Break up of state oil monopoly?

As part of the efforts to dismantle the SOE's monopoly in the petroleum sector, China should separate the oil wholesale business away from the three major State-owned industrial enterprises, experts suggested. Song Qiong/Xinhua

Oligopolies prevent fair and reasonable competition inindustries

Industry experts suggested that China should establish a separate and independent company to operate the oil wholesale business and manage the supply to retailers, to break up the de facto monopoly of the three State-owned large oil companies, especially the two onshore oil giants.

A major portion of China's oil stations are run by Sinopec Ltd and PetroChina Co Ltd, and although oil stations owned by foreign companies and private investors do exist, they have a marginal significance in terms of market share.

"As a good way to form fair market competition in the petroleum sector, we should make some adjustments in the oil retailing field by stripping away the oil station business from three main State-owned oil enterprises and set up another SOE specialized in the operation of oil stations," said Xu Baoli, director of the research center of the State-owned Assets Supervision and Administration Commission.

As China's new leadership has pledged a series of economic reform plans to invigorate the economy this year, dismantling the SOEs' monopoly in industries including petroleum, telecommunications and finance have become major targets.

During the World Economic Forum in Dalian, Liaoning province, earlier this month, Chinese Premier Li Keqiang said China is now at a crucial time and the country won't achieve sustainable economic growth without structural upgrading and transformation.

"We need to classify SOEs into competitive and non-competitive areas to deal with the so-called monopoly problem of SOEs," said Shao Ning, SASAC's vice-chairman.

In the service industries, which are considered a competitive area and include telecommunications and finance, a series of measures will be taken by the government to promote market access and competition.

In the domestic oil market, three main State-owned petroleum giants — China National Petroleum Corp, China Petroleum and Chemical Corp and China National Offshore Oil Corp — have dominated main business areas, including oil exploration, refining and retailing, for the past decades.

Xu said he believes that the oil station business should be made independent from CNPC, Sinopec and CNOOC and more encouragement should be given to foreign and private investors to create more competition in terms of price, quality and services.

Although it was opened to foreign investors in 2004, the domestic petrol station market is still dominated by Sinopec and CNPC, both of which own more than 80 percent of the country's petroleum retail market.

By the end of 2011, Sinopec had more than 30,000 petrol stations. By the first half of 2012, PetroChina had more than 19,000 petrol stations, accounting for about 40 percent of the market share.

Private and foreign companies planning to enter the oil station sector still face some market restrictions. Petrol station operators are required to have stable oil supplier.

Those who cooperate with CNPC and Sinopec as their oil suppliers need to provide a supply contract of more than three years to the local government in Chongqing municipality and others are required to have their own oil storage with ample reserves.

"This requirement represents a big burden for private oil station owners," Ye Tan, a renowned financial commentator wrote in her blog.

"CNPC, Sinopec and CNOOC own the franchise of oil exploration, so we can't exclude the condition that they discriminate against downstream enterprises at the oil refining and retail segments, taking advantage of their control of the industrial upstream. When crude oil production is limited, main SOEs may decrease their supply to other refining companies, which would suffer production reductions in that case," said Xu.

In order to ensure the safety of the non-renewable energy oil, the presence of three national petrol companies in the exploration development sector, which is considered an administrative monopoly, conforms to common international practices, according to Xu.

However, the government still needs to find ways to further ease market access in the oil refining and retailing sectors to offset the influence of the administrative monopoly in the exploration sector, Xu added.

Engaging in businesses including refining, oil chemicals, oil stations and lubricating oil in China, multinational oil and gas company Royal Dutch Shell Plc now runs more than 600 petrol stations in the market, data from the company's website show.

Kang Yan, a senior partner at Roland Berger Strategy Consultants (Shanghai). said that Shell Oil Co has been striving to expand its petrol station network in China as part of its efforts to deepen the company's global presence.

"This represents Shell's decision for a long-term development in the Chinese market," Kang added.

Shell operates its independent-branded oil stations in China through acquisition and lease deals. In addition, the company also jointly established hundreds of oil stations with Sinopec.

More competition in the industry would be beneficial because oil prices would decrease once competition becomes fierce and service at petrol stations would also improve, according to Kang.

"If all the petrol station retailers, State-run, foreign and private, could sell the finished-oil products explored by CNPC, Sinopec and CNOOC, a competitive tendency would be formed among the three oil majors in the finished oil market. Each would choose oil products with low prices and good quality," Xu said.