Energy & Resources

We’re off to see the Wizard

Sinopec’s dilemma reveals a misconception about ‘state capitalism’

A tapped-out approach

In the 1939 film, The Wizard of Oz, a single man keeps a kingdom in thrall by stage-managing spectacles while he remains hidden from sight. Some China observers seem to assign similar skills to the mandarins orchestrating the country’s economic affairs. But what if those commentators are giving ‘state capitalism’ much more credit than it deserves?

The reality of the situation is not so clear-cut. The Chinese state may be highly centralised, but it runs a complicated continental economy – and must juggle the conflicting interests of different groups.

For example, in WiC82 we described the rival Chinese state-owned trainmakers CNR and CSR, and their fiercely competitive behaviour. (Little evidence there of a monolithic state planner at work.)

Yet it’s an idea that continues to fascinate much of the international media. Last week the Economist magazine ran a cover story on a similar subject, and the Wall Street Journal published an article headlined “China’s ‘state capitalism’ sparks a global backlash”. Clearly the image of a clique of ingenious Chinese cadres – plotting their nation’s dominance of world resources – has started to take root.

Paradoxically, Chinese newspapers have chosen recently to look more at the system’s often uncoordinated approach. And they say it’s especially the case when state firms acquire assets abroad.

The relationship between the three major state oil companies, Sinopec, PetroChina and CNOOC, is a case in point. Sinopec is viewed as the weakest of the three because it lacks significant oil supplies of its own, drilling just 30% of the oil it sells, according to Century Weekly magazine. It’s a vulnerability that its ‘sister’ companies seem determined to exploit – by competing against Sinopec for overseas reserves.

When the three were founded in the early 1980s, they were not created equal. PetroChina received the massive Daqing oil field, CNOOC got offshore wells, but Sinopec’s main asset was the large refinery capacity of the south. That turned out to be a critical disadvantage when the oil price spiked in 2008, with the price of refined oil (such as gasoline) strictly controlled in China. That lossmaking experience convinced Sinopec management to pursue new reserves abroad.

“Although Sinopec has large-scale assets and a strong downstream advantage, its profitability is not as good as [PetroChina] and CNOOC,” explains Guo Haitao, assistant director at China Energy Strategy Research Centre. “Every time the international oil price rises, Sinopec suffers losses.”

But when Sinopec paid $7.1 billion for a 40% stake in Repsol’s Brazilian operations last month, it looked like a case of China Inc bidding against itself. “Informed sources said that Repsol was not only negotiating with Sinopec,” reveals Century Weekly. “CNPC [parent of listed PetroChina] and CNOOC were also involved in the bid. In fact, in almost every overseas energy M&A, people see the three familiar domestic oil giants.”

“The current plundering by the three companies is confusing,” another industry executive told the magazine.“Sometimes, even when a project is about to be concluded, the three still compete for it causing the price to increase further.”

That’s led Sinopec to beg Sasac (the State-owned Assets Supervision and Administration Commission, see WiC45) – the body that directly owns the three rivals – to referee.

On the face of it, Sasac seems minded to agree. “If there are central-level enterprises that compete with each other in the same area for the same project, we must severely criticise them,” said Wang Xiaoqi, Sasac’s secretary for planning and development, “we must stress [the] principle [that] who enters first should be supported.” If they can manage that, perhaps Western conspiracy theorists will finally be right about ‘state capitalism’.


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