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China Embraces the World Market

Case Studies - Specialist Boxes

China builds oil giants to reach global resources

In 1998, China's weak oil security outlook and looming foreign competition with WTO entry encouraged the Chinese government to overhaul the domestic oil and petrochemical industries in an attempt to build internationally competitive oil and petrochemical companies. In 1993, China became a net importer of crude oil abandoning a thirty-year oil self-sufficiency policy. Currently China imports about one third of its crude oil needs and this is expected to rise to about a half by 2010. Since the early 1990s, the Government has stepped up efforts to purchase shares in overseas oil resources.

Industry structure

Two vertically integrated oil companies modelled after global players emerged from the 1998 restructuring, China National Petroleum Corporation, CNPC and China Petrochemical Corporation, Sinopec. These companies are consolidating their monopoly over China's on-shore markets and actively tapping overseas oil fields. The government's restructuring assigned downstream refinery and petrochemical assets in northwestern China to the former state oil producer, CNPC and upstream oil extraction facilities in southeast China to former petrochemical manufacturer, Sinopec. The Government also granted these two companies exclusive import and export rights for oil and petrochemical products and took over all local government wholesale and retail companies in these sectors.

Recent restructuring

In the late 1990s, the Government packaged the best oil and petrochemical assets of CNPC and Sinopec into stock companies, PetroChina Company Limited and China Petroleum and Chemical Corporation, Sinopec. This allowed the companies to shed their high levels of debt, redundant workers and heavy social welfare responsibilities and to reduce governmental interference in their daily business operations. In 2000PetroChina and Sinopec listed in the stock markets in Hong Kong, New York and London. The third state oil sector monopoly, China National Offshore Oil Corporation, CNOOC, China's offshore oil and gas exploration and production monopolist listed overseas in 2001.By introducing private ownership into the new oil companies the Government hoped to increase their efficiency and reduce the massive losses common in state owned enterprises.

Looking ahead

With entry to the WTO, China's oil companies will lose their monopoly over domestic oil and petrochemical markets. As local oil companies currently lag global players in production levels, efficiency, technology and innovation, analysts are watching carefully to see if they can survive market competition from multinational oil companies.

However, Chinese oil companies have several current and potential competitive advantages. They have ample scope for reducing their costs, lower wage and salary costs and familiarity with local conditions. Their current monopoly over markets means multinationals wanting to access the vast Chinese markets have no option but to team up with them. Such cooperation should boost their technology levels and management expertise.

However, all these advantages could be lost if the Government fails to carry through with politically difficult reform programs designed to improve management and corporate governance, further reduce state shares in these companies and improve managers' remuneration.

Author: Dr Yinhua Mai, Researcher, Centre of Policy Studies, Monash University, Melbourne.


This page last modified: Tuesday, 10 December 2002 11:42:35 AM

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