Energy & Resources

Gulf in price

How foreign petrol stations will compete in China

Oil-w

Shandong’s Shengli oilfield

Two cars drive into a Gulf Oil filling station. They are 105 years and two continents apart. One driver admires the station’s pagoda-shaped design, and the other the cheap fuel on sale. Which motorist was living in the US in 1913 and which one in China in 2018?

The answer is not what you might guess. That’s because it was the Chinese style pagoda that adorned the world’s first drive-in filling station in Pittsburg in 1913. The cheap petrol, meanwhile, was on sale in Guangzhou earlier this month after Gulf Oil took advantage of new ownership rules, unveiled in late June, to open a flagship outlet.

Prior to this, foreign petrol retailers were only allowed to hold a minority stake in filling stations through a joint venture. That stipulation has gone, although in this instance Gulf Oil has franchised its brand to a local partner.

The London-headquartered oil firm tried to create a stir, inviting Dwight Yorke, former star player of English football club Manchester United (which has a huge following in China), to cut the ribbon when its first petrol station opened for business on September 8.

Over the next few days, ThePaper.cn noted that ‘Gulf Oil’ had become a trending topic on social media. Chinese drivers were delighted that it was offering prices about 25% cheaper than rival petrol stations owned by the state-run duopoly Sinopec and PetroChina.

However, the good cheer did not last for long. After three days, Gulf Oil hiked its prices to the market standard, explaining that it had only lowered them for the opening.

According to ThePaper.cn, foreign fuel retailers must also adhere to the reference prices set by National Development and Reform Commission, although in this case the powerful economic planner had not intervened during the promotional period at the new Guangzhou station.

And given PetroChina and Sinopec supply more than 80% of fuels in the domestic market, there is less scope for foreign operators to compete with the state-run duo by cutting prices. Prices at the pump are already cheaper than Europe although on a like-for-like basis they are still much higher than in the US.

Nevertheless, foreign competition could still reshape China’s retail fuel sector, potentially upping standards.

“We will compete with better services,” a local executive of Gulf Oil told Sina Finance.

Since the restriction on foreign ownership was scrapped in June, the world’s oil majors have begun unveiling expansion plans. Gulf Oil plans to open 1,000 to 2,000 outlets over the coming decade, mainly as franchises although local executives say they have not ruled out self-managed petrol stations.

At the end of 2017 there were about 100,000 service stations in China. Sinopec leads the pack with a 31% market share, followed by PetroChina on 21%. Shell is the largest foreign operator with 1,300 outlets, which it operates through JVs with either Sinopec or Yanchang Petroleum (another state firm run by the Yan’an local government, see WiC399) in Shaanxi, Sichuan and Hebei. ExxonMobil also has a JV with Sinopec and operates roughly 1,000 stations, mainly in Fujian and Hunan. Third is BP, which plans to add 1,000 outlets over the next five years, on top of the 740 it already runs in association with a private-sector refiner, Donming Petrochemical, with its stations largely in Shandong province.

All told, foreign firms currently account for about 3% of Chinese petrol stations.

But as we wrote in WiC366, the future profit might not come so much from petrol, but from what is sold alongside it. Sales of snacks, beverages and other fast-moving consumer goods are the key to boosting margins at Chinese service stations. Local media believes foreign competition will push Sinopec and PetroChina to broaden their retail scope and improve their efficiency. Indeed, Sinopec has been looking to IPO its filling station unit. Profit from the unit’s non-fuel segment surged 63% in the first half to Rmb1.26 billion (out of a total profit of Rmb18 billion, or $2.62 billion).

For foreign players like Gulf Oil it certainly looks a promising market. Better still, the retail bit of the business is not regulated by the NDRC.


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