China Long Line

8/8/2019 China Long Line

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Long Lines, Lost Profits

Chinas Regulated Fuels Market


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There has been enormous shortage of fuelthroughout China some time ago from eastern

shanghai to Southern Guandong province asalso the capital Beijing.

The result was long lines of trucks,cars andtwo wheelers at the petrol pumps.

But the retailers were either rationing thefuel or refused to give at all citing excuses thatthere is no stock.

People engaged in brawling killed eachother raring for fuel.


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The root cause was huge rise in unregulated

international crude oil prices.

But the gasoline and diesel prices were

heavily regulated in communist china.

Media reported that chinas state owned oil

companies had to buy crude oil at recordhigh prices and sell refined products at prices

as regulated by the state.


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Low regulated prices had three impacts:

Higher demand for oil.

Higher demand for complimentary goods suchas cars and trucks-new found love of chinese

middle class thanks to consistent 8-10% GDPgrowth rate over Past 25 years.

Chinese oil companies and refiners are forced to

export all they can to take advantage of higherprices elswhere, even as the country remains anet oil importer, relying on foreign stock.


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SUPPLY & DEMAND

China: Top oil producing country in Asia &

fifth largest in the world

Worlds second largest consumer of oil

Daily use of oil: 6 million barrels

IEAs estimation: Demand will increase

3.4% annually & Supply will decrease 1.5%


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In Demand: Sector wise

Demand for refined oil products More thandoubled between 1990 and 2003

Demand for gasoline and diesel fuels Increasedfrom 1 million to 2.7 million barrels per day

Increase in number of cars & trucks from 25 millionin 2004 to anticipated 100 million within a decade

Increase in demand was a catalyst for increasing oilprices from $20 in 2002 to a record high of nearly


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Industry History


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The History . . .

In 300 BC, a domestic petroleum industry was

slow to develop.

Foreign firms such as Standard oil & Asiatic

Petroleum supplied much of the country's oil

until the establishment of Peoples Republic of China in 1949.


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Modern Oil & Gas Industry . . .

China National Petroleum Corporation The China National Offshore Oil Corporation

(CNOOC)

China Petroleum and Chemical Corporation

(SINOPEC)


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STRATEGY . . .

Increasing Resources

Seeking a Greater International Role

Expanding Market


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State Oil Companies

PetroChina


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PetroChina

PetroChina Co. Ltd was one of the worlds largest oil andgas Co. Ranked 9th in Petroleum intelligence Weeklys top 50

company rankings.

Was established in 1999 and headquartered in Beijing. Listed 10% of its shares on the Hong kong and New York

stock exchanges. British Petroleum was a large purchaser of the IPO, sold

at an estimated profit of $1 bn. Warren Buffets holding co, Berkshire Hathway, held

13.3% of its H-shares at the end of 2004.


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Companys revenues were $46.9bn in 2004 with

an operating income of $17.7bn and net income

of $12.4bn.

The High- Margin upstream exploration and

production business segment accounted for 12%

external sales, while low- margin downstream

refining and marketing segment accounted for

70%.

PetroChinas Business


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PetroChina held proved reserves of 10.9bn barrels

of oil and 44.6 trillion cubic feet of gas.

In 2004 Co produced 2.1 million barrels of oil per

day and 2.3 billion cubic feet of natural gas per

day, realizing avg prices of $33.88 per barrel of oil

and $2.55 per thousand cubic feet of natural gas.

It supplied 82% of its crude oil production to its

own refineries, 11% to Sinopec, 4% to regional

refineries, and exported the rest.

Production, Reserves and Supplies


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The refineries

PetroChinas 25 refineries, located throughout the

north, processed 1.9mn barrels of crude oil per

day in 2004.

O/P for the year was 74mn tonnes for a wide

range of refined pertoleum products including:

gasoline, diesel, kerosene, fuel oil, naphtha,asphalt, lubricants and paraffin.


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Sales and Distribution Network

Approx. 58mn tonnes of gasoline and diesel were

produced, and 65 mn tonnes were sold through the

companys retail and distribution channels.

Avg realized selling prices for gasoline and diesel were

3543 and 3165 Chinese Renminbi (RMB) per tonne

respectively.

Out of PetroChinas 17403 service station network-

14309 are owned, 2937 are franchised and 427 are

wholly o r jointly owned by CNPC.


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State Oil Companies

Sinopec

b


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China Petroleum & Chemical Corporation(Sinopec) was Chinas largest producer anddistributor of gasoline and diesel fuel.

It was established in February 200.

32% of its shares were offered on the Hong Kong,New York and London stock exchanges in Oct2000, raising $3.4

About Sinopec


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Sinopecs Business

Companys revenues were $74.9 bn in2004, with an operating income of $7.6bn and net income of $4.4 bn.

