OIL AND NATURAL GAS COMPANIES IN CHINA
China has consolidated its oil and gas production industry around three companies, the top three oil companies in China: 1) PetroChina, a state energy giant, whose parent company is China National Petroleum Corp; 2) Sinopec (China Petroleum & Chemical Group); and 3) China National Offshore Oil Corporation (CNOOC). Two of the ten biggest oil companies in the world are Chinese (PetroChina and Sinopec).
China has traditionally protected its own oil and gas companies by not allowing foreign oil companies into China. PetroChina and Sinopec control the refineries that produce 90 percent of domestically-produced gasoline and diesel. They also control a large portion of China’s gas stations and are able to squeeze out independent operators by restricting their supplies of gasoline.
Price controls aimed at keeping inflation in check have saddled refiners with billions of dollars of losses. Refiners have to pay higher prices when oil prices rise but are kept by the price controls from passing on the expense to their customers. As of 2005, Sinopec and PetroChina were allowed to set fuel prices within an 8 percent range of te government’s recommended price. Sometimes the government has given subsidies of hundreds of millions of dollars but not nearly enough to cover losses resulting from high oil prices.
In December 2010, the United States filed a suit with the WTO claim the Chinese government gave Chinese energy companies unfair government subsidies.
Websites and Resources
Chinese Oil and Natural Gas Companies: U.S. Energy Information Administration Report on Oil in China eia.doe.gov/cabs ; U.S. Energy Information Administration Report on Natural Gas in China eia.doe.gov/cabs ; Fueling the Dragon iags.org ; China’s Growing Demand for Oil pdf file cbo.gov/ftpdocs ; Good Websites and Sources: Oil Refining Business in China pdf file eneken.ieej.or.jp ; China National Petroleum Corporation (CNCP) cnpc.com.cn/en ; Wikipedia article on CNPC Wikipedia ; China Petroleum and Chemical Corporation (SINOPEC) english.sinopec.com
On Energy and Electricity: U.S. Energy Information Administration Report on Energy in China eia.doe.gov/cabs ; U.S. Energy Information Administration Report on Electricity in China eia.doe.gov/cabs ;China Sustainable Energy Program efchina.org ; China Energy Report pdf file piie.com/publications ; Another Lengthy Energy China Report ieej.or.jp ; China Energy Production Statistics indexmundi.com ; Beijing Energy Network (a Chinese grassroots environmental group) greenleapforward.com
Links in this Website: ENERGY AND ELECTRICITY IN CHINA Factsanddetails.com/China ; DAMS AND HYDRO POWER IN CHINA Factsanddetails.com/China ; THREE GORGES AND THREE GORGES DAM Factsanddetails.com/China ; COAL IN CHINA Factsanddetails.com/China ; COAL MINE DEATHS IN CHINA Factsanddetails.com/China ; OIL AND NATURAL GAS Factsanddetails.com/China ; CHINESE OIL AND NATURAL GAS COMPANIES Factsanddetails.com/China ; NUCLEAR POWER AND ALTERNATIVE ENERGIES Factsanddetails.com/China ; WATER IN CHINA Factsanddetails.com/China
PetroChina is China’s largest oil producer and oil company, producing about two thirds of China’s crude oil. In November 2007, PetroChina became the world’s largest oil company in a matter of a few hours when it debuted on the Shanghai Stock Exchange and raised $8.9 billion in its first initial public offering (IPO), with stock prices doubling a single day, raising its value by some measures to $1 trillion, more than double the value of Exxon-Mobile, the world’s largest company before it was overtaken by PetroChina.
The value of Petrochina quickly fell after its IPO made it the world’s first $1 trillion company. The $1 trillion figure was reached by multiplying the total number of stocks by the $5.90 price the stocks was selling for on the Shanghai market at end of PetroChina’s debut. The figure was misleading because the government owns 86 percent of PetroChina’s shares and prices for PetroChina shares were only around $2.50 in Hong Kong and New York.
