Energy & Resources

Breaking up is hard to do

After plague of scandals, critics want to break up oil giant CNPC

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Not so pumped up: reformers have suggested CNPC’s petrol stations could be hived off from the group

As memos go, Reuters describes it as unusually “blunt”. The message was issued last year to staff at China’s second biggest oil major and warned them against taking bribes. Specifically it was circulated to those working on a $900 million refinery expansion in Fujian province.

“Project engineering and construction has been a main area for corruption at Sinopec,” it stated. “All members, especially those in key posts, must treasure their positions, stay guarded and resist temptation.”

The news agency – which was read the document by a Sinopec source – went on to draw this conclusion: “The memo underscores what experts say is one of the biggest challenges facing Xi Jinping and his drive to tackle corruption – rampant graft in engineering, procurement and construction contracts awarded by state firms.”

Sinopec’s larger state-owned brother CNPC has recently grabbed more of the headlines about suspected graft.

As we reported in WIC207, in late August a first senior executive at CNPC was arrested for “serious discipline violation” and three more senior colleagues were then charged. The biggest coup was to follow at the beginning of last month when CNPC’s former boss Jiang Jiemin was also detained.

All of the men were part of a powerful faction termed the Shengli Gang because their careers had been formed at the Chinese oilfield of the same name. Jiang was the most prominent to be detained for what local media has described as the “enormous embezzlement of funds”, citing sources close to the Party’s discipline watchdogs.

The probes into CNPC – whose listed vehicle is called PetroChina – have continued. This month a services provider to CNPC called Wison Engineering Services was drawn into the investigation by Chinese authorities.

In a statement to the Hong Kong stock exchange, Wison said regulators had enquired “about certain projects of the group, taken books and records and frozen certain bank accounts”. The Shanghai-based firm’s CFO has resigned, and its billionaire chairman Hua Bangson “is not contactable and not available to discharge his daily duties”.

But it is a similar investigation of a larger contractor in Sichuan that could cause far bigger waves. The company in question is Zhongxu Energy, which has enjoyed extremely close relations with CNPC in recent years. Its boss (another tycoon) Wu Bing has been detained since August.

The question here is how Zhongxu managed to forge such close links with the oil giant. According to Caijing magazine, the pair inked their first deal in 2007. Within three years Zhongxu had either built or was managing 8,000 petrol stations for CNPC. These were located as far afield as Sichuan in the west and the northeastern provinces of Liaoning and Heilongjiang. The magazine said that Zhongxu was working with CNPC in 17 business areas, including logistics, consulting and seismic processing.

Speculation about the relationship is now focusing on the background of one of Zhongxu Energy’s key shareholders, Zhou Bin. A former anti-graft official told the New York Times that investigators are questioning Zhou, who is the son of Zhou Yongkang. That makes this the most significant probe yet: Zhou senior was the undisputed leader of the Shengli Gang, and more importantly a former member of the Politburo Standing Committee and a supposed ally of the jailed Chongqing Party boss Bo Xilai.

The anecdotal evidence is that something momentous is afoot. That’s because typing Zhou Bin’s name into China’s leading search engine Baidu generates a top link of ‘Zhou Yongkang is under investigation and his son Zhou Bin was arrested two months ago’. This then directs the reader to an article on Yahoo Finance, which is telling because China’s normally vigilant internet censors have elected to allow the link to stay live. Usual practice would have been to block searches involving Zhou Bin’s name.

If it emerges that there is a case against Zhou Bin, it will confirm a pattern of patronage and pay-offs that many have suspected for a while. That is to say, it will offer a more concrete illustration of how well-connected political figures have been able to use the largest state-owned firms for their own enrichment, primarily through the use of contractors who win lucrative service deals.

The chief energy researcher at CNOOC, China’s third biggest oil firm, hinted as much to Reuters. “It’s inevitable to have the corruption problem because of the high concentration of power at the top,” Chen Weidong admitted. “They hold public tenders for projects but the process of choosing winners is not open.”

A structural flaw is clearly being exposed, editorialises Century Weekly. “The CNPC scandal should raise questions of how graft is linked to the monopoly power of state-owned giants,” the magazine writes.

More immediately, the media is asking whether the growing scandal at CNPC could lead to the announcement of specific reforms within the oil industry at the Party’s Third Plenum next month.

The Economic Observer even headlined its article on the theme: “Will CNPC be broken up?” It then quotes informed sources in government as suggesting that CNPC’s gas pipelines may be hived off into a separate company.

The newspaper says CNPC controls 90% of the country’s natural gas network, which gives it a virtual monopoly over wholesale distribution. This has brought it into confrontation with firms like Shenhua and Datang which would like to use the network; it also means that CNPC’s own gas production enjoys privileged access.

The China Daily also thinks a break-up could be on the way. But it focuses on a different area: the petrol pumps used by consumers. Between them, CNPC and Sinopec have 19,000 and 30,000 petrol stations respectively, accounting for over 80% of the petroleum retail market (European firm Shell, by contrast, has just 600 petrol stations in China). State holding company Sasac told the newspaper that while exploration and production were a national security concern – and thus likely to stay with the three oil majors – the same is not true for petrol stations.

The director of Sasac’s research centre Xu Baoli says that petrol stations should be independent from the majors and greater encouragement should be given to foreign and local private investors in this area.

“If all the petrol station retailers – state run, foreign and private – could sell the finished oil products of CNPC, Sinopec and CNOOC, a competitive tendency would be formed among the three oil majors in the finished oil market. Each would choose oil products with low prices and good quality.”

Will such dramatic changes really happen? The Economic Observer has its doubts. It quotes a senior economic planner who admits that the biggest obstacle to splitting up firms like CNPC is opposition from vested interests. Not only do these groups and their families benefit from the current circumstances, their political clout is strong enough to thwart reform plans.

And there have been some conflicting signals this week too, notes the Wall Street Journal. On Tuesday it reported that Zhou Yongkang had made a rare public appearance – in this case, at his alma mater, the China University of Petroleum (the institution’s website carried photos of the visit). That indicates that, in spite of all the speculation, Zhou is at liberty. Significantly, Xinhua made no mention of Zhou’s walkabout.

Make of all this what you will.

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