High Margin upstream exploration andproduction accounted for 4% of external sales, while low- margindownstream refining andmarketing/distribution segmentsaccounted for 11% and 55% of

external sales respectively.


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Production, Reserves and Supplies

Sinopec held proved reserves of 3.3bn barrels of

crude oil and 3 trillion cubic feet of natural gas.

In 2004 co produced 749 thousand barrels of oil

per day and 567 mn cubic feet of natural gas per

day.

Two- thirds of the cos production came from itsShengli field located in Shandong.

Avg prices realized were $33.28 per barrel of oil

and 2.11 er thousand cubic feet of natural as.


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The refineries

It was the 4th largest refiner with a 2.9mn barrelper- day capacity.

The cos 26 refineries accounted for nearly half of chinas total domestic distillation capacity.

In 2004 it processed 133 mn tonnes of crude oil,producing 115 mn tonnes of refined products.


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Sales and Distribution Network

Over 27mn tonnes of gasoline and 61mn tonnesof diesel were sold in 2004 at avg realized pricesof RMB 3762 and RMB 3215 per tonnerespectively.

Retail accounted for 67% of gasoline and 49% of diesel sold.

Sinopecs retail distribution networ totaled 30352service stations, 3482 of which were franchised.


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Pricing Policy

An Overview


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The History . . .

SDPC set refined product prices

Adjustments infrequent and not a reflection of

international markets Pump prices were liberalized

International prices were at a 10yr low and product

smuggling was on a rise

1998


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Pump Price Liberalization

Retail-Guidance Price for Gasoline and Diesel based on Singapore FOB trading practice

Prices set by the companies could be +or 5% of guidance price

Wholesale prices 5.5% below eachcompanys retail price

Internal sale prices were not regulated

Changes in Guidance Price were made on

the companies request Singapore


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SDBC began publishing Retail-GuidancePrices on monthly basis

Special Customer Prices

No mark-ups to military / nationalreserves

5% premiums to Airways and Railways

2000

2001 March

PRC stopped regulating Crude Oil prices but not

Gasoline and Diesel


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New Pricing Scheme October 2001

Chinas New secret Oil product price scheme

Government benchmarks remained

yet rules became less transparent and retail pricing flexible

NDRC successor to SDPC published guidance priceintermittently

Guidance prices based on Weighted Average of

Singapore, Rotterdam and New York FOB trading prices


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US $/barrel RMB / Ton Notes

Weighted Average Price 68.4 4,162 Previous months WAprice of diesel

Shipping Cost 1.5 91

Import tariff (6%) 4.2 255 5% for gasoline

Consumption tax 1.96 119 RMB 277 / ton forGasoline

Value Added Tax 12.9 787

Port Handling Fee 0.8 50

Suggested Retail Margin 8.2 500 RMB 550 / ton forGasoline

Diesel GuidancePrice

98.1 5,965

PRC Diesel Price


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Wholesale - Retail Pricing

NDRC DieselGuidance PriceRMB 4,360 / Ton(RMB 3.70 / litre)

Wholesale4.5% below

company retail price3,831 to 4,497(3.20 to 3.80)

Company Retail+/- 8% NDRC price

4,011 to 4,709(3.40 to 4.00)

IndependentStations

+/- 8% NDRC price4,011 to 4,709(3.40 to 4.00)


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Price Parity Breakdown

The price parity method introduced by the Chinesegovt. in 2001 was abolished in 2003 after the

outbreak of SARS.

Few increases in retail prices of gasoline and dieselwere made in between. These increases howeverwere not enough to cover up the losses of

downstream oil companies.

In this of environment of high global crude prices,exploration and production business prospered

by importing crude oil at international prices.


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Price Parity Breakdown

This led to a shortage of gasoline and Dieselsupplies in China.

The Latest Price hike that the Chinese

government passed on to the consumer was just before the summer Olympics of 2008.

The recent cool off in crude oil prices from anall time high of $140/barrel to a low of around $40 a barrel has somehow solved theproblem of the Chinese government for thetime being.


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WTO

Introduction


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Chinas accession to the world trade organisation (WTO) on Dec.11th 2001

helped open its refined products market to foreign competition. Once

restricted to local companies, retail distribution was liberalized in Dec

2004 with wholesale distribution scheduled to open in Dec. 2006.

Even with the elimination of sales barriers, Petrochina, Sinopec ,China

oil(CNPC) and Zhuhai zhenrong would continue to dominate chinas

wholesale market, fuel storage and transportation infrastructure, placing

independent retailers at a severe disadvantage.


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Major Roles of WTO

The three main WTO-related changes that will most directly affect theChina oil and gas industry are:

The reduction of tariffs

The elimination of certain non-tariff barriers to trade

The opening of the retail and wholesale markets to

foreign participation.


