China State-Owned Oil Monopoly System to Slowly Change

Earlier this month the Unirule Institute of Economics, a Beijing-based think-tank, said in a report that deep reform is needed in China’s oil monopoly system, which they claim has led to low efficiency. The report said that the first step should be opening crude oil import access to all of China’s refineries.

The think-tank recommended that the government allow oil refinery companies with a production capacity of over 5 million tons to import crude oil this year, and authorize all oil refinery companies to import crude oil next year.

Private oil companies in China are not usually permitted to import crude oil directly, but have to rely on state-owned companies for their supplies. The only crude private companies can import is heavy crude, which is harder to refine.  Lighter crude is more valuable since it yields higher value lighter products such as gasoline.

The report cites private refineries in East Shandong Province as an example. The major source of crude for refineries there is also heavy, which they are allowed to import, according to Liu Aiying, director of the Shandong Oil Refining Association. However, Liu said that the oil import quota is generally not enough for private refineries and they sometimes have to purchase crude from the state-owned oil groups.

Chinanews.com, reporting on the think-tank’s report, quoted government officials who said that Beijing has concerns about opening crude oil import access to private companies, claiming that if all of the private oil companies go overseas to negotiate prices and purchase crude oil, prices could rise to an unpredictably high level.

However, Sheng Hong, the think-tank’s director, told Global Times during a press conference announcing the new report that China has already lost its pricing power for international crude oil by only permitting state-owned enterprises to buy crude oil overseas. Critics of the report state that reform of the oil monopoly system is unlikely to be achieved in the short term due to its complexities.

The think-tank claims that the total loss caused by the country’s oil monopoly system, including profit loss in the oil industry, reached as high as 3.477 trillion yuan ($561 billion) from 2001 to 2011.

However, not everybody in China thinks that state-run companies, even oil monopolies, are so horrible. In a June 3 commentary “China’s SOE monopoly fallacy” China.org.cn said that the reform and development of China’s state-owned enterprises (SOEs) has achieved “remarkable progress” in recent years with 59 SOEs making the 2011 Fortune 500 list, while Sinopec, CNPC and State Grid placed in the top 10.

While not mentioning the Unirule Institute of Economics report by name, the commentary nonetheless takes aim at its assertions.

“Some neo-liberal scholars argue that SOEs benefit from their monopoly status and hamper the healthy development of private companies and that if a ‘genuine market economy’ is to be established SOEs should withdraw from competitive industries,” China.org.cn states. “The SOE monopoly theory is outdated since it can’t account for the fact that China’s private economy grows faster than its state-run economy.”

The commentary does however admit that SOEs in the oil and gas sector enjoy a high level of monopolization, but the commentary also claims that this does not limit competition among state-owned oil companies.  “Competition also exists within monopoly industries. In China, the production of oil and gas is mainly controlled by three SOEs: Sinopec, CNPC and CNOOC. Oil products are mainly produced by Sinopec and CNPC, which are locked in fierce competition with one another.”

Yet reform is under way in China, including the oil and gas industry, even if it is coming at a snail’s pace.

Last June, Beijing unveiled what the China Daily called “a string of policies by the central government to encourage the opening of monopolized sectors to private investment.”

“Since May [2012] ministries, including the Ministry of Land and Resources, the Ministry of Transport, and the Ministry of Railways have announced a slew of detailed policies to materialize the ‘New 36 Rules’ released in 2010 on private investment in State-monopolized sectors including natural resources, energy, railway construction, banking and public utilities,” the China Daily wrote.

The first private Chinese company to test the waters last year was Guanghui Energy when it applied for a crude oil import license, an area strictly controlled by China’s state-owned energy companies.

Since that time Guanghui Energy and some other private enterprises have already started overseas oil and gas development, according to Chinese state media, yet Guanghui Energy has not imported any crude oil as applied for.

However, Guanghui signed a letter of intent on June 13 with Royal Dutch Shell to explore the possibility of developing a liquefied natural gas (LNG) import terminal in eastern China’s Jiangsu province. Chinese media and international media ran the story the same day.

Later this year China’s State Council is expected to announce additional proposals to make the country’s economy more market-oriented. Already, in May it slashed what Bloomberg called “bureaucratic red tape” by eliminating or delegating to lower levels 117 different administrative approvals, including some for large oil and gas projects.  The Shanghai-based National Business Daily said that in May the commission approved only four new projects, compared with 239 in May of last year.

Considering the size of China’s state-owned companies (particularly its oil majors) that are some of the largest companies in the world, and the history of economic and regulatory development in China, (which is after all still a communist country with strict top down economic planning by Beijing), these developments are encouraging. Hopefully, in time they will lead to greater marketization and even a purer form of capitalism, which begs the question: What would Chairman Mao and the proponents of China’s Great Leap Forward think about all of this?