At the end of December 2007, PetroChina was valued at $738 billion, compared to $510 billion for Exxon and $231 billion for BP. By other measures PetroChina is much smaller than Exxon-Mobile. In 2006 Exxon-Mobile produced 1.56 billion barrels of oil, racked up sales of $365.5 billion with profits of $39.5 billion while PetroChina produced 1.06 billion barrels of oil, racked up sales of $91.9 billion with profits of $19 billion. PetroChina’s growth prospects however are better than those of Exxon-Mobile. It is expect to grow 5 to 6 percent over coming years while Exxon-Mobile and other major oil companies are not expected to grow at all. PetroChina could have raised more money in its Shanghai debut: investors overbooked the issue by a record $440 billion.
PetroChina became the world’s third largest energy company by market value in 2006, overtaking BP and Royal Dutch Shell. It posted a record output of the equivalent in oil and gas of 2.9 million barrels of oil a day, a 5.2 percent increase from the 2005. Gas production jumped 23.5 percent in 2005.
PetroChina was the most profitable company in Asia in the second half of 2004 and produced 1.034 billion barrels in 2005, a 5.5 percent rise from 2004 after drilling new fields in western and northeastern China. PetroChina gets half its oil from Daqing and controls much of the oil in Changqing. It own 67 percent of PetroKazahkstan and has had success drilling for gas in western China.
PetroChina stock is sold on the New York, Hong Kong and Shanghai stock exchanges. The American billionaire Warren Buffet bought shares of PetroChina for about 20 cents a share and sold them in September 2007 for seven time she price he paid for them.
PetroChina reported profit declined in 2008 as loses in the refining business caused by government price controls exceeded gains from surging crude oil prices.
Petrochina Buys Full Stake in Oil Sands Project
In January 2012, AP reported: PetroChina, Asia's largest oil and gas company, will take full ownership of the MacKay River oil sands project in Canada after Athabasca Oil Sands Corp announced Tuesday it sold the remaining 40 percent of the development for US$673 million.The deal continues a trend that has seen China's state-owned oil companies invest billions of dollars in exploration or production ventures in Canada, Africa, Latin America and elsewhere. It gives PetroChina full control of one of Alberta's newest oil sands developments. Athabasca had previously sold PetroChina a 60 percent stake in two oil sands projects owned by Athabasca. The sale comes less than a week after Alberta regulators approved the project. [Source: AP, January 3, 2012]
Athabasca said it exercised its option to sell its remaining stake in MacKay River because it would like to deploy its capital and resources in other development projects. The company said it will save about $190 million in capital spending this year from the divestiture. The first phase of the MacKay River project is expected to produce 35,000 barrels per day, eventually expanding to 150,000 barrels. Construction of the project will begin next month with startup targeted for 2014.
China is the world's second-biggest oil consumer and has a growing appetite for oil that may one day surpass that of the U.S. which views Canada's oil sands as a pillar of its future energy needs. Canada is increasingly looking to China to sell its vast oil reserves after the U.S. delayed a decision on the Keystone XL pipeline that would bring oil from Canada to refineries in the U.S. Gulf Coast.
Alberta has the world's third largest oil reserves, more than 170 billion barrels. Daily production of 1.5 million barrels from the oil sands is expected to nearly triple to 3.7 million in 2025. Overall, Alberta has more oil than Russia or Iran. Only Saudi Arabia and Venezuela have more. Canada's only major oil export market is the U.S. But with the product of oil sands and pipeline delivery to the U.S. under perennial clouds of environmental objections, and with Asian demand growing, Canada wants to diversify its market, and China is eager to oblige.
The Chinese have urged the Canadian government to approve a pipeline to Canada's Pacific coast so that tankers can ship oil sands crude to China. Sinopec, a Chinese state-controlled oil company, has a stake in a $5.5 billion plan drawn up by the Alberta-based Enbridge company to build the Northern Gateway Pipeline from Alberta to the Pacific coast province of British Columbia. Sinopec also paid $4.6 billion for a 9 percent stake in Syncrude, Canada's largest oil sands project.
