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Energy Investment Guidelines Fail to Dent Oil Monopoly

07-17 13:10 Caijing
Import rights for crude oil and refined oil are still under firm state control, restricting the free flow of oil and gas resources in the entire oil industry chain and forming formidable barriers in the industry.

By staff reporters Shi Zhi, Weng Shiyou, Li Yi, and Zhu Yao

On June 18, the National Energy Administration (NEA) released the Opinions on Encouraging and Guiding Further Expansion of Private Capital Investment in the Energy Sector, in response to Premier Wen Jiabao's call for the implementing rules of the "New 36 Clauses" encouraging private investment in various sectors to be introduced in the first half of the year. However, some have criticized the document for failing to address the topic of liberalizing import rights for crude oil, an issue of utmost importance to private enterprises.

In the coming months, detailed implementation rules for private investment in various sectors will be introduced. Still, industry insiders have stated that the rules only provide guidance based in principle rather than practical use.

Import rights for crude oil and refined oil are still under the firm control of the state, restricting the free flow of oil and gas resources in the entire oil industry chain and forming formidable barriers in the industry. Private oil companies must first apply for and obtain import, wholesale, and retail licenses from the government in order to conduct business.

The oil industry was gradually opened up to private enterprises after China's reform and opening up, particularly after Deng Xiaoping's southern tour in 1992. The retail sector, due to its low barriers to entry, became the main channel for private enterprises to enter the industry. In 1999, nearly 90 percent of gas stations were privately run; these stations accounted for up to 60 percent of total refueling nationwide. As a result, private oil enterprises refer to the years between 1992-1999 as the "Golden Age."

However, after China's accession to the World Trade Organization (WTO), the General Office of the State Council issued two documents in May 1999 and Sept. 2001 granting monopoly rights for the wholesale and retail of refined oil products to China Petrochemical Corporation (Sinopec) and China National Petroleum Corp. (CNPC), two large state-owned conglomerates. The move came as a severe blow to privately-run gas stations throughout the country.

Yet since that time, hope for re-opening the industry to private investment has resurfaced on several occasions. In accordance with its WTO commitments, since 2002 China has been required to implement non state-run trade import quotas of 4 million tons of refined oil and 7.2 million tons of crude oil, both of which should increase by 15 percent annually for 10 years.

However, the former State Economic and Trade Commission announced in April 2002 that imported crude oil which fell under non state-run trade quotas could only be refined by Sinopec or CNPC. The basis of this announcement was the No. 38 Document issued three years prior. It meant that if imported oil was not included in one of the two groups' production plans (scheduling), it could not be imported even if it fell under non-state-run trade quotas. In fact, after more than 10 years, China has only nominally fulfilled its WTO commitments in non state-run trade quotas.

The slow progress in opening up import rights for crude oil affected not only traders, but also refineries. In the latter case, this indicates that they can only get their raw materials for manufacturing from Sinopec and CNPC. Compared with private refineries' production capacity, the amount of crude oil the refineries can get from the two state-owned giants is minuscule.

Responding to this phenomenon, economist and honorary president of the China Society of Economic Reform Gao Shangquan wrote that the ruling foundation should  be the people's livelihood and public opinion, instead of the proportion of the state-owned economy. Gao added that if the state-owned economy is set as the foundation for governance, it will pass a point of no return, administrative monopoly will be unbreakable, and deepened reforms will be impossible.

Full article in Chinese: http://magazine.caijing.com.cn/2012-07-15/111948975.html

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