The Chinese oil market is becoming more competitive-sort of. On January 1, Measures for the Administration of the Refined Oil Market and Measures for the Administration of the Crude Oil Market issued by the Ministry of Commerce took effect, marking an era in which private and foreign oil companies can compete fairly in the oil market with Chinese state-owned oil enterprises.

Chong Quan, Spokesman of the Ministry of Commerce, noted that the opening of the wholesaling rights of refined oil and crude oil would create a new competitive situation in the Chinese oil market, which will be split among state-owned enterprises, private companies and foreign oil companies. Before, Chong said, the refined oil market was controlled by the China National Petroleum Corp. (CNPC) and China Petroleum & Chemical Corp. (Sinopec). The crude oil was distributed collectively by the government.

However, judging by the current situation, a much greater competitive market soon is unlikely, as the market is currently dominated by state-owned oil conglomerates.

State still in control

Pei Xiaofeng, an analyst with Everbright Securities Co. Ltd., said the oil market opening won't cause a major setback for state-owned oil companies.

"There are three reasons," said Pei. "First, the market opening doesn't mean it will be actually marketized, as the oil price is still controlled by the government. Second, after years of development, CNPC and Sinopec have established an integrated and comprehensive market network as well as a group of eminent sales professionals. They have had a major influence on the market and the market is deeply controlled by them. Third, the opening of the refined oil wholesaling market doesn't mean the opening of oil imports. Currently, the government is unlikely to open the refined oil import rights to foreign or private oil companies."

Obviously, it is most difficult for private and foreign companies to shake the position of the CNPC and Sinopec.

As major suppliers of oil, CNPC and Sinopec enjoy absolute control over the Chinese refined oil market due to the comprehensive operational and sales network they have established through years of monopoly.

Niu Li, an economist with the State Information Center, said private and foreign oil companies are also still subject to the pricing management mechanism by the Chinese Government.

At present, the price of Chinese refined oil is decided by the National Development and Reform Commission (NDRC), a government organ. The international oil price fluctuates from time to time, while the Chinese oil price, after being set by the NDRC, will be maintained for a long period of time. Sometimes, the domestic oil price will be lower than the price of oil imports.

Sinopec recently revealed that China will carry out a new refined oil pricing mechanism, which will be based on prices for Brent crude oil from the United Kingdom, Dubai crude in Saudi Arabia, and Minas in Brazil, instead of the former mechanism based on prices in New York, Singapore and Rotterdam.

However, oil companies cannot price oil freely. According to China Securities Journal, the reason is that the government supervisory department needs to take many aspects into consideration, including the purchasing power and price index, energy conservation, renewable energy development, fuel surcharges and international oil prices.

Niu pointed out that if the refined oil pricing rights remained unchanged, the refined oil retailing price would remain the same. Therefore, state-owned oil companies, which have absolute control over domestic oil sources, would unlikely be hit hard.

Foreign players

As the second largest oil consumer, China is becoming a major playground for international oil barons. In December 2004, China opened its refined oil retailing market. By now, the world's largest oil and petrochemical companies have established factories or networks in China and most of them have entered the Chinese oil and petrochemical industry save for the wholesaling sector.

The opening of the wholesaling business of the refined oil market will make it convenient for foreign and private oil enterprises to enter the crude oil and refined oil wholesaling sector.

The Ministry of Commerce noted that beginning January 1, 2007, companies engaging in the refined oil wholesaling business must have registered capital of at least 30 million yuan with oil terminals of 10,000 cubic meters. They should also possess distribution channels for refined oil, special railway lines, road transportation vehicles, or a port capable of handling 10,000 tons of refined oil. Additionally, those companies must have a long-term and stable refined oil supply channel.

Chong said a buffer period of 18 months, starting from January 1, will be given to state-owned oil companies. The state-owned refined oil wholesaling companies and storage companies can be reshuffled in the next 18 months, and the retailing companies in six months. After the reshuffle, the Ministry of Commerce, together with other relevant departments, will straighten out and rectify the refined oil companies throughout the whole country.

At the present time, some foreign oil giants are speeding up their efforts in establishing logistic infrastructures, optimizing the refined oil distribution network so as to enter the Chinese refined oil wholesaling and retailing market as soon as possible.

For instance, Shell Oil Co., ExxonMobil and BP have been investigating Chinese coastal areas like Dalian City, Zhejiang and Guangdong, intending to establish their own oil terminals.

As a matter of fact, BP established BP Nansha oil terminal, the first joint venture oil terminal in China, with Guangzhou Development Industry (Holding) Co. Ltd. This oil terminal is situated in the center of the Pearl River Delta, capable of reserving about 360,000 cubic meters of refined oil and petrochemical products. It is also large enough to welcome an 80,000 ton ship.

Russian state oil company Rosneft is planning to set up gas stations in China with CNPC. The gas stations will sell refined oil produced by Rosneft and CNPC. The company intends to penetrate the Chinese refined oil wholesaling market through the existing logistical network established by the CNPC.

The 10 million ton oil refinery project carried out by Sinopec has caught the attention of Saudi Aramco company, which intends to purchase 25 percent of the stock in the project.

"The opening up of the wholesaling market will attract more investment from foreign companies," said Zhu He, Assistant Chief Engineer of the Economics and Development Research Institute under Sinopec.

Zhu noted that foreign oil companies will continue to perfect their sales network in relatively developed coastal areas in southeast China and are moving on to inland and western parts of the country to set up wholly foreign-owned oil sales companies. Currently, they are enlarging their shares in existing joint ventures to pursue more independent business development.

Compared with foreign oil giants, Chinese domestic private oil enterprises are not as optimistic as some expected. Although private oil companies applauded the loosened wholesaling rights and have been preparing for extending market share, the opening of the market does not mean private companies can immediately purchase sufficient refined oil from the domestic market. In the short term, they will still have to rely on state-owned oil controllers for oil sources.

Han Xuegong, professor with the Sinopec Management Institute, pointed out that as for private oil enterprises, their biggest rivals are neither Sinopec nor CNPC, but international oil giants.

Big brother watching

Oil is defined as a strategic resource in China. In the past, the Chinese Government vigilantly supervised the oil industry and the opening of the wholesaling market doesn't mean the supervision will be loosened.

In a Xinhua report, Zhou Dadi, Director General of the Energy Research Institute of the NDRC, illustrated China's supervisory plan over the oil industry.

Zhou believes that the nature of oil as a strategic resource ensures that China will never loosen control of it, especially when oil prices are on the rise as they are now.

"The opening of the crude oil and refined oil wholesaling market will inevitably bring about clashes and setbacks for some," Zhou said. "Therefore, the government's supervision-especially legal supervision-must be completed. The law should guarantee fairness in terms of market access and competition as well as resource allocation. Vicious competition should be avoided."

As for the foreseeable competition in the oil retailing and wholesaling market, Zhou stated that more market players can help optimize the property structure and boost company productivity and competitiveness. However, Zhou worried that opening the market could also lead to cutthroat competition and more risks to company business operations. The number of oil refineries will likely decline and the refining industry will become highly concentrated, he said.