Sinopec (China Petroleum & Chemical Group) is China’s second largest oil and gas producer and Asia’s biggest refiner. It supplies 80 percent of China’s fuel and broke into the top 10 of the Fortune 500 list of top global companies in Its profits increased 13 percent in 2010 to $10.9 billion. It earns less money that it could because it is forced to sell oil products at lower-than-market prices because of government pressure. Many refined products are sold at below cost.
Sinopec is based in Beijing it is owned by the parent company China Petrochemical. It supplies 80 percent of the fuel sold in China and refines 2.8 million barrels of oil a day. Sinpoc makes money from its exploration and production divisions and loses money from its refining and makes money and loses money from its chemicals operations.
Sinopec is aiming to produce 39.8 million tons of crude in 2006, an increase 1.4 percent from the previous year; and 7 billion cubic meters of natural gas, an increase 11 percent from the previous year Sinopec has its fingers in a lot of pies. It and BASF operate a $2.9 billion chemical plant in Nanjing,
Sinopec’s CEO Fu Chengyu was appointed in April 2011. He is an urbane, English-speaking petroleum engineer and Central Committee member with a degree from the University of Southern California, became both chairman of the corporation and head of its Party committee. His predecessor, Su Shulin, became the deputy Party chief in Fujian Province, following in the footsteps of another former oil executive, Zhou Yongkang, who now sits on the Poliburo Standing Committee and is responsible for China’s vast security apparatus. [Source: Andrew Higgins, Washington Post, May 6, 2011]
Sinopec, Corruption and the Communist Party
Sinopec is controlled by and its top management is appointed by the Communist Party. Sinopec Corp is listed on stock exchanges in Hong Kong, New York and London yet 75 Japan of its shares are held by state-owned Sinopec Group in Beijing. It is often presented as an example of the “China model,” an economic order that often looks capitalist but is controlled by---and designed to serve---the Communist Party. Management decisions are announced not by its board of directors but by the Communist Party’s Organization Department, a secretive body responsible for most top appointments in business, government, academia and media.[Source: Andrew Higgins, Washington Post, May 6, 2011]
Andrew Higgins wrote in the Washington Post, “Sinopec’s connections and wealth ensure that it faces little competition and enjoys easy access to credit from state-owned banks. But they also make it a target for public outrage, and a symbol of a system riddled with corruption by politically connected insiders. The company’s financial interests also sometimes clash with its political loyalties. Dependent on imported oil to feed its refineries, Sinopec loses money unless it passes on the global market’s rising prices to Chinese consumers. But the state, which regulates gas prices, worries about stoking inflation, which risks fuelling political troubles for the Party.” [Ibid]
Sun Haifeng, an associate professor at Shenzhen University’s School of Communications, told the Washington Post that Sinopec and other big state corporations “don’t operate in the framework of a full market economy but operate in the framework of power. In February 2011 Sun helped expose a ruse in which, amid mounting public anger over the cost of fuel, Sinopec asked staff to write Internet messages and blogs under false identities in order to “create a positive opinion environment” for higher prices, according to a leaked internal document issued by the company’s “Party Committee Work Bureau.” It promised prizes for the best 20 fake messages. For his indiscretion Sun said was called in “for tea” by the “relevant departments,” Chinese code for a questioning by security police. His post got deleted. [Ibid]
Sinopec has been dogged for years by corruption. Its former chairman, Chen Tonghai, took bribes totaling over $28 million. His mistress testified against him as did former colleagues, who told how he used to claim nearly $6,000 a day from Sinopec for personal expenses. In July 2009, Chen was given a suspended death sentence after being found guilty of engaging in corrupt practices.
