China View from the Bridge: July 2015

Is the era of the Chinese energy mega deal coming to a close? Between 2009 and 2013 Sinopec, CNPC and CNOOC made over $104bn worth of deals and acquisitions collectively, compared to just $9bn from their US counterparts. In 2014 the big three spent just $2.8bn internationally, despite low oil prices presenting some attractively priced investments.

Chen Weidong, Chief Energy Researcher at CNOOC, reckons the previous government’s goal of energy security at any cost is no longer a priority and, as the economy cools, state-owned enterprises are feeling the pinch of low oil prices, risky investments and rising production costs.

The universal “go out” policy that characterised so many acquisitions in emerging markets like Latin America and Africa is now under closer scrutiny, especially as oilcos are being asked to improve their situation at home. Clean energy, increased efficiency and anti-pollution drives will be the primary focus for the three companies over the next decade.

Alongside a series of widespread reforms, Premier Li Keqiang is pioneering the “Internet Plus” plan that seeks to marry the digital intelligence of China’s tech firms with the commercial resource of its traditional industries. Energy and manufacturing companies in particular are being put forward for the experiment in the hopes they will bring their organisations further into the 21st century.

For example, CNPC is teaming-up with tech giant Tencent to collaborate on mobile payments, internet finance, online-to-offline business, group buying, membership management, cloud computing and big data analytics to help it organise and optimise its massive database of consumer information.

Local customer knowledge, combined with improved production facilities, higher quality products and quick, efficient networks could make China’s oil giants a formidable force to international firms operating in the region.

To counter the threat, Shell has built a new commercial centre to better service its downstream customers and also completed work on its eighth blending plant in the region.

The Anglo-Dutch major is looking to streamline logistics and distribution channels for imported sulfur products. It will also be able to deliver 330m litres of lubricants a year through the Tianjin plant alone, including its high-end Shell Helix Ultra and PurePlus product suit to Chinese customers.

If domestic majors become more agile and efficient at cross-selling to existing customers and international players continue to deliver high-end, innovative products under respected and recognized brand names, smaller, under-resourced independents will struggle to compete. By some estimates there are more than 3,000 independent lubricants producers in China, not all of whom will be able to find a niche to exploit or mass market to serve.

That said, in the age of Internet Plus, a disruptive producer with a clever marketing strategy could pose a serious threat to more well-established producers too.

OATS is already playing a key role in helping lubricants producers and marketers of all sizes gain a competitive edge in their markets, based on our earlFUSiON platform and its associated products and services.  To find out more, or to comment on anything you have read in this month's OATS China Bulletin, simply contact Diana Shen. We look forward to hearing from you.

Sebastian Crawshaw