China's state-owned oil companies-Sinopec, CNOOC, PetroChina, and Sinochem-are discussing an arrangement to buy crude oil together instead of individually, to avoid bidding wars and gain more bargaining power, unnamed sources in the know told Bloomberg.
The group has already secured the support of the central government and its first step as a collective buyer would be to bid on Russian and African oil cargos on the spot market, the Bloomberg sources said.
If the group bidding pans out, it could indeed give the four quite a lot of bargaining power: Bloomberg notes that Sinopec, CNOOC, PetroChina, and Sinochem together import more than 5 million bpd of crude oil, which is more than 20 percent of OPEC's total daily production. That stood at a little over 24 million bpd as of May.
The idea of these four companies grouping together first emerged last year, but it seems the time was right to give it a try this year, amid the havoc that the coronavirus outbreak wreaked on oil markets.
China's state giants, according to Bloomberg, struggled to maintain their rate of imports during the worst of the crisis, under their long-term contracts with large exporters such as Saudi Arabia and the UAE. The fact that the grouping is taking place suggests the majors want to be more flexible for the future, and not as bound by the so-called nomination process that gives the oil seller power to decide on the final volumes to be delivered even if the buyer cannot accommodate all of them.
China's state-owned oil companies have been among the worst affected by the Covid-19 crisis, according to analysts. All three firms posted losses for the first quarter and cut capital expenditures for this year as the oil price collapse and the fuel demand crash dented their revenues.
Going forward, revenues are expected to continue to be weak this year, and losses will likely mount in the coming quarters. Longer-term prospects are brighter due to government support and orders for companies to boost oil and gas production in China.
By Irina Slav for Oilprice.com
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Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. More
Comments
This isn’t different from the concept behind the founding of OPEC sixty years ago. Nor is it different from Tokyo Electric Power Company and Tokyo Gas Company forming a group to buy all the LNG needs of Japan at the most competitive prices.
It is also similar to the grouping of Korea Gas Corp (KOGAS), Japan’s JERA and China National Offshore Oil Company (CNOOC) which collectively represent one-third of the world’s LNG purchases.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London