Sinopec Wine Scandal
Sinopec was widely criticized for its purchase of 1,176 bottles of Chateau Lafite Rothschild 1996 for $1,813, and several bottles of high-end Moutai for $125,510 in company cash, with the total bill $245,000. The scandal occurred at a time of rising public anger over high gas prices and has been a for the ruling Communist Party, which controls the oil giant and appoints its top management, and has reinforced a widespread belief that big state-owned corporations serve the interests---and lavish lifestyles---of a tiny group of insiders. [Source: Andrew Higgins, Washington Post, May 6, 2011]
Chinese netizens had a field day with Sinopec’s claims that a lone, wayward executive---Lu Guangyu--- is to blame---and has now coughed up for wine already drunk. “Is Sinopec an oil company or a wine merchant?” fumed a Chinese commentator on a Web forum dedicated to discussion of the scandal. “Embezzling public money is a crime, but public security (police) has done nothing.”
The story came to light in April 2011 when apparently disgruntled employees posted a few invoices that detailed Sinopec’s expensive wine purchases on Tianya, a popular Chinese internet forum. Andrew Higgins wrote in the Washington Post: “They showed that in just a few days last September, Sinopec’s branch in Guangdong, China’s most populous and wealthiest province, purchased hundreds of bottles of Chateau Lafite Bordeaux---some costing $2,100 each---and of Maotai, a fiery Chinese liquor served at banquets. Furor ensued, and eventually it became clear that the full bill was larger; a quarter million dollars in high-end booze was unaccounted for. At a press conference last week, Sinopec promptly hurled Lu under the bus, and declared the matter settled.
Three days after the alcohol purchases became public, Chinese gas prices rose to their highest ever level. A gallon of premium fuel now costs around $5 in Beijing. “How can the price of gas not go up when they indulge in such extreme luxury?” asked an angry online commentary by the person who posted the invoices under a pseudonym.
Sinopec’s Response to the Wine Scandal
“Sinopec’s branch in Guangdong confirmed the authenticity of the invoices but initially denied any wrongdoing,” Higgins wrote, “describing its alcohol deals as part of the company’s “normal operations.” CCCTV, China’s main state-run television network, meanwhile reported that Sinopec’s Guangdong managers had launched a hunt for the “internal ghost,” or whistleblower, responsible for leaking the purchase documents.”
“As the furor grew, Sinopec’s corporate headquarters in Beijing stepped in with its own effort at damage control: It held a meeting to trumpet the company’s austere ways. A worker in the corporate canteen told how Sinopec is so thrifty, it serves braised radishes and onion leaves. Another staffer hailed the memory of “Iron Man Wang,” an abstemious model oil worker feted by Mao Zedong, who died in 1976. The exercise attracted ridicule. Critics lampooned Sinopec on the Internet by posting cartoons of radishes.”
In an effort to calm the crisis, Sinopec’s management called Chinese journalists to a meeting in Beijing. Higgins wrote: “They provided details of an internal investigation and pinned all the blame for the wine affair on the head of the Guangdong branch. Sinopec, according to the company officials, got tipped off about the booze last October and tried to investigate then but got stonewalled by Guangdong managers. Sinopec, said Fu, the newly appointed chairman, welcomes “supervision” by the public and is determined to “resolutely combat the influence of all kinds of corrupt thinking and lifestyles.” The disgraced Guangdong chief has now been removed from his post, though he’ll stay on at Sinopec. He’s also been ordered to pay $20,000 out of his own pocket to cover the cost of 613 bottles of red wine already consumed.
