18 February 2019

Losing crude import oligopoly will have huge impact on big oil

When Fu Chengyu {傅成玉}, chairman of China Petroleum & Chemical Corp. (Sinopec) (00386.HK, 600028.CN), was asked in August to comment on efforts to open up the oil and gas industry, the energy veteran revealed that something big is being cooked up in the run-up to the plenum of the Communist Party elite in November.

Since last year Beijing has been pressing for market-based reforms in the energy sector, including introducing new players in the operation of cross-border oil pipelines and liquefied natural gas terminals. All these changes point to putting an end to the long-standing oligopoly of PetroChina (00857.HK, 601857.CN), Sinopec and CNOOC (00883.HK).

The reform drive is bound to get on the fast track after the third plenary session of the ruling party’s central committee. China Securities Journal quoted anonymous sources as saying that Beijing will take the unprecedented action of granting permission to refineries outside the three oil giants to import crude in volume.

A combined import quota of 20 million tons will be assigned to the refineries, the newspaper reported. If fully used, it will be equivalent to 7 percent of the country’s overall imports in 2012. Shandong Haihua (000822.CN), Sinochem Group and Shandong Dongming Petrochem Group are said to have been shortlisted for the initial batch of firms that can directly purchase crude oil overseas.

At present, the output of domestic refineries, which are mostly located in the eastern Shandong province, is subject to the feedstock supply of the big-three oil firms. Eliminating this dependency will immediately drive down their refining costs.

Although the initial quotas are limited if compared to the country’s total consumption, the potential knock-on effects of such a move on the entire sector will be significant.

An increase in crude oil supply, along with lower refining costs, will fuel competition in downstream operations such as distribution and retailing, which account for a considerable portion of the earnings of PetroChina and Sinopec.

– Contact the writer at [email protected]



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