By Liao Yingmin, Institute of Market Economy, the DRC

Research Report No 68, 2009

Currently, the financial crisis sweeping across the globe has made a strong impact on the world economy, making the prices of staple resource commodities fluctuate drastically and resulting in hikes and slumps of world crude oil price in particular. Under such circumstances, the countries in the world have no alternative but to readjust their oil even energy policies. In the context of the ever-changing Chinese and foreign economic situations, we should sum up and ponder on the development of China's oil industry and further discuss over and probe into such issues as the pricing mechanism and industrial organizations. To this end, we should further adjust China's policy toward the oil industry, optimize the industrial organizations and facilitate the formation of an effective competition pattern so as to ensure the sustainable development of China's oil industry and China's oil security.

I. Status Quo of China's Oil Industrial Organizations and Reasons for the Formation of Those Organizations

1. Status quo of China's oil industrial organizations

In 1998, China's oil enterprises were restructured on a large scale for the enhancement of their international competitive power, with the establishment of China National Petroleum Corporation (CNPC) and China Petrochemical Corporation (SINOPEC), two extra-large oil and petrochemical enterprises integrating upstream and downstream links, China's domestic trade and its foreign trade and production and marketing, thus forming the present oil industrial pattern.

(1) The development of upstream organizations for oil prospecting

At present, enterprises approved by the State Council to be entitled to prospecting and developing petroleum gas include CNPC, SINOPEC, China National Offshore Oil Corporation（CNOOC）and Shaanxi Yanchang Petroleum (Group) Co., Ltd... Of China's total crude oil output, CNPC accounts for over 50%, SINOPEC for over 20%, CNOOC for about 15% and Shaanxi Yanchang for about 5%; several small local companies are also involved in oil gas development and will not stop mining until the resources are exhausted.

(2) Oil refining organizations

Currently, the nationwide processed crude oil has amounted approximately to 330 million tons, which are mainly refined by CNPC and SINOPEC. CNPC's petroleum refinery distillation capacity makes up about 37% of the total and that of SINOPEC accounts for about 50% of the total. Recently, CNOOC and Sinochem Group have commenced to build oil refineries, plus more than 80 local oil refining enterprises, making up less than 10% of the total petroleum refinery distillation capacity.

(3) Oil product distribution organizations

Currently, there are over 2,000 oil product wholesale enterprises in China, which are mainly controlled by CNPC and SINOPEC or affiliated to them. The retail of oil products is characterized by competition between state-owned, privately-operated and foreign-invested enterprises. Gas stations owned by CNPC and SINOPEC make up 50% or so out of nearly 100,000 gas stations and the sales of oil products by CNPC and SINOPEC account for over 70% or so of the total.

In general, the oil industry is currently characterized by an initial market-oriented structure of upstream prospecting and extracting, highly concentrated midstream oil refining and processing and relaxed downstream distribution.

2. Main reasons for the formation of the present oil industrial organizations

(1) Nurturing large oil enterprises is a must for addressing the competition on the international market

After 1990s, upsizing of oil companies across the globe and integration and internationalization of upstream and downstream industrial chains have been stepped up at large. The transnational petrochemical companies of such countries as the United States have manipulated 1/3 of the world total petrochemical output, 2/3 of the global trade volume, over 70% of investment and 80% of technology development and transfer. The national oil companies of many developing countries have also come to realize the vital importance of integrated and internationalized operation. They have concentrated their production at a fast pace and stepped out of their own countries one after another to conduct transnational operation. As a result, a number of national oil companies have played an important role in the international oil competition. To fight against the competition on the international market, ensure China's oil security and improve the international competitive power of Chinese oil enterprises, China has carried out the reform of its oil system and has soon stepped up the concentration of its oil industry.

(2) Policy is the most important reason for determining the status quo of oil industrial organizations

In 1998, China carried out the reform of its oil system and set up CNPC and SINOPEC, two extra-large petroleum and petrochemical enterprises integrating upstream and downstream links, China's domestic trade and its foreign trade and production and marketing, thus forming a basic pattern for the oil industry for a duration of nearly 10 years. At the same time, a series of market access policies consolidated the leading position of CNPC and SINOPEC. Other enterprises, except for CNPC, SINOPEC and CNOOC, were strictly restrained from gaining access to the upstream oil prospecting and development; in terms of oil refining and distribution, after 1998 a series of policies and regulations were successively put out to straighten up small refineries and standardize the circulation of oil products. Independently-operated oil product wholesale enterprises other than CNPC and SINOPEC were not allowed to come into existence. The oil products were distributed by wholesale by CNPC and SINOPEC in a concentrated way and the newly-established gas stations in various localities were unitarily wholly-owned or controlled by CNPC and SINOPEC. Although the Ministry of Commerce promulgated Provisional Measures for the Management of Oil Product Market and Measures on Management of Crude Oil Market respectively in 2001 and 2004, prescribing that a licensing system must be carried out for the circulation of crude oil and oil products and that enterprises qualified for market access can all apply to market supervision authorities for business operation, it was still hard to put both Measures into effect due to the excessively concentrated sources of oil supply.

(3) Characteristics of the oil industry have evident influence on industrial organizations

The oil industry involves various links and industrial chains relating to prospecting, development, processing and retail and is characterized by natural monopoly, with oil prospecting and development being risky and highly capital-intensive, the crude oil transportation and refining assuming an economical efficiency of scale and the transportation and marketing of oil products being oriented toward a network economy. After the restructuring of CNPC and SINOPEC, the construction of midstream petroleum refinery distillation capacity and the downstream oil distribution have been strengthened. The network advantages have loomed up in the transportation and marketing of oil products and an entire industrial chain integrating upstream and downstream links, China's domestic trade and its foreign trade and production and marketing has come into being. The market concentration of CNPC and SINOPEC has been promoted steadily with a strong position on the market.

Since rigorous market access policies are carried out for the oil industry and the development of midstream and downstream links is usually restricted by upstream market conditions, the influence exerted by the market competition on the industrial organizations is relatively limited at the present stage.

…

If you need the full text, please leave a message on the website.