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Reduction in Tariff

Chinas entry into WTO will affect tariffs on some, butnot all, oil and gas products.

Tariff Reduction Pre WTO Post WTO

Crude Oil 6% zero

Gasoline 9% 5%

Diesel 6% 6%

Kerosene 9% 9%

Fuel Oil 6% 6%

LNG 6% 5%

Lubricating Oil 9% 6%


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Elimination of Non-Tariff barriers

China has agreed to eliminate quotas andlicenses on the import of refined petroleumproducts by 2004, and to increase quotas by 15%each year until 2004.

The current import ban on gasoline and diesel

fuel will also reportedly be lifted immediatelyupon WTO entry.


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Enhanced Market Access

Retail distribution

Wholesaledistribution

State-ownedenterprises.


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Conclusion

Co-operation with Domestic majors

Challenges faced by Chinas Oil and Gassector


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Scramble of Market Share

Introduction


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Construction of a 12.5 billion yuan ($1.71

billion) refinery in Qingdao in East China's

Shandong Province by the end of January. Monopolistic Approach

South and North.


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Some Facts

Sinopecs cost burden. The higher prices will add about 0.06

yuan to

Sinopec earnings-per-share this yearand 0.02

yuan to those of PetroChina. Earnings-per-share for Sinopec, the

nations

biggest refiner, was 0.3 yuan last year


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Chinas overseas quest for Oil

Sinopec and Petro china has first right to buy international oil and gas prosperities.

Sinopecs strategy.

The Net Effect


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Selling retail fuel since 1996.

BP- Sinopec ( 60% owned by Sinopec ).

BP- Petro china( 51% owned by Petro china).

British Petroleum

R l D t h Sh ll


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Royal Dutch Shell . . .

Kerosene supplier. Oil depots and filling stations by 1948 Reentered fuel market in 1996, opening service

stations in Guandong, Beijing, Tianjin, Nanjwing and

Wuhan Joint venture with sinopec, signed in 2004 to

establish new service stations in Jiangsu andShanghai.

Sinopec 60% owner and exclusive fuel supplier. Planned to acquire 400 service stations from

Sinopecs existing network Both companies agreed not to compete in areas

jointly covered.


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Shell has five core businesses: exploration andproduction gas and power, refining andmarketing, chemicals and trading and shipping.

The company operates in more than 140countries.

Core Business . . .

Total engages in all aspects of the petroleumindustry, including Upstream operations (oil andgas exploration, development and production,

LNG) and Downstream operations (refining,marketing and the trading and shipping of crude oil and petroleum products).


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To protect the poor and hold back inflation

,governments across Asia, including china, have eithersubsidized fuel prices by using their own budgets , or

worse, kept them low by twisting retailers arm.


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Petrochina and sinopec have been hit hard byballoning refining losses.

Sinopec was hit harder as compared toPetroChina.

According to the reports the companies net profitwas down by 67.5% year on year.


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Compensation

Profits had been shifted from the oil productionand marketing and distribution segment.

Received government subsidies .

Sinopec and petrochina received a rebate fromthe government on value added tax on oilproducts such as gasoline and diesel.


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Recent Trends

China's first oil price increase in 17 months should

end fuel shortages that were unnerving thecountry's leaders, but it leaves Beijing no nearer to

the market deregulation needed to ensure stable

long-term energy supplies.


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Chinas biggest concern is consistency. The

government doesn't want direct exposure to

global markets. They are worried that full

liberalization will lead to boom-and-bust cycles.

To this day, Beijing is all about control. This

dilemma, this push-pull, will remain a remnant of

the command-and-control economy of old. It is

politically sensitive prices that are in the cross

hair.


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Conclusion

China's aim to use market prices for energy tocurb wasteful use and investment is a long-termstrategy for the near- and medium-term, itneeds affordable energy prices to power its

industrialization.

To achieve that, the government has struck a

subtle alliance with national oil firms: in returnfor granting near-monopoly power to stateenergy giants Sinopec Corp and PetroChina ,Beijing wants their guarantee for stable oilsupplies.


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Maintaining economic and political stability and arapidly rising standard of living have been criticalconsiderations for the ruling Communist Party,which fears social unrest if prices were allowed torise too quickly.

History suggests China will not easily relinquishcontrol of such an important price.

The supply crunch is possibly worse thanprevious ones in 2003 and 2005. Analysts saidthe most recent two shortages were directly theresult of Beijing's price controls.


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The low fuel prices, which have helped to fuelChinas economic growth, are not sustainable,

and China cannot build power plants fastenough to satisfy the excess demand at current

controlled prices. It will be interesting to seehow Chinas competitiveness is affected when

firms are forced to absorb the full cost (or moreof the cost) of energy inputs into production

decisions.


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Thank You

China Long Line

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