China has issued a crude oil import licence to a non-state-owned company after months of expectations, in a grudging first step towards opening its state-dominated oil sector to competition.
Hopes had been high that China would loosen controls over crude imports – and ultimately, over the entire oil sector – by issuing more licenses to independent players. But so far those have failed to materialise.
Guanghui Energy, an oil and gas company based in the frontier province of Xinjiang, may import 200,000 tonnes of crude this year, following approval by the Ministry of Commerce.
By selecting Guanghui rather than any of the “teapot” refineries, the independent operations that pose a threat to China’s two dominant state-owned oil companies PetroChina and Sinopec, the Ministry of Commerce has stopped short of truly opening the market. Guanghui already owns oil and gas blocks in Kazakhstan but has no refineries, so its crude is most likely to be refined at a PetroChina facility in Xinjiang.
“People have a lot of expectations for reform and hope that a breakthrough will come soon, so they get excited over this news. But reform is actually still at very initial stages,” said Li Li, research director at ICIS China, an energy consultancy. Reformers have said that dismantling the monopoly oil majors’ hold over imports, domestic pipelines and other strategic sectors is necessary to break their dominance and create a more competitive and efficient energy sector.
As part of its World Trade Organisation commitments, China allocates about 10 per cent of its crude imports to non-state traders, but extra paperwork requirements effectively limit the competitiveness of those imports.
Zhou Xizhou of IHS Cera in Beijing said Chinese reforms often begin with the point of least resistance. “This will encounter less national oil company opposition,” he said. “So many areas are still dominated by the NOCs, but this opening is not very threatening to them.”
The majority of China’s crude oil is imported by Petro-China, Sinopec and smaller Cnooc, as well as two state-owned trading companies. The “teapots”, mostly based in Shandong, account for about 16 per cent of China’s refining capacity and have stubbornly clung to life despite lending and capacity restrictions designed to shut them down.
Guanghui is already a pioneer in getting around the oil majors. Late last year, it inaugurated China’s first independent cross-border pipeline. It got its start producing liquefied natural gas in Xinjiang and then trucking it to the rest of the country, at a lower cost than the gas transported in PetroChina’s pipelines.