By staff reporter Ren bo and He Yuxin

"Success will come when conditions are ripe," said Wang Jiming, president of Sinopec ( China Petroleum and Chemical Corp. ) (0386 ， HK  600028 ， SH), on the purchase of Beijing Yanhua Petrochemical Co., Ltd. Sinopec’s purchase of Beijing Yanhua has proceeded smoothly, with the U.S. Securities and Exchange Commission approving the proposed purchase on March 2. Sinopec and Beijing Yanhua jointly issued a statement on March 7, announcing that the purchase had been approved by the temporary shareholders’ convention.

Wang Jiming told reporters that the whole process would be completed before the end of March, and any remaining details would simply be procedural. Following the announcement, the stock price of Beijing Yanhua rose steadily, and speculation over the next purchase in Sinopec’s integration campaign increased.

As the market focuses on Sinopec’s future, however, lingering problems from an earlier purchase attempt continue to plague the oil giant. Maoming PetroChemical Shihua Co. Ltd. (MPCSH) (0006370) was one of Sinopec’s earlier purchase targets.

MPCSH was originally a subsidiary company of Maoming Refining and Chemical Corp. Ltd., of which Sinopec holds a controlling stake.But because MPCSH entered the stock market earlier than most of Sinopec’s other companies, its ownership structure is more complex.

In 2002, the private enterprise Beijing Taiyue Real State Co., Ltd. became the largest shareholder of MPCSH, with Maoming ranking second.

Since 2002, Maoming has regulated raw materials prices to MPCSH on four separate occasions. Maoming claims that it increased the price of oil for two reasons: first, international oil price have increased sharply, and second, the MPCSH is no longer a subsidiary company of the corporation.At the end of 2004, MPCSH was forced to stop production due to raw material shortage s.

During this period, Sinopec expressed its desire to purchase the petrochemical section of MPCSH but offered a price far below Beijing Taiyue’s expectations.

MPCSH complained of its weakened bargaining power due to raw material supply shortages. Such shortages, it claimed, demonstrated "the continued strengthening of monopoly power." Beijing Yanhua and MPCSH are just two of many targets in Sinopec’s enterprise restructuring plan.

For several years, Sinopec has been restructuring its operations based on an established strategy set out by the Chinese central government. Currently, Sinopec Group, the holding company of Sinopec, has over 60 units under direct control, and Sinopec has over 80 affiliated units, including 20 subsidiaries and over 50 branch companies.

Among all these companies, thirteen have already listed on stock exchanges. As a further part of its restructuring, Sinopec has to internally coordinate the exportation, refining, marketing and distribution of its products. The 13 companies listed either domestically or in Hong Kong provide the greatest challenges for restructuring.

In 1998, low international oil prices depressed the petrochemical industry. The state-owned enterprise reforms that followed brought significant changes to the petrochemical industry, and China National Petroleum Corporation and Sinopec emerged as the dominant companies in the southern and northern oil markets respectively.

The structure of China ’s oil industry has drawn comparisons to a monopoly with administrative constraints. Some experts think that the administrative arrangement of the industry is exclusive, but that such a structure can quicken the pace of reform. After restructuring, however, problems concerning the internal corporate structure and the coordination of relationships among various enterprises require further reform.

On Feb. 25, 2005, Sinopec Group consolidated its most valuable assets, including six oil fields, 25 oil refineries and petrochemical companies, distribution companies in 19 provinces, and five research institutions under the name of " China Petroleum and Chemical Corp. "

Nevertheless, Sinopec remains overwhelmed by the many interest groups involved in its restructuring. Before Sinopec publicly offered its own stock for sale, 14 enterprises within the Sinopec Group had issued stocks on the Chinese domestic stock market. In order to strengthen Sinopec, 11 of the 14 were allocated to Sinopec by its holding group, Sinopec Group. Due to the allocation, Sinopec (600028) faced severe conflict of interest problems related to connected transactions with and between its listed subsidiaries.

When Sinopec issued stocks in the Hong Kong, New York and London markets, it promised investors that it would reconstruct the company, securing its independence, cutting connected transactions with its listed subsidiaries, and avoiding internal competition.

In particular, the company emphasized its plans to integrate its listed subsidiary companies. Fierce competition in the global oil and petrochemical industries has increased the pressure to reorganize within Sinopec. Under its current system, Sinopec operates inefficiently, unable to integrate its strategy as a whole in order to maximize profits.

But the road of restructuring has proven to be rugged, as Sinopec wrestles with investors and interest groups in order to streamline not only its assets but also the managing hierarchy and supply and demand chain. The only two complete, or nearly complete, purchases are Hubei Xinghua Company, Ltd. and Beijing Yanhua. Both required higher-than-expected purchasing costs.

From the beginning of November 2003, the stock price of Beijing Yanhua rose steadily from HK ＄ 2.8 per share to HK ＄ 3.67 per share before the announcement of the purchase. The final purchasing price was HK ＄ 3.8 per share.

But the purchase of Hubei Xinghua was not as smooth. Sinopec exchanged its assets in the electric power industry of the State Development and Investment Corp (SDIC) with the assets of Hubei Xinghua , and then bought the oil-refining assets of Hubei Xinghua Company with its property and interests in SDIC.

As a successful start of Sinopec’s ambitious intergration campaign, the acquisition of Xinghua might fanned the conglomerate’s enthusiasm for further buyouts, but subsequent integration efforts, particularly in the case of Maoming, haven’t been as smooth.

In February of 2004, Sinopec prevented Maoming from issuing stocks on the domestic stock market on the grounds that Sinopec owned 99.812% of its stock. Maoming had issued 1.5-billion-yuan (US＄ 180 million) in convertible bonds, however, meaning that bondholders could exchange the bonds for stocks of Maoming once the bonds matured.

But Sinopec demanded that Maoming buy the bonds back, upsetting many investors. Internal Integration Sinopec’s internal structure overlaps, allowing competitions between its subsidiary companies to decrease overall profits.

Beginning in early 2001, Sinopec transferred decision-making powers and financial management responsibilities from local enterprises to Sinopec headquarters, and turned most of its subsidiaries into branch companies under direct control from the headquarters.

Sinopec’s downsizing efforts have also brought new problems related to bureaucratic inefficiencies. In addition to the restructuring of its management system, Sinopec gained control over its four major business areas: oil extraction, oil refining, chemical industry and retail through multiple trades with its parent company Sinopec Group.

Thus, Sinopec obtained most of the assets related to oil extraction, ethane production and gas stations from Sinopec Group, with the exception of 8 million-tons of oil refining capacity.

In Jan. 2005, Sinopec required all its subsidiary companies to decrease the price of diesel oil and gasoline by 150 yuan per ton and increase the factory price of naphtha by 450 yuan per ton. In this way, profits would be transferred to oil refining enterprises.As a result of the decision, the stock prices of some enterprises that rely on Sinopec to supply naphtha fell significantly.

Some think that Sinopec tries to accelerate the pace of integration by levering market prices. China will open its wholesale refined oil market this year, putting pressure on Sinopec to streamline its operations. Sinopec’s competitiveness will be inferior to that of foreign players if it does not complete its restructuring process.

Thus the debate goes beyond the gains or losses of one enterprise. The strategic planning of the entire oil and petrochemical industry is at stake. The central government can maintain the current, semi-monopolistic system or speed up market-driven institutional reforms.

The conflict will continue to cast its shadow on the further restructuring efforts of both Sinopec and China National Petroleum Corporation.

English version by Zhu Hongbin