BP has greater ambitions for China than any oil major has ever dared to consider possible

Financial Times: BP has greater ambitions for China than any oil major has ever dared to consider possible

“Shell and CNOOC are setting up a $4.3bn refinery and chemicals plant in southern China, which makes the Anglo-Dutch company one of the largest foreign investors in the country.”

Friday 14 October 2005

By Enid Tsui in Hong Kong

Published: October 14 2005

Lord Browne’s ambitions in China goes far beyond what western oil majors have ever achieved in one of the world’s largest energy markets.

If BP gets its way, it may receive a significant stake in Sinopec, marking the first time a state-owned Chinese oil giant allows foreign influence into its boardroom.

The country’s oil and gas sector is dominated by the three national companies – Sinopec, PetroChina and CNOOC. While their dominance has historically overshadowed private sector investment in the sector, these behemoths are no strangers to working with overseas partners.

Western oil majors have been selling oil products in China since the late nineteenth century. Shell boasts that its founding Samuels brothers were shipping “Crown” kerosene to Shanghai as early as 1894.

The often violent and xenophobic political turmoil in the decades that followed barred foreign operators from the country but, in the early 1980s, they were urged to return as China embarked on the road to market reform and ambitious development.

Local oil companies were desperately in need of modern technologies to access the country’s sizeable reserves and, in the years that followed, Chinese oil companies awarded dozens of contracts to a long list of foreign companies to help explore and operate their domestic fields.

If not for the overwhelming desire to gain a foothold in what they thought would one day be a leading market, the foreign operators probably would not have bothered.

As operators of Chinese oilfields, they are given fees instead of the much more desirable right to sell the product. The closely guarded upstream sector also happens to be the only one in China that is consistently profitable.

The rules are more relaxed in the gas sector and foreign companies are allowed to own some of China’s production.

Shell is in a 50:50 joint venture with PetroChina to develop the Changbei natural gas field in China’s Ordos Basin. The project, expected to cost $600m (£342m), will begin sending gas to Beijing and surrounding provinces in 2007.

But in a country that, in spite of the government’s best efforts, has yet to take up natural gas as an important energy source, the commercial appeal of such projects is limited.

In fact, Royal Dutch/Shell and Unocal pulled outof commitments to help CNOOC and Sinopec develop gas fields in the East China Sea last year, citing poor commercial prospects.

One area that has been gasping for foreign investment has been the oil and gas infrastructure sector.

Here, too, investors face uncertain returns as well as difficulties in negotiating mutually agreeable contracts with their Chinese partners.

Foreign majors came close to owning part of China’s main pipeline for gas. Talks for an international consortium – which consisted of Shell, ExxonMobil and Gazprom – to invest in Petrochina’s $18bn West-East pipeline fell through after the parties could not agree on a development plan.

The Chinese group ended up shouldering the full cost of the project.

Foreigners have also stayed away from China’s refining sector.

With the government keeping tight control over prices of refined products in order to protect local industries from the brunt of oil price increases, refiners have seen margins shrink as they have to pay international prices for crude oil.

Sinopec’s declining fortune this year has been a case in point. Its refineries made an operating loss in the first half as the cost of crude oil rose by more than 40 per cent. France’s Total is the only foreign company that has had a long presence in China’s refining sector, through a 20 per cent stake in Dalian’s West Pacific Petrochemical plant.

There is no convincing case to be made for investment in the country’s vast network of retail pumps either, a business that has seen increasing foreign investment recently.

Shell, for example, invested about $200m to run 500 retail pumps with Sinopec in Jiangsu province. “There is no money to be made from the pumps,” says Shang Ma, head of oil and gas research at Fitch Ratings in Beijing. “Nevertheless, we have seen companies such as Shell, BP and Total setting up joint ventures in China’s retail sector. Given there is so much restriction on what foreign companies can do in China, they are investing in what they can in the hope of gaining entry into what may one day become a free market.”

With China’s World Trade Organisation commitments kicking in by the end of 2006, the government can no longer control wholesale prices of refined products, reducing the entry barrier for both local and foreign investors.

For now, the one area that has attracted big foreign money is the chemicals industry, probably the most liberalised sector in China’s oil and gas industry.

Shell and CNOOC are setting up a $4.3bn refinery and chemicals plant in southern China, which makes the Anglo-Dutch company one of the largest foreign investors in the country.

ExxonMobil and Saudi Aramco are investing in a $3.5bn petrochemical project in Fujian province with Sinopec.

BASF, the German chemicals-maker, announced this week that it would expand its $2.9bn plant in Nanjing, which it owns jointly with Sinopec.

So far, foreign companies have only managed to squeeze limited returns from their investments in China, by dodging between the many rules on what they can and cannot do in the country.

While BP’s rivals have appeared willing to wait for change in China, they will undoubtedly have their eyes glued on the company’s attempt to test Beijing’s tolerance for a more creative mode of partnership.