In an effort to curb inflation, China's top economic planner - the National Development and Reform Commission - told oil companies to keep fuel prices artificially low at the beginning of summer. While successfully keeping a lid on inflation, currently at a 15 month low of 3.3%, the policies are making it increasingly challenging for the nation's state-owned oil companies to maintain healthy profits.
Refining losses at Sinopec resulted in a 41% decline in first-half net income to 24.5 billion yuan ($3.9 billion while rival producer PetroChina reported a six percent decline in profit to 62 billion yuan ($9.8 billion) during the same period. Even for these state-owned giants, the fifth and sixth largest companies in the world by revenue, a combined 47% drop in profits is still a bitter pill to swallow. The NDRC has since indicated it might relax price controls in the second half, although analysts point out similar promises made in the past which also failed to materialise.
Slim margins mean the nation's top oil and gas producers are casting their nets further and further afield. PetroChina President Zhou Jiping said the company plans to generate over half of its oil and gas output from overseas by 2020 and has earmarked a tidy $15.7 billion for overseas acquisitions in 2012. Currently, PetroChina is still under budget, so expect to see a major announcement sometime in the next few months. Sinopec has also said it will more than double its foreign production by 2015 as part of Chairman Fu Chengyu's “go out” policy.
National oil companies have a responsibility to the people and the state, however unfair governmental pressure may have a more stultifying effect in the long run. The challenge for China's top oil companies in the future will be balancing global aspirations to become internationally competitive organisations with their domestic economic responsibilities.
Cash is certainly king, but if the state's financial position weakens due to a larger economic slowdown, will these giants still be able to afford massive refining losses at home and a global expansion plan all at the same time?
The majors would do well to keep sight of the domestic market too, where competition from both international and domestic players will turn the heat up on fuel and lubricants sales in the coming years. Sinochem Group, less than a quarter the size of its rivals Sinopec, CNOOC and PetroChina, has recently invested $4.6 billion in a refinery in Quanzhou. Shell also announced $100 million of upgrades to its existing Tianjin plant. The growing clout of smaller state-owned firms, like Shaanxi Yanchang Petroleum Corp, which recently announced they were preparing for an IPO, will increase competition at home.
Although Shell has “put their money where their mouth is” in the Tianjing plant and a $1 billion shale gas investment plan, global director of Shell downstream, Mark Williams, believes recent economic data could show cause for concern. Williams claims that demand for diesel and petrochemical products in China is at a “near-recession level low”, despite the energy-powerhouse posting steady growth figures. If growth slows too quickly, oil companies with large-scale, over-speculated refining investments will experience a saturated marketplace with slow demand for lubricants and other oil products.
In such a situation, marketing and product differentiation will be key. OATS innovative and flexible software for iPhones and iPads will give oil companies a much broader reach – especially in the China's growing smartphone market – helping them stay the vital one step ahead of the competition.
To find out more about OATS mobile solutions, or to comment on anything you have read in this Bulletin, simply contact Diana at DShen@oats.co.uk. We look forward to hearing from you.
Sebastian Crawshaw
Chairman, OATS