In the pipeline

For insurers, piping’s hot

Anyone with doubts about the importance of China National Petroleum Corp should look at the career paths of its former bosses.

Earlier this year, Jiang Jiemin left his role as chairman of CNPC to become the head of the State-owned Assets Supervision and Administration Commission (Sasac), the organisation that overseas large state-owned enterprises (for more on which, see WiC45).

In fact, Century Weekly reported at the time that it is typical for CNPC’s senior management to go on to great things. The magazine points out that the head of Fujian province was a former vice president at the oil firm, while an earlier president of the company went on to become Sasac’s Party secretary.

The question now is whether Jiang will take bolder steps to shake up the state-owned giants. And those looking for clues on how he might go about his new job might look at an unusual CNPC deal that originated under his tenure.

Last month CNPC signed a contract with Taikang Asset Management and the Beijing Guolian Energy Industry Investment Fund to set up a joint venture. It is called CNPC Pipeline United and is a business that will construct and operate oil pipelines.

PetroChina, the listed arm of CNPC, will inject its West-East Pipeline assets – valued at Rmb20 billion ($3.25 billion) – into the JV in exchange for a 50% stake. Meanwhile Taikang and Guolian will invest Rmb36 billion and Rmb24 billion in cash each, taking a 30% and 20% stake respectively in the new firm.

The contract stipulates that investors cannot sell their stakes for at least 10 years but that they receive annual returns worth more than 6.2%, according to a source speaking to the Economic Observer.

CNPC has the right to purchase the stakes of the other shareholders after the 10-year window closes.

But what makes the deal particularly interesting is its structure. Taikang is investing via a consortium that comprises nine Chinese insurers. Similarly, the Guolian portion is made up of a number of local investment funds. So the deal has the appearance of a syndicated loan, with a wide range of investors stumping up money. This kind of arrangement is not common in China, but if it proves successful it could develop into a new route for companies to receive financing.

Certainly, Jiang thinks that the deal structure by his old firm is important, as it allows private investors to get regular returns from stakes in stable, state-controlled companies, reports ChinaScope Financial. These private shareholders should, in theory, also impose higher standards of corporate governance on company management.

There are signs that the government is keen to encourage this kind of funding: the approval process, overseen by the insurance regulator, only lasted two days, reports the Economic Observer.

In the same way that it is notable that CNPC sourced funding from insurers, it is also noteworthy that bank financing wasn’t involved in the deal. After all, the pipe project that underlies the joint venture is a quality asset that will provide a stable cashflow.

“One important reason is that banks no longer have a price advantage on such loans,” a Taikang stakeholder told the Economic Observer.

Furthermore, the long-term nature of the project might be less attractive to banks in tying-up capital for a protracted period.

For CNPC the venture seems like a smart way to fund its expansion programme, which already consists of a range of expensive long-term commitments, including buying access to oilfields and building the infrastructure to extract, move and distribute its resources.

The problem with investing in such massive projects is that it puts pressure on working capital. In March, when the deal with the insurers was being thrashed out, CNPC’s working capital was negative Rmb79.7 billion, reports Century Weekly. So it makes sense for CNPC to have as broad a range of financing channels as possible. Zhou Jiping, the company’s chairman, said at a news conference in May that the firm will “promote joint-venture cooperation and promote an asset-light strategy,” the Economic Observer concluded.

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