Total-ly invested in China's energy
sector By Federico Bordonaro
On March 2, PetroChina signed an agreement
in Beijing with French oil
major Total SA. The two companies' goal is jointly
to develop the south Sulige gas field in the Erdos
Basin in Inner Mongolia. This
field, according to Chinese authorities, holds
more than 100 billion cubic meters of proven gas
reserves.
The official statement also
states that the two companies signed a memorandum
of understanding on commercial strategies
regarding the natural gas
extracted, without providing any further details.
A Dow Jones Newswires note reported,
"French oil giant Total may hold a majority stake
in the gas project and will gradually reduce the
stake once it gets a return on its investment,
said a source close to Total." And, according to
Total China president Jacques de Boisseson, the
French corporation also plans to open 500 service
stations in China over the next six years,
together with state-owned oil trader Sinochem.
Total will thus become the third European
major to go into business in China's retail oil
market, after Shell and British Petroleum, which
formed joint ventures with PetroChina and Sinopec
a few years ago.
The significance of this
new contract lies in the increasing interest of
foreign oil and gas operators both in the
exploration and exploitation of China's
fossil-energy reserves and in its retail oil
market. Since Beijing acceded to the World Trade
Organization (WTO), its domestic market rules have
been continuously redefined. Foreign corporations
and investors have thus been required to prepare
to act effectively in a changing environment, in
which the government still plays a crucial role.
In fact, Beijing has been busy
reorganizing most of its state-owned fossil-energy
assets since 1998. Two vertically integrated
companies have been helping Beijing put its
restructuring plan into effect: China National
Petroleum Corp (CNPC) and China Petrochemical Corp
(Sinopec).
The restructuring plan has been
conceived to rationalize both the production and
the regional task management of the entire
national energy sector. Traditionally, CNPC had
concentrated on fossil-energy exploration and
production, while Sinopec had focused on refining
and distribution. After the reorganization, CNPC
is to be active mainly in the north and west and
Sinopec in the south. Since most of China's oil
resources are in the north and west, CNPC will
maintain its focus on crude-oil production and
Sinopec will remain oriented toward refining
operations.
PetroChina was set up in 2000,
as a CNPC subsidiary holding the latter's
high-quality assets. Another major state-owned
company, the China National Offshore Oil Corp
(CNOOC), engages chiefly in offshore exploration
and production. Furthermore, the overall
regulation of the state energy sector is now the
responsibility of the State Energy Administration
(SEA), launched in 2003.
To help the two
national heavyweights secure their market
positions, the government has not hesitated in the
past few years to revoke permits it had issued to
foreign companies, under various pretexts, thus
preserving its state-owned giants' de facto
duopoly while avoiding formal infringement of WTO
rules. This means the political risk in China's
oil-and-gas market has remained high for foreign
businesses through the past decade. Nevertheless,
international oil and gas majors have obviously
not lost interest and are continuing to work to
expand their influence in the Chinese market.
A recurring theme in the development of
China's energy sector, as many analysts have
noted, is that China appears to be interpreting
the spirit of the WTO rules to its own national
advantage, chiefly in terms of maintaining a
significant amount of state control over this
crucial sector.
For example, WTO
stipulations require China to open up its retail
and wholesale fuel markets to foreign firms.
However, retail prices are still bureaucratically
regulated, in such a manner that international
refiners cannot easily turn a profit on sales
inside China.
According to a 2004 article
in the Hong Kong daily The Standard, state-run
companies have been able to expand their retail
networks and cope with foreign competitors "by
squeezing the margins of retail station operators
by jacking up the price of oil sold to them and
then buying them when they lose money". Although
"the new requirements to run a retail business
appear straightforward, the ministry announced on
its website that new retailers require a stable
oil supply via contracts with legal wholesalers
and must meet the development plans of local
governments. It also said that there will be
penalties for selling illegal oil to retailers."
Furthermore, although Shell and PetroChina
agreed last year jointly to develop the Changbei
natural-gas field (in the Ordos Basin in
northwestern China), Beijing has also proved
unwilling to open up its domestic upstream sector
to international investors.
Nonetheless,
specialists and operators alike appear to be
wagering on a further opening-up of China's retail
and wholesale energy markets. The decisive factor
is probably the recognition of some of China's
basic, and vital, needs.
To begin with,
Beijing's deal with the WTO paves the way for an
opening of its domestic refined-oil retail market
to foreign firms, notwithstanding the persistence
of national strategies to support state-owned
corporations. Thus China is expected to fulfill
its obligations, and hence to open up its
wholesale market for refined oils.
Another
key aspect is China's imperative need to enhance
its energy security. Accordingly, the government
is both upgrading national exploration and
production capabilities and expanding China's
strategic partnerships abroad.
The French
have long eyed the potential benefits of energy
and technology cooperation with the rising Asian
giant, so Total's agreement with PetroChina is an
almost natural development in this context.
Additional joint ventures consisting of a Chinese
state-owned corporation and a foreign energy firm
can be expected to follow the Total-PetroChina
deal.
Yet another motivating factor,
related to environmental issues, should encourage
Western energy players to pursue the China market.
Beijing needs to expand the use of cleaner-burning
fuels, such as natural gas, to replace coal
progressively, especially at a time of such hugely
increasing energy demand from its constantly
growing economy. PetroChina and Total, Europe's
largest refiner, are set to benefit from Beijing's
goal of making natural gas contribute up to 8% of
the nation's energy supply by 2010 (from about 3%
now). China's natural-gas production rose 20.6%
last year, according to the Beijing-based National
Bureau of Statistics' annual economic report.
Another point worth noting, with regard to
China's foreign policy and energy strategy, is
that Total's exploration and production president,
Christophe de Margerie, told the press during the
agreement ceremony that PetroChina and Total are
studying the development of a gas field in Iran.
It remains to be seen how any further escalation
of US-Iran tensions over Tehran's nuclear
ambitions could jeopardize this joint business
strategy.
In conclusion, although
Beijing's smart management of WTO rules has at
times been sharply criticized by Western media and
decision-makers, the negative impact of such
practices on the prospects for doing business in
the world's fastest-growing energy market appears
to have been relatively limited. Moreover, in an
international economy often marked by economic
nationalism, the Chinese approach to globalization
is perhaps becoming more acceptable - especially
to the French, presumably.
Competition
among Western oil and gas majors in China is set
to increase, and for the moment, France's Total
appears to have scored a good point.
Federico Bordonaro is senior
analyst with the Power and Interest News Report.
He can be contacted atfbordonaro@NOSPAMpinr.com.
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