By Michael Lelyveld
China’s reform plan for its oil and gas industry has drawn mixed reviews as the government seeks private funds for state companies without surrendering control.
On May 21, the cabinet-level State Council and the Communist Party of China (CPC) Central Committee issued new guidelines for the petroleum industry under the heading “Several Opinions on Deepening Oil and Gas Sector Reform.”
The vague blueprint outlined a series of measures “to give the market a decisive role in the industry,” said the official Xinhua news agency.
A key feature of the plan is to attract private investment in the country’s beleaguered state-owned oil monopolies—China National Petroleum Corp. (CNPC), China Petroleum & Chemical Corp. (Sinopec), and China National Offshore Oil Corp. (CNOOC).
All have been pressured by the slump in world oil prices since mid-2014, although first-quarter earnings staged a partial recovery at both CNPC PetroChina and Sinopec after recent price increases. CNOOC does not report quarterly earnings, but revenues rose 55.8 percent due to higher prices.
The new guideline for the sector highlights the mixed-ownership model, which the government has promoted for state-owned enterprises (SOEs) with limited success since 2013.
Last month, the National Development and Reform Commission (NDRC), the top planning agency, said that nearly 20 SOEs had opened their doors to mixed-ownership investments.
But aside from Sinopec’s decision to sell up to a 30-percent share in its marketing operations for oil products to “social and private investors,” examples of such partial privatization in the petroleum sector have been few and far between.
CNPC has said it is ready for private interests to take minority shares of up to 49 percent in its exploration activities.
The latest reform announcement may push the door slightly more open for private investment in China’s national oil companies (NOCs), but it falls far short of the “big bang” of reforms that the industry probably needs.
After a long period of stagnation, China’s domestic oil output has dropped by 6 percent to 3.9 million barrels per day so far this year due to high production costs, while imports have soared to meet demand growth.
“Reform can’t come soon enough for China’s oil giants,” read a headline from The Wall Street Journal’s “Heard on the Street” column.
The state-owned companies “spend too much employing too many people while being expected to sell fuel at a discount when prices rise sharply,” the paper said. PetroChina employed seven times more workers than U.S.-based Exxon Mobil Corp. to produce only slightly more oil last year, it said.
Xinhua’s report on the reform guidelines acknowledged the problems of state ownership in the oil industry.
“This ‘elite club’ has given rise to inefficiency in resource allocation, which the government is trying hard to correct,” said Xinhua.
A move in the right direction
Analysts say the guidelines move the industry in the direction of reforms, but how far and how fast remain to be seen.
The reforms could lead to “some erosion of the NOCs’ current dominant market positions,” said a review by London-based Fitch Ratings. But the companies are expected to maintain strategic importance, citing their roles in providing energy security and affordable fuels.
“The opinions continue the government’s drive to reform the oil and gas industry,” Fitch said. “However, the government has not set any timelines or taken any substantial regulatory measures, which imply the execution of the reforms will take time.”
The repeated encouragement for private investment in the sector may offer the most promise among the eight categories of regulatory changes. But the government has made clear that the NOCs will keep their dominant roles.
Xinhua said that “private companies will be permitted to take part in oil-gas exploitation and gradually build a system that is led by state firms and jointly participated by various organs.”
The plan would foster competition by letting non-SOEs apply for licenses to develop petroleum projects, and allowing more oil and gas blocks to be offered for bidding through tenders, Platts energy news service said.
Private capital would also be welcomed to invest in and operate oil and gas storage facilities, Xinhua reported.
Funding from sources including asset-management groups and insurers could take stakes in the NOCs or their spinoffs, but these would continue to be minority shares.
Some of the guidelines mirror European competition reforms by seeking to separate transmission networks from energy suppliers and requiring third-party access to pipelines.
Perhaps the biggest reform in recent years has been the opening for independent refiners to import limited amounts of crude with assigned quotas since 2015.
But these will be subject to “tighter scrutiny and supervision,” according to Platts. The reforms call for changes in export rules after the independents were barred from exporting fuels last year.
China’s state-controlled system for domestic fuel pricing also “should be more market-oriented, and government should step in only when abnormal price fluctuations occur,” the opinions said.
Signs of internal divisions
The exceptions and reservations are seen as signs of internal divisions in the government and resistance to change in the oil sector.
“It’s a constant struggle to try to get their oil companies to act like private, disciplined investors … but just simply not being willing to give up direct control,” said Mikkal Herberg, energy security research director at the Seattle-based National Bureau of Asian Research.
“And so, you’re constantly struggling to find some magic formula that draws in foreign capital or private capital and forces these companies to be more efficient,” Herberg said. “You can’t have it both ways.”
The presentation of the guidelines as a series of “opinions” sends the message that political forces in China are still debating the reforms behind the scenes, Herberg said.
Analysts appear divided on whether the blueprint has cleared the way for foreign as well as private investment in China’s petroleum industry.
A report by oilprice.com said that foreign companies “will soon be able to invest in China’s upstream (exploration and production) sector through joint ventures with the country’s three major fossil fuel companies,” citing the guidelines.
But Fitch, Platts and Xinhua made no mention of roles for foreign firms.
Whether the government allows access or not, the appeal for foreign oil companies may be limited by the country’s difficult geology, high production costs, and state controls.
Herberg said that foreign companies might be interested if they were offered some special opportunity to invest upstream in China or in some joint venture abroad. But in a world market flooded with oil, China’s attractions may not be a top choice.
One primary consideration for any investors will be not only what the reforms are but when they will be implemented.
“We can only evaluate this 10 years from now,” Nomura Securities analyst Gordon Kwan told The Wall Street Journal. “It’s not going to be an overnight success.”