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Business
Business
UPDATED: October 13, 2007 NO.42 OCT.18, 2007
Selling to Survive
Private gas stations and oil depots in China are forced to sell packaged assets to foreign buyers after struggling through nine years of gas shortages
By TAN WEI
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Zhao Youshan, Director of the Petroleum Distribution Committee of the China General Chamber of Commerce (CGCC), runs the first private gas station and the first private oil depot in Heilongjiang Province. He used to take pride in the oil storage capacity of 20,000 cubic meters his depot holds, a capacity that supplies as many as 1,000 gas stations in the province. At present, how to fill all these empty tanks is his biggest headache.

"I sold the other five gas stations I owned after years of hard work," said Zhao. "The only one I have now is what was the first private gas station in Heilongjiang, but I'm without a drop of oil."

Rising global oil prices and soaring sales of automobiles in China have marked the past few years. On average, nearly several million new cars-either gasoline- or diesel-fueled-hit the road every year. Even with the continued increase in customers, private gas stations and oil depots unable to turn a profit are faced with empty tanks and are under great pressure to survive.

Zhao's problem is a typical one facing many private gas and oil station owners in China. "Without a sufficient oil supply, the oil distribution business will shrink quickly, as will private investments in the market," said Zhou Tianyong, Deputy Director of the Research Office at the Party School of the Central Committee of the Communist Party of China.

Yet the predicament that private gas stations face offers foreign investors a good chance to enter the energy market in China. Recently, French oil giant Total Group, the world's fourth largest oil and gas company, finished purchasing deals to buy 20 private gas stations in Liaoning Province. And at the same time, the French company has been running through related procedures for buying three private Chinese wholesale oil companies, revealed Zhao.

"Short on oil supply, local private stations have found it impossible to maintain their operations," said Feng Wei, General Manager of Tianjin-based China Port Well Yield Logistics Co. Ltd. "That is the key to Total's success in purchasing all these private gas stations."

Other than selling their packaged assets to foreign buyers, some private oil business owners have sought foreign investments in hopes of turning their stations into local flagship operations, said Feng.

A prime example of this is the cooperation between Shell and Shuorun Petrochemical Co. Ltd., a subsidiary of Doyen Holding in Chongqing. The joint venture has engaged in the gas station business in China under the brand of Shell since 2006. Business has gone smoothly, according to Shuorun's Deputy Manager, Yong Shisheng.

SK Energy, South Korea's largest refiner, has also found a foothold in China's market. It is planning to purchase oil refineries, oil depots, docks and gas stations in Shangdong Province in order to make it the beachhead for its business expansion in China's oil distribution market.

A good bargain

Private oil assets have attracted as much as $300 million in overseas capital up to this point and they should have sold their assets, according to Zhao, because they "have no alternative."

Many oil depots were run at a loss over the past decade due to the oil supply shortage. Because investing in a gas station can cost several hundred thousand to 1 million yuan ($133,000), and for an oil depot it costs nearly 100 million yuan, it has been difficult for these owners to make a profit and just as hard to quit the business while running at a loss.

Private gas stations buy oil products either from private oil depots or from several oil majors like Sinopec and CNPC which also supply oil products for private depots. This comes from a 1999 stipulation that basically gives Sinopec and CNPC a monopoly over the domestic oil product wholesale business-all domestic oil refiners have to hand over their oil products to the wholesale companies subordinated to the two oil giants and are not allowed to sell their products themselves. As a result, the two giants control the supply as well as the pricing for oil products in China. They have been reluctant to sell gas and diesel to private companies because the monopoly fed the strong growth of their wholesale subsidiaries, leaving private oil businesses no chance to survive.

"All my money has been invested in the company," said Zhang Shunjie, board chairman of a Liaoning-based petrochemical company. "But neither of the two giants has ever supplied us since 1999 and we can hardly make both ends meet by finding oil from other dealers.

"I've been trapped for almost 10 years," said Zhang. "I want a good bargain as foreign buyers are scrambling for the precious resources. It's imaginable that based on these resources foreign oil investors will soon be able to compete with domestic giants for the market. Aren't we aware of the value of what's in our hands? We have been struggling for life under the duopoly of state oil giants for years and are left with no choice but to sell."

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