ChemChina Entry Marks Cosmetic Reform to China Oil Market

The entry into China's tightly controlled crude import market by small refinery operator ChemChina marks a modest reform, but there is little sign that Beijing is ready to open the door wider to competition for the world's second-largest oil market.

China's demand growth over the past decade has been a major factor in a long-term oil rally that has taken Brent crude above $100 a barrel and kept it there for most of the past two years. Crude imports into China will rise toward 9 million barrels per day (bpd) by 2020, according to industry estimates, from about 5.3 million bpd now -- already nearly 6 percent of global supply.

Rising fuel demand would present a potentially lucrative opportunity for global oil majors and traders if the market was open. For Beijing, the advantage of more domestic competition may be to push the powerful state-run duopoly of Sinopec Corp and PetroChina to keep fuel supply abundant even when refining margins are poor.

The price Beijing would have to pay for wider reform may, however, be too high, industry sources say. It would weaken the two firms' clout in global crude markets and make their task of securing China's strategic oil supply tougher.

"The big majors are performing a very important role for the state in terms of securing energy resources from abroad and keeping the market supplied," said an industry veteran who used to work closely with Sinopec.

"This is another reason why their interest should be protected and they will continue to assert critical influence on policy makers."

Sinopec and PetroChina control 90 percent of China's crude imports. Sinopec is Asia's biggest refiner and its trading arm Unipec buys most of China's crude imports. PetroChina mostly refines domestic crude output of around 4 million bpd.

POLITICAL CONNECTIONS

ChemChina is the operator of several small refineries known as teapots, and with other similar operators has long pushed for a more open crude import market. It won an import quota for 10 million tonnes for 2013, joining a market dominated by Sinopec and PetroChina since an industry revamp in 1998.

The political connections of ChemChina's chief executive, Ren Jianxin, a former communist youth league leader, may have helped. Ren is from the same political camp as President Hu Jintao and the premier-in-waiting Li Keqiang.

"This could be a departing gift from Hu for a fellow youth league leader Ren," said a Beijing-based industry executive.

That could mean the chance of independent refiners winning any other permits may depend more on the political sway of individual aspirants than any drive from Beijing for a freer oil market, industry and trading officials said.

The line-up of China's new leadership -- the seven-member Politburo Standing Committee -- which excluded the more reform-minded candidates, could mean reforms across the economy, including in energy, will be slow.

"I don't think the issuing of these permits necessarily signals that the government is about to do anything radical very soon," said Philip Andrews-Speed, Principal Fellow at Energy Studies Institute of National University of Singapore.

"Indeed, it allows the government to say 'you see, we are doing something', but really it may just be cosmetic."

Even with his connections, winning the licence took three years of lobbying for Ren, whose western-influenced management style has won him foreign backers. Private equity firm Blackstone invested $600 million for a 20 percent stake in ChemChina's chemical division in 2007.

CONTROL

China, which could overtake the United States as the world's top oil user by 2020, controls crude imports tightly to keep domestic oil supply stable. The government considers it easier to work through two state firms whose primary task is to guarantee supply than to deal with many competing importers.

Sinopec and PetroChina would resist any major reforms in the crude import system, and represent a powerful political force. Between them they contribute over a tenth of the dividends to Beijing's coffers from the more than 110 state-owned enterprises combined, a Sinopec official estimated.

Other small refiners will be encouraged by ChemChina winning a permit despite the obstacles to winning permits. Teapot refiners have total capacity to refine around two million bpd, nearly 17 percent of China's total refinery capacity of 12 million bpd.

A permit to import crude means smaller oil refiners can cut costs and better compete in fuel retail. Without an import licence, they rely on fuel oil as a feedstock, which produces less high value fuels such as gasoline and diesel and limits their flexibility to match output to demand.

Sinochem and CNOOC, parent of offshore oil producer CNOOC Ltd, both run smaller plants similar to ChemChina, and would covet import permits to bolster their refining business. Others include privately-run, Hong Kong listed Brightoil Petroleum, a bunker fuel trader with ambitions to extend into crude business.