Could Somebody really Drink $245,000 Worth of Wine and Expensive Maotai
Evan Osnos wrote in the The New Yorker: “Did Lu Guangyu, the general manager of Sinopec’s Guangdong branch, really drain four hundred and eighty bottles of vintage Moutai and six hundred and ninety-six bottles of red wine” That’s exactly what his employer says, and it’s sticking to it. Leaving aside the problem of outing an employee by name for an ostensibly epic substance-abuse problem, a few questions remained, and the Chinese press deserves credit for asking them. As the Global Times put it in an investigative piece credited to Li Xiang and Zhang Han: “The price of Moutai has risen quickly in the past two months, with a hike of around 350 yuan ($53.73) a bottle since Spring Festival, making it unaffordable for ordinary people. Some insiders believe that the price is actually an index for China’s corruption.” [Source: Evan Osnos, The New Yorker, May 10, 2011]
“An index, indeed. The reporters spoke to four Sinopec employees, one of whom said: Most of the luxury liquor Lu bought was used to bribe local authorities, as Sinopec’s expansion strategies, such as opening new gas stations, preferential policies on transportation and tax, and even paying people off to overlook pollution, all require a benign connection with local authorities ... Keeping this “fragile” connection going is paid for through gifts. In other words, bribes.” [Ibid]
As Li and Zhang found: “All four interviewees working at Sinopec contacted by the Global Times said that huge spending on alcohol is omnipresent. "At every festival, giving gifts, especially costly ones, to your leaders who have been taking good care of you is a backdoor form of etiquette known to all, so a small part of the alcohol can be found in the drink cabinets of Sinopec’s top leaders,” an accountant working at Sinopec Yangzi Petrochemical Company Ltd told the Global Times anonymously.
So, what of old Lu Guangyu, whose name has been drenched in ignominy in all this? Perhaps he did have a sip or two, but a quarter million dollars’ worth seems ambitious. As a Sinopec employee explains: “Lu could certainly never consume this astonishing amount of luxury alcohol by himself, given he’s in his late 50s and about to retire.” If that’s a reason not to doubt him, it makes me wonder what the younger staff is up to.
CNOOC is China’s third largest oil producer and oil company. Based in Hong Kong, it is publically traded in Hong Kong and New York but is 70 percent owned by the state-owned China National Offshore Oil Corporation. The company is more profitable than Sinopec and PetroChina because it is not bogged down with refining costs.
CNOOC is headed by Fu Chengyu, who grew up in Heilongjiang and once said his family was so poor he had to barter eggs for schoolbooks. He graduated from Daqing Petroleum Institute in Heilongjiang in 1975 with a drgree in geology and worked as field engineer in China for seven years. He studied at UCLA and became CNOOC’s chief operating officer in 1999 and chairman in 2003.
As of 2005, William Blair & Co., an $11 billion money managent firm in Chicago, was the largest non-government share holder in CNOOC. It sold its shares when CNOOC began its efforts to purchase Unocal, saying the CNOOC was putting the interests of China ahead of those of its shareholders.
CNOOC aims to be a key supplier of liquified natural gas to China. CNOOC controls fieldsoff the east coast of China in Bohai Bay and other places. In the early 2000s, it announced it was going to spend $700 million on pipelines and gas fields in the South China Sea to supply gas to Macau and the Guangdong Province via the city of Zhuhai.
Like other giant energy companies in China, CNOOC, pursues profit but is ultimately answerable to the party, whose secretive Organization Department appoints its boss. The oil corporation is listed on the Hong Kong stock exchange, but a state-owned parent company in Beijing holds a majority of its shares---and makes all key decisions. This adds a layer of hidden calculation to what, in companies driven only by the bottom line, would be a straightforward and relatively predictable business agenda.
CNOOC’s Effort to Buy Unocal
In the 2005, CNOOC tried to buy Unocal, the 8th largest oil company in the United States. It was the largest takeover ever attempted by a Chinese company and was supported by China’s state-owned banks, powerful Washington lobbyists and the powerfull Wall Street investment banks Goldman Sachs and J.P. Morgan.
CNOOC and Unocal are partners in offshore drilling in China. In June 2005, CNOOC offered to pay $18.5 billion for Unocal in cash. It dropped its bid due to political pressures from Washington. Instead Unocal was bought by Chevron, the second largest oil company in the United States, for $17.1 billion in cash and stock deal---a considerably lower price than what CNOOC offered.
