attract more foreign investment in its oil and gas sector with the intention to improve its domestic production. In the current scenario, Petrochina and Sinopec’s dominance on Chinese pipeline infrastructure makes it extremely difficult for any other company to use these pipelines. Other companies need permission from the two National Oil Companies who have the right to turn down any usage requests.

According to Lin Boqiang, the director at Energy Economic Research Centre at Xiamen University, “"The pipeline business is like the power-transmission business that should be run by independent companies that allow equal access to all market players, by allowing one or two companies to dominate the market, you create a huge barrier for other companies to compete.” 

ProductionConsumption932016

A huge gap between China’s oil production and consumption

Who could benefit from the possible spin- off?

As reported in the South China Morning Post, PetroChina and Sinopec have a combined pipeline network of more the 100,000 kilometers. If Beijing succeeds in spinning off Sinopec and PetroChina’s pipelines, it could signal the beginning of a reform that could reduce the existing monopolies of the two companies. This move could greatly benefit the international oil companies (IOCs) who are either already present or are willing to enter the Chinese oil and gas sector. Related: OPEC Struggling To Keep Up The Pace In Oil Price War

Onshore production in China is mostly limited to China’s NOCs. However, IOCs have now been granted greater access to offshore oil prospects and technically challenging onshore gas fields. IOCs that are involved in China’s offshore E&P (through joint ventures or production sharing contracts with a Chinese NOC) include: ConocoPhillips, Shell, Chevron, BP, BG, Husky, Anadarko, and Eni, among others. All these companies could benefit from the possible spin off as this move could encourage competition between the Chinese NOCs and foreign oil and gas companies.

Are these reforms the real deal?

Rumors circulating in Beijing hint that the Chinese government is toying with the idea of combining the nation’s energy companies in order to compete against the likes of ExxonMobil and Shell, revive its slowing economy, and battle low oil prices. One of the options under this plan is to combine PetroChina with its arch-rival Sinopec. The biggest reason for this merger would be to increase China’s energy efficiency by eliminating the overlapping operations of state-owned oil and companies in exploration, refining, and retail. Related: China Builds Influence In Latin America As Commodity Prices Tank

If any such merger takes place, the newly formed corporation could be twice as big as ExxonMobil. However, the merger of Sinopec and PetroChina might not happen at all, as the resulting company would become too big for its own good. Moreover, the resulting job losses from consolidation would be something that the Chinese regime thinks twice about.

The central government is currently preparing to shuffle the leadership of PetroChina, Sinopec and CNOOC. According to Willy Wo- Lap Lam, an adjunct professor at the Chinese university of Hong Kong, the changes being made to China’s energy champions “signal that the central government wants to continue to deepen reform of the state-owned sector, and the change starts from the top. These reforms could involve scaling back the oil companies’ monopolies in certain areas little by little.”

By Gaurav Agnihotri of Oilprice.com

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