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Reuters: Tighter oil market grip seen as China nears WTO duty

EXTRACTS: Industry insiders say the final rules may emerge just days before the December 11 deadline. But they are not banking on much more leniency that would pave the way for global majors such as BP Plc and Royal Dutch Shell to expand their fuel supply networks in the world’s most-populous nation.  Majors such as BP and Shell run hundreds of retail stations along the booming coast, but covet the freedom to move fuel between regional refineries, uniting Chinese operations with their dynamic global trading systems.

THE ARTICLE

Thu Aug 17, 2006 9:45 PM ET

By Chen Aizhu

BEIJING (Reuters) – With a deadline for market opening barely four months away, China shows little will to revise a set of rules that would tighten the hold of the state oil firms on its lucrative wholesale oil sector.

Beijing’s latest draft regulations on opening the industry, following a government meeting in May, show that entering the world’s second-largest oil market may be even tougher than before China joined the World Trade Organization five years ago.

China, fearful that broader access could erode its energy security, may meet the letter of its WTO commitments by leveling the playing field for Chinese and foreign firms, analysts and officials say.

But the country is shirking the spirit of a freer market, which it believes offers its subsidised consumers few incentives, while a continued firm hold poses few risks, they added.

Industry insiders say the final rules may emerge just days before the December 11 deadline. But they are not banking on much more leniency that would pave the way for global majors such as BP Plc and Royal Dutch Shell to expand their fuel supply networks in the world’s most-populous nation.

One of the toughest criteria requires new license-holders to secure long-term fuel supply pacts with existing players — state-run Sinopec Corp. <0386.HK> and PetroChina <0857.HK> — and have two years of retail experience with 10 petrol stations

Beijing’s existing wholesale regulations — aimed at domestic firms — dated from 2000 and did not require ownership of retail stations or fuel supply contracts.

“By requiring fuel contracts with existing suppliers… the government is passing on authority to the two (Chinese) oil majors,” said a retail manager with an international oil major, who declined to be named.

LIMITED TRADE, PRICE RISK

The rules, set to take effect from January 1, would shorten the list of the existing 2,400 wholesalers by disqualifying those who failed to meet the new norms within a grace period, said industry sources who had seen a copy of the regulations.

The draft is the result of several rounds of consultations between the Ministry of Commerce and industry participants, including majors such as BP and Exxon Mobil Corp. , local independents and the two Chinese giants.

“There are not many people in the governments who know the industry well. So you go to state oil companies. They have an undue amount of power over policies,” said Philip Andrews-Speed, an energy policy expert at University of Dundee.

Sinopec and PetroChina produce nearly 90 percent of China’s fuel, runs more than half of the country’s roughly 80,000 petrol stations and dominate the wholesale business of importing, transporting and bulk selling fuels such as gasoline and diesel.

Obsessed with self-sufficiency and supply security, Beijing encouraged the state giants to build refineries together with producing nations, locking in crude supplies, while curbing the need for imported fuel and limiting exports.

“China is trying to be self-sufficient in absolute terms. What many large countries actually do in a true free market is to have a lot more imports and exports,” said Andrews-Speed.

At the heart of the issue is Beijing’s willingness to open up fuel import rights, now mostly controlled by the oil duopoly.

A Ministry of Commerce official told Reuters that import regulations were being studied but declined to give details or say when they would be made public.

China has pledged to raise oil product import quotas by 15 percent each year till 2011 when the policy is up for review. But fuel oil, a heavy product long opened to local firms and used by utilities and ships, makes up bulk of the quota, effectively limiting openings for the more lucrative diesel and gasoline.

HOPEFULS

Majors such as BP and Shell run hundreds of retail stations along the booming coast, but covet the freedom to move fuel between regional refineries, uniting Chinese operations with their dynamic global trading systems.

Beijing’s reluctance to ease its rigidly administered fuel prices is an added risk, as imported diesel and kerosene, for instance, cost more than on the domestic wholesale market.

“Why should we worry? The government is set to protect dominant state oil firms to maintain supply stability… The controlled prices would make any new market player difficult to survive,” a PetroChina refining official told Reuters.

While small local firms will be shut out by guidelines such as holding 30 million yuan ($3.76 million) in registered capital and more than 10,000 cubic metres of oil storage, a clutch of state firms are emerging to rival Sinopec and PetroChina.

Two hopefuls are number-three oil firm China National Offshore Oil Co., parent of CNOOC Ltd. <0883.HK>, and one-time monopoly oil trader Sinochem Corp.

Both are beefing up much-needed refining muscles. CNOOC is building a 240,000 barrels per day refinery in southern Guangdong province — its first plant due for completion in 2008 — while Sinochem plans to erect a similar facility on the east coast.

CNOOC is set also to boost its retail network after acquiring some 20 petrol stations in Shanghai early this year. Sinochem has teamed up with European major Total SA to set up hundreds of petrol stations in the next five years.

But even CNOOC, known for its audacious but failed bid to buy U.S. firm Unocal, admits that the road ahead is rocky.

“It is very tough to break into the sector. You can easily get blocked,” a CNOOC official said.

($1=7.978 Yuan)

((Editing by Ramthan Hussain; [email protected]; Reuters Messaging: [email protected]; +8610 6598 1211)
 
© Reuters 2006. All rights reserved. 

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