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THE WALL STREET JOURNAL: Gasoline Suppliers Could Gain As China Bolsters Pump Prices

By SHAI OSTER
March 16, 2006
BEIJING — Chinese and foreign oil companies are racing to fill a bigger share of China's gas tanks.
China's gasoline market is among the fastest-growing in the world, as millions of affluent Chinese buy new cars. But even as the amount of gasoline sold has surged, profit margins haven't. Policy makers, afraid of sparking inflation, have capped fuel prices, causing some oil companies to incur losses.
That could change soon. Top officials have pledged to raise prices at the pump as part of a wider effort to encourage conservation and raise energy efficiency. China is also set to lift restrictions on wholesale fuel distribution by foreign companies by year-end as part of its World Trade Organization commitments. That could spell good news for BP PLC, Total SA, Royal Dutch Shell Corp., Exxon Mobil Corp. and other foreign companies seeking to sell here.
It remains unclear when and by how much the Chinese government will lift gasoline and diesel prices. David Hurd, a Beijing-based analyst for Deutsche Bank, says the government might raise gasoline prices 20%, while keeping diesel prices unchanged. Higher diesel prices could hurt China's tractor-driving farmers, whom China's leaders have made a priority to help as part of their effort to narrow the wealth gap between coast and countryside.
The volume of diesel sold in China is double that of gasoline sold, Mr. Hurd says.
A bidding war early this month for a stake in a small, independent chain of gasoline stations in Shanghai underscores the interest in the market. China National Offshore Oil Corp. — the country's biggest offshore oil producer by volume but a distant laggard in terms of retail gasoline sales — outbid several rivals for the chain of 22 stations. China National Offshore Oil is the state-owned parent of Hong Kong-listed Cnooc Ltd.
China's retail gasoline market is dominated by China Petroleum & Chemical Corp., known as Sinopec, which owns 56% of the gasoline stations in China, says energy consultancy Cambridge Energy Research Associates. Sinopec directly owns 27,000 gas stations across the country, and either partly owns or franchises an additional 4,000.
Sinopec sells enormous volumes of fuel, but has made scant profits because of the government's price restrictions. It has been hit harder than some of its competitors because it must buy lots of crude oil at high international prices and then sell refined products at a loss under the Chinese price-cap system. At the end of last year, the government gave Sinopec a subsidy of 10 billion yuan ($1.24 billion) to make up for the heavy losses it sustained.
Raising prices would help Sinopec improve its profit margins. But analysts say the company doesn't have the cash to expand operations, nor does it have the crude-oil supplies to feed many more stations.
“Now our goal is not to take up more gas stations in China…I think we've got enough,” says Wang Jiming, Sinopec's vice chairman of the board. “Now our goal is to focus on how to improve per-station efficiency.”
Hong Kong-listed Sinopec's stock has risen about 50% since the end of 2005 amid expectations of price changes. Sinopec shares rose 1.7% to HK$4.53 (58 U.S. cents) yesterday, up eight Hong Kong cents each.
Leading rival China National Petroleum Corp., known as PetroChina and with 24% of the retail market, could be in a stronger position to grow. The company is China's largest crude-oil producer by volume, and it pocketed huge profits last year by selling crude, whose prices have doubled since 2003. PetroChina's fat coffers and bigger oil reserves make it easier for it to expand in the retail gasoline market, analysts say.
PetroChina expects to start getting 200,000 barrels a day from a new pipeline from its field in Kazakhstan starting in May, according to the U.S. Department of Energy's Energy Information Agency. Huang Meilong, an analyst with Shenyin Wanguo Securities Co. in Shanghai, said PetroChina is more likely to buy up independent retailers to expand. Hong Kong-listed PetroChina rose five Hong Kong cents to HK$7.60 yesterday.
Foreign competitors also could benefit from the market overhaul, and many have plans to expand. Current rules limit the number of wholly owned gas stations foreign companies can have in China, effectively forcing them to partner with either PetroChina or Sinopec. But few are willing to pass up a chance to expand their presence in such a fast-growing market.
Foreign companies could make bigger profits once China permits them to distribute their own fuel to gas stations. Industry executives are hopeful that Beijing might further open the market to foreign players in a bid to foster more competition and help drive down gas prices.
Exxon Mobil, which operates 19 stations under the Esso brand in southern China, is working with Sinopec and Saudi Aramco to develop a sales-and-marketing joint venture that would eventually have 600 stations in the southern province of Fujian. That project was announced in 2004, but a formal agreement has yet to be signed.
France-based Total has announced plans to roll out 500 stations over six years in two joint ventures. BP is in the process of establishing 1,000 stations in joint ventures with PetroChina and Sinopec, while Royal Dutch Shell is rolling out 500 stations.
“The rise of the middle class, the rise of passenger-car vehicles — all means this will be an increasingly important market in transportation fuels,” says Terry Blaney, director of Shell China's downstream business.
–Zhou Yang contributed to this article.
Write to Shai Oster at [email protected]

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