Unocal spokesman said the company accepted the Chevron offer over the more lucrative CNOOC bid because the CNOOC bid was too politically risky and CNOOC failed to offer adequate compensation guarantees if the deal failed to go through for political reasons. Beijing’s response to the rebuke was relatively mild.
The CNOOC-Unocal deal failed because of political opposition to it in the United States. The U.S. House of Representatives passed a resolution 398 to 15 that expressed concerns over the deal because of national security interests even though it only involved 0.8 percent of the U.S.’s oil production.
The Chinese were unhappy because they were unable to secure an important source of oil. Stockholders with Unocal were disappointed because they could have gotten more money from CNOOC deal. People in the American oil industry and the entire American business community were not pleased either. They worried that the same argument could used against them if were to invest in oil fields in another country. The only people that were really happy were politician who scored political points and Chevron which obtained Unocal for a cheaper price than it otherwise might have had to pay, plus it desperately needed Unocal to remain a global oil player.
Objections to the CNOOC deal are particularly unfair because Saudi Arabia, Venezuela, Russia, France, Brazil, Norway and Venezuela have all made major acquisitions in the U.S. oil and gas sector. Venezuela bought Citgo, which hold oil supplies vulnerable to disruption that can negatively effect the U.S. economy. By contrast Unocal has only modest operations in the United States. Only a quarter of its reserves are in the United States (around 70 percent of Unocal’s reserves are in Asia and not geopolitically vital to U.S. interests). CNOOC is expected to continue to aggressively try to obtain oversees energy assets.
Chinese Oil Companies Abroad
Chinese oil companies want a piece of the action and share in the development and profits of oil fields rather than just being buyers. These companies are willing to pay top dollar’some think overpay---for oil assets, in part because they are supported and financed by the government who are willing to do almost anything to secure reliable energy sources.
PetroChina has 20 contracts to explore or purchase production facilities in 12 countries, including Peru, Tunisia, Azerbaijan ad Mauritania. CNOOC paid $2.3 billion for a stake in an offshore oil field in Nigeria. It has a deal with the BHP Billiton to search for oil off the coast of western Australia It also has deals to develop the North West Shelf and the Gorgan natural gas site off the northwestern coast of Australia.
In 2002, CNOOC became the largest offshore producer in Indonesia when it bought a stake from the Spanish company Repsol. It also signed a $12 billion, 25-year contract to purchase liquified natural gas from Australia’s Northwest Shelf project. In 2007, PetroChina signed a $40 billion deal to develop the Browse Basin natural gas project off the coast of Western Australia. In January 2010, PetroChina pulled out of the deal. In September 2009, PetroChina said it would invest $1.7 billion in Canadian oil sands.
In March 2004, Sinopec signed a $300 million deal to develop natural gas resources in the Saudi Arabian Ghawar field. Many say the deal is risky and could deliver little. In October 2004, it made a deal with Iran to help develop the Tadavarn oil field in exchange for Sinopec agreeing to buy millions of tons of Iranian liquified natural gas. One media source estimated the value of the deal at $70 billion.
Foreign Oil Companies in China
Between 1982 and 2005, there has been $7 billion in foreign investments on China’s oil industry.
Foreign companies doing business in China include Exxon, BP and Royal Dutch/Shell. They are involved in exploration and running gas stations under their names.
Exxon Mobile is helping Sinopec establish over 500 gas stations across the country.
Chevron is working with CNOOC on a couple of relatively small projects.
In the fall of 2004, Royal Dutch/ Shell Group and Unocal puled out of an offshore as development project, siting commercial reasons.
Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, National Geographic, The New Yorker, Time, Newsweek, Reuters, AP, Lonely Planet Guides, Compton’s Encyclopedia and various books and other publications.
© 2008 Jeffrey Hays
Last updated April 2012