ChinaOil C O M M E N TA R Y
War at the pumps
Chinas NOCs have slashed fuel prices in a bid to steal back market share
from private retailers, reports Saw Wright
CHINAS teapot refineries, and the independ-
ent fuel stations they supply, have had a rough
year weathering rising taxes, falling demand
W H AT: and a revocation of export licences. Now a new
Sinopec and PetroChina challenge has appeared in the form of a price war
have cut prices for their with the countrys state giants.
higher-quality fuel in an In recent weeks Sinopec and PetroChina
effort to out-compete have engaged in a price war across the countrys
their rivals. fuel stations, offering free car washes, credits on
pre-paid gas cards and heavy discounts for fuel
W H Y: as they attempt to out-compete their rivals. Chi-
The two fuel retailing nese customers have responded well, with many
giants have seen their abandoning the cheap, but lower-quality, fuels
market share eroded by offered by the teapot-fed fuel stations in favour
both private and foreign of higher-quality NOC offerings now that prices
players. have equalised.
This marks something of a change of tactics
W H AT N E X T: on the part of state oil firms. Previously, they had
Beijing can only let a offered sparse discounts, relying on their dom-
price war continue for ination of Chinas wealthy southeast to support
so long or risk the NOCs higher pricing.
crushing the private The objective of this seems clear restore the
sector. NOCs market dominance over their upstart
rivals and the international competitors claw-
ing their way into China. Once commanding an
enormous duopoly covering almost the entire
Chinese market, Sinopec and PetroChina have
seen their market share eroded by Beijings
attempts to liberalise the economy.
Meanwhile, with oil prices low and a glut of
fuel available on the local market, Sinopec and
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PetroChina have the capacity to fight this kind
of price war for some time without cutting into
their overall profits, while the teapots are already
operating with strained resources and may find
their position diminished.
Under pressure
There are more complex motivations in play,
though, and it remains unclear who will ulti-
mately benefit.
Since import quotas were first granted in
2015, the independent refineries and their fuel
station clients have been something of a head-
ache for the Chinese government. There have
been a growing number of claims of tax avoid-
ance and breaches of regulations, as well as con-
cerns that the teapots thirst for crude has driven
up prices for other buyers. Massive demand from
the teapots has previously seen tankers queuing
at Chinese ports and kept oil prices from slump-
ing too far.
But one reason Beijing has attempted to liber-
alise the energy economy and encourage teapot
refineries has been to cut down on the power of
the oil clique and the NOCs.
Splitting up the market and allowing compet-
itors to enter did achieve this to an extent, espe-
cially as it allowed Chinese consumers to choose
cheaper options and multinational oil giants to
enter Chinas previously closed economy.
In a pro-liberalisation climate a few years ago,
Week 29 27July2017
ChinaOil C O M M E N TA R Y
when oil cost more than US$100 per barrel, Sin-
opec and PetroChina would not have dared to
try to force out their competitors for fear of either
damaging their profits or triggering state inter-
vention and a return to stricter price controls.
But with crude prices half of what they were
three years and some of the teapots shine hav-
ing rubbed off, this may be the NOCs chance to
regain ground.
Diversification
Whoever is behind it, though, the price war
cannot go on forever, even with the NOCs deep
pockets and extensive resources.
The National Development and Reform
Commission (NDRC) has been slow to alter
official prices of fuel and diesel. Prices were only
lifted last week after an eight-week freeze that
the commission said was driven by a focus on
international crude prices rather than domestic
market shifts, which limits the amount to which
prices can fall and incentives can be offered.
In addition, the teapots may find other ways
to circumnavigate the price falls, as they have
already been doing in order to survive without
access to the lucrative export markets and in the
face of higher taxes.
With Chinas demand for oil shrinking as the
economy develops and fuel-efficiency becomes
the order of the day, the independent oil produc-
ers and distributors in China are having to take
drastic measures to stay afloat.
Shandong Dongming Petrochemical, for
example, plans to add naphtha cracking systems
able to process up to 800,000 tpy to produce
plastics and synthetic rubber, diversifying away
from the vehicle fuel game altogether. Others are
investing in small onshore fields to reduce pro-
duction costs, or branching out into other indus-
tries such as lumber, finance and even renewable
energy. Shandong Haike, for example, is moving
into electrolyte production for lithium-ion bat-
teries, in line with Beijings clean energy policies.
Speaking to NewsBase Intelligence (NBI),
energy analyst Thomas ODonnell suggested
that fostering this diversification might have
been the states objective all along when liberal-
ising the industry.
He said: The world of oil is growing much
more technical, and all Chinese companies are
being challenged. With their organisational/
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managerial cultures it is hard to implement
innovation in tech and operations in both con-
ventional and non-conventional plays in the way
the US and EU majors, and US shale, can.
Damage control
However, smaller teapots that cannot hope to
implement these often expensive changes may
see themselves forced out of the market entirely, or
bought up by the NOCs as they flounder. This is less
of an issue for IOCs invested in the Chinese mar-
ket, although Royal Dutch Shell warned of market
volatility in an email quoted by Reuters, blaming
seasonal supply and demand changes.
Sinopec, in particular, cannot take too big
a hit to its profit margins or even appear to be
embattled thanks to the upcoming IPO of a fur-
ther 10% of retail division Sinopec Marketing.
As this sale (intended to reduce corruption,
improve efficiency as well as encourage Chinese
investors) is actually aimed at the public unlike
the previous one, Sinopec is particularly inter-
ested in demonstrating both market dominance
and profitability.
This puts it on a delicate balancing act, trying
to keep profit margins comfortable while trading
them for gains in market share.
Sinopec is most capable and professional,
ODonnell said, and likely can handle a long-term
low-price environment best of the Chinese NOCs.
With the independents, Id say one has to be sure
of what kind of support they get from the state as
things go forward; this is not a free and competitive
market country, after all. But in principle, a long-
term low-price regime should give the competitive
advantage to the big NOCs who would normally
scarf up independents in trouble.
The question then becomes whether the Chi-
nese government will allow Sinopec to push the
price war for long enough to gain that advantage
and buy up its teapot rivals. If the governments
objective is to force the teapots to diversify and
gain a competitive advantage, it will have to walk
a fine line between creating competitive, innova-
tive conditions and allowing the NOCs to drive
the fragile teapot ecosystem into the ground.
Perhaps that explains the motivations behind the
recent offer from Sinopecs trading arm, Unipec,
to work with independent refiners. (See: Sino-
pec: Chinas oil imports will hit 8m bpd this year,
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