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The Wall Street Journal: Draft Rules for China’s Oil Industry Worry Total

Foreign-Access Plan
For Wholesale Market
Is Vague, Firm Says

By DAVID WINNING
August 2, 2006

BEIJING — Draft rules for China’s domestic oil trade are prompting concern about whether the country will make good on a commitment to open the sector to foreign companies this year, executives at French energy company Total SA said.

China committed to letting foreigners into its oil market as part of its accession to the World Trade Organization in 2001. The retail business was opened at the end of 2004, allowing foreign companies like Total to run a small number of filling stations on their own or to operate larger networks with Chinese partners. By the end of this year, according to its WTO deal, China is to let foreigners into the wholesale market — the business of distributing gasoline and other oil products from refiners to filling stations. That sector has long been dominated by two state-owned companies: China Petrochemical Corp., or Sinopec, and China National Petroleum Corp., parent of U.S.-listed PetroChina Co.

But a draft version of new distribution regulations is vague on major points about the requirements for licenses and exactly what they will allow, Total executives said. For example, the rules are vague on whether the government will require foreign companies to build an expensive network of gasoline-distribution depots by themselves — or whether they can lease such facilities.

“Until the rules are clarified and precise, we won’t know if there is a genuine willingness to open this sector or [if] it is just a way to continue the duopoly of Sinopec and PetroChina in the sector,” Jacques de Boisseson, general representative of Total in China, said in an interview. Jeff Attwood, president of Total (China) Investments Co., said the uncertainty might cause Total to delay its planned investment in the distribution business and could undermine an existing joint-venture agreement to build a network of 500 filling stations.

Total executives said they asked about the draft rules at a meeting this year between Chinese officials and executives from several foreign oil companies. So far, they said, they haven’t received clarification. Officials at China’s Ministry of Commerce didn’t respond to a request for comment.

Total’s complaints come amid broader signs of ambivalence in China toward continued opening of some important markets. Foreign bankers have expressed concern that new policies could raise barriers to entry for their companies just as China is preparing to implement its pledge to the WTO to let them take local-currency deposits. There are also worries that other regulations Beijing is issuing will tighten oversight on foreign retailers and Internet investors.

Foreign oil giants are eager to gain wider access to China’s market, where oil demand is growing rapidly thanks to an explosion in car ownership and surging economic growth. Several foreign oil giants have already signed joint ventures with Chinese partners to build filling stations across China. BP PLC is working with both Sinopec and PetroChina to build as many as 1,000 stations in eastern and southern China, while Royal Dutch Shell PLC has teamed up with Sinopec to build as many as 500 stations in eastern China.

Total plans to invest $220 million in its joint venture with Sinochem Corp., a state-owned oil-trading company, to build a 200-station network in northern China and a 300-station network in and around Shanghai. Total also wholly owns 10 filling stations in the central province of Hubei, under rules that let foreign companies own as many as 30 sites without a Chinese partner.

Mr. Attwood said those joint-venture plans were premised on the expectation that Total would get access this year to the potentially lucrative wholesale business, an estimated 90% of which is currently controlled by Sinopec and PetroChina. Other foreign oil companies are also watching the progress on rules for the wholesale market, although other executives haven’t publicly criticized the existing draft.

A BP spokesman couldn’t be reached for comment. A Shell spokesman would say only that the company is looking at the opportunities in the wholesale market. A spokesman for Exxon Mobil Corp., which has 18 filling stations in Guangdong province, declined to comment on any expansion plans.

Total executives said that in addition to questions over whether foreign distributors must build their own depots, the Ministry of Commerce’s draft regulations also leave unclear whether a required minimum of 30 filling stations will be assessed on a national basis or counted province by province. Furthermore, they said, it is unclear whether a wholesale license will enable foreign companies to distribute gasoline and other products to filling stations other than their own.

How the regulations are finalized is “of paramount importance to us in defining our strategy,” said Mr. de Boisseson, Total’s general representative.

Mr. Attwood said, “Right now and until the end of this year, it is hard to define in my own mind or those of our shareholders what we will do. We need to see what the rules of the game are.”

Write to David Winning at [email protected]

 

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