Energy & Resources

Three kings do battle

A three-way war for China’s oil business has commenced

Three kings do battle

Crude battle tactics

As every Chinese schoolchild knows, between the years of 220 and 280 their country was split into three kingdoms: Wei, Shu and Wu. It was an era of battle, bluff and chess-like stratagem – in which some of China’s greatest generals competed to grab territory. Something similar may be underway in the country’s oil industry today.

The news that CNOOC is coming ‘onshore’ and that CNPC and Sinopec have abandoned their Yellow River pact, has many analysts predicting war. The first battleground is over refining capacity and for control of the greatest number of petrol stations.

What is going on is an unbundling of an industrial structure created for a former era. Take CNOOC. It was originally conceived as China’s offshore oil and gas specialist. Thus while CNPC and Sinopec drilled for oil on the Chinese mainland, CNOOC sought its reserves under the sea and abroad.

However, as China’s search for new reserves grew, the government allowed CNPC and Sinopec to explore offshore too. In response to finding its exclusive ‘offshore’ mandate breached, CNOOC’s management is turning its attention to the mainland too. “We are now discussing the acquisition of five or six private gas stations and soon will have our own retail system,” an employee of CNOOC East Hebei Sales Branch told the 21 CN Business Herald.

But that is only part of the CNOOC land grab. Last month the oil firm opened the 12 million tonne Huizhou refinery and announced it was in discussions to buy 200 petrol stations in Guangdong province. CNOOC’s plan is to have 1,000 petrol stations by 2010. And with refineries opening in Ningbo, Shandong and Hebei, it will have a total refining capacity of 60 million tonnes.

Fu Chengyu, CNOOC’s longtime CEO and chairman said last week that while the firm has become one of the best performing upstream oil companies, its next stage of development is downstream i.e. refining and retail sales.

Li Feng, an analyst with, confirms that CNOOC poses a threat to the onshore duopoly of CNPC (parent of PetroChina) and Sinopec because it is a

“strong player”.

Moreover, it has chosen its battlefields carefully. The Pearl River Delta (or Guangdong) is the first line of attack, probably because the area is adjacent to an important CNOOC field in the South China Sea. This offshore asset has a lower cost of production than its rivals, which will give CNOOC an edge as it attempts to expand into distribution. For example, it can undercut Sinopec in the wholesale prices its charges for the products derived at its Huizhou refinery.

But Sinopec is not just worried about CNOOC’s push into its southern stronghold.

According to the terms of a 1998 agreement with CNPC, Sinopec was allocated the territory south of the Yellow River, and since this was the more economically vibrant half of the country, it also gained the largest number of petrol stations (29,062 versus CNPC’s 18,648).

However, now CNPC has started pushing into the south. For example, it wants to have 800 petrol stations in Jiangsu province (which is south of the Yellow River) by 2015. It will also use a large portion of the Rmb100 billion ($14.6 billion) it raised from recent bond issues to build coastal refineries that will aid its push southwards.

China’s economic planners seem to like the Three Kingdoms ‘dynamic’. There are ‘three’ telcos too. With three operators you get strong players but also competition.

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