CNOOC, private firm ink gas station deal

Oil producer, Zhangjiagang retailer to jointly tap downstream businesses

China's third-largest oil producer CNOOC Ltd has teamed up with the privately owned CNPC&TAFO Petro Corp to jointly develop gas station businesses, a further step in the opening-up of the nation's energy sector.

CNOOC gained nine franchise gas stations owned by CNPC&TAFO, a Zhangjiagang-based private company majoring in oil retailing in Jiangsu province via the contract, according to CNOOC's statement. CNPC&TAFO will follow the standards of CNOOC to operate the nine gas stations.

Sinopec Group, the largest refiner in China, has dominated China's gas retailing market along with PetroChina Co, the country's biggest oil and gas producer, for a long time.

"The cooperation between CNOOC and the private oil retailing company aims at strengthening the downstream sector of the oil explorer," said Lin Boqiang, director of the China Center for Energy Economic Research at Xiamen University.

He said PetroChina and Sinopec used to employ the strategy of increasing the number of franchised gas stations to expand their downstream businesses in the past. However, the situation has now changed.

"It is not easy to build new gas stations at present while the private companies are not willing to sell gas stations because of good profits," Lin said. "This seems to be the only option for CNOOC to enlarge its retailing business."

By the end of 2013, Sinopec owned more than 30,500 gas stations in China, accounting for about 33 percent of the total number. PetroChina has more than 20,000 gas stations.

CNOOC, the country's largest offshore oil and gas developer, lags far behind the other two giant rivals, owing only 445 gas stations in China. Sinopec, the market leader, had 13 franchised gas stations by the end of 2013.

Besides the two giants, CNOOC is also facing competition from domestic players such as Sinochem Group and foreign players like Royal Dutch Shell Plc. Seeing China's growing demand for fuel, many international players are investing in China's retailing businesses.

Istvan Kapitany, executive vice-president of Shell Retail, said earlier this month that the company will continue to invest in China as it foresees huge potential in the retail market.

At present, Shell operates about 1,100 service stations in China. In 2012, the company accelerated its retail expansion with a speed of opening almost one service station per day. "To offset the challenges, CNOOC can expand its brand and downstream businesses by teaming up with private oil retailing companies through franchising," Lin said.

Private companies are more active and competitive in the market, he said. "However, it also has potential risks, especially if the franchised gas stations do not adhere to the rules and standards set by CNOOC," Lin said.

Yann Cohen, partner of the energy and chemicals unit of the US-based management consulting firm Monitor Deloitte, said even if the Chinese government opens up the retail business, the major constraint is access to fuel.

"One option to break the oligopoly might be to have an independent organization in charge of the blending, so that all the retail players are in the same game," he said. " The other option is actually to deregulate the fuel prices so that it can follow the global oil trend - this option would de-bottleneck the refining challenges."