Private Oil Companies Getting Squeezed in China

With China's giant state-owned oil companies and its central government doing everything they can to limit opportunities for private oil companies, smaller companies are scrambling to find alternative ways to stay in business. The key issue: the small companies cannot get reliable supplies of oil productions from the duopoly of the state oil majors, Sinopec and CNPC.

Meeting earlier this summer, representatives from 90 private retail businesses regrouped their assets in an attempt to sell them to foreign oil companies. According to Zhao Youshan, president of the China Commercial Federation's oil chamber, an unnamed U.S. company has signed agreements to buy packaged assets from 15 private Chinese oil companies for $10 million. Zhao said another 75 such businesses in Zhejiang, Liaoning, Fujian, Xinjiang, and Shandong provinces are negotiating the sale of their assets with nine international oil companies, including BP.

These oil companies, usually small, choose to package their assets for sale to foreign buyers to increase the assets' appeal and improve the companies' bargaining power. Although China's private oil companies are numerous, their business volume is shrinking due to lack of adequate oil supplies. Most of these retail outlets don't have their own refineries to supply oil products and have to rely on Sinopec and CNPC. Meanwhile, the two state-owned companies are using their market power to compete with supermajors like Shell, Exxon Mobil, and BP, all of whom covet the profits to be had in China's booming market.

Thousands of small private oil companies have disappeared. In 1998, China had 3,440; by the end of 2006, only about 300 remained. Similar patterns can be seen in private oil retailing. In 1998, there were a record 56,300 outlets. By the end of 2006, there were only about 45,000, and those accounted for about half of all service stations in the country. Revenues have also dropped, from about 100 billion yuan in 1998 to 60 billion last year.

The duopoly is clearly to blame for this change in fortune. Back in 1998, Sinopec and CNPC owned a handful of service stations. By the end of 2006, Sinopec owned 28,001 and CNPC owned 18,207.