Chinese dream

Beijing’s response to tumbling oil prices may be to merge its state-owned oil giants, CNPC and Sinopec, according to reports in the Wall Street Journal and Financial Times. It is hard to imagine such a crazy plan ever coming to fruition. At most, it is the subject of research deep within China’s vast state bureaucracy. Even the newspapers running the story of “possible mergers” admit that the idea is merely something that is being “considered” and that the companies and authorities will not comment, could not be reached, or have “not heard of a plan to merge the two companies”.

Mergers could boost efficiency in an economy increasingly burdened by high capacity, the researchers have told reporters. China certainly has an excess of oil infrastructure. Its shift from a net importer of key oil products to a major exporter last year was a cause of some irritation to the government’s central planners, who only ever envisaged China’s becoming self-sufficient in refining capacity.

But to whom would CNPC and Sinopec sell their surplus refineries, in the event of a merger? Only five Chinese companies have licences to import crude, despite tentative opening up. It seems unlikely that any private sector or foreign company without the requisite licence would fork out $3.5bn (the cost of PetroChina’s 200,000 b/d Qinzhou refinery) and remain hostage to state-owned giants for feedstock — especially as the oil giants are known for their uncompetitive behaviour.

Any major bidding for a Chinese refinery or retail chain, while simultaneously slashing capital expenditure (capex), could expect some pretty tough shareholder questions. And shareholders would demand to know why Shell, BP or Chevron were participating in a privatisation that the Chinese government itself flagged as a response to declining oil sector profitability.

Hubris was partly to blame for the 2007-14 refining sector arms race between CNPC, Sinopec and smaller rivals Sinochem and CNOOC that caused this overcapacity and squeeze on profits. Beijing is hardly blameless either. A monetary policy that threw money at well-connected state-controlled firms during the 2008-09 Great Recession fostered huge over-investment in physical assets all across China’s economy. But corruption played a large part too.

Government investigators at the CCDI have rolled up vast numbers of so-called “oil faction” officials across northeast and west China as part of the 2013 “petro-purge”. Among the accusations the CCDI levelled at disgraced former CNPC chairman, Jiang Jiemin, was that the oil giant awarded firms across west China contracts on uncompetitive terms as a way of winning the loyalty of local party officials.

Xi Jinping and his right hand man, Wang Qishan, who heads the CCDI, clearly believe that corruption at the heart of an over-mighty oil sector bankrolled their now-humbled rival, Zhou Yongkang. Zhou, a former oil sector executive who grew to head the country’s internal security apparatus, was formally arrested last summer. Zhou was believed to be linked to the crisis that nearly enveloped the Xi Jinping succession in 2012.

The purge continues, despite Zhou’s arrest. This month, the CCDI confirmed it had uncovered several instances of graft at Sinopec and would be carrying out extensive probes into its dealings over the course of this year. A cynic might note that creating one massive company with $620bn in assets would, at least, halve the potential for corruption. The same cynic would also be compelled to admit that such a company could also become an extremely rich and powerful rival to the president’s own authority.

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