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Regional oil groups unlikely to appear
By Wang Ying and Gao Peng (China Daily)
Updated: 2005-09-20 08:40

The recent establishment of the nation's fourth largest oil company in West China does not indicate the government wants to have similar oil groups in other regions, said a senior official from the Ministry of Commerce (MOFCOM).

"The consolidation of several small oil firms into one group in western Shaanxi Province last week came out of particular circumstances in that region," Hu Jingyan, director-general of Foreign Investment Administration under the Ministry of Commerce, told an oil and gas forum yesterday in Beijing.

Hu was commenting on the set-up of a State-owned oil company in Yan'an, Shaanxi Province. The new oil firm ranks the fourth-largest company in China after PetroChina, Sinopec, and China National Offshore Oil Corp (CNOOC) in petroleum exploitation and refining capacity.

"That does not mean we will establish other similar oil group companies in each resource-abundant province," added Hu.

The MOFCOM official attributed the reasons to the country's limited oil reserves and its long-term plan of consolidating the oil sectors by encouraging the growth of existing oil majors.

Several small local oil companies in Shaanxi Province were last Wednesday grouped together by the provincial government to form a new oil group called Yanchang Oil (Group) Co Ltd, which is controlled by the State-owned Assets Supervision and Administration Commission of Shaan'xi provincial government.

The new group, based in Yan'an, comprises 21 oil exploration firms and three refineries.

Locally-managed oil companies in Shaanxi Province last year produced 7.2 million tons of crude oil, and boasted a capacity to process 9 million tons of oil, industry sources said.

China, the world's second-largest energy consumer after the United States, last year produced 174.5 million tons of crude oil, and processed 273 million tons of oil, official statistics show.

Company sources said the coming together of small-sized oil firms within the province will help improve production efficiency, and boost sustainable growth in the regional oil sector. This has suffered from disordered competition among small oil firms resulting in a waste of energy.

"The mergers between small and medium-sized oil enterprises can bring about economies of scale, increase operational efficiency and reduce production cost," said Gong Gang, a professor of macro-economics at Tsinghua University.

Industry analysts also argued the establishment of Yanchang Oil will not menace the oil market in China primarily dominated by the duopoly of PetroChina and Sinopec.

"It still remains questionable whether the management and technology owned by Yanchang will be competitive enough for the highly-risky petroleum sector, since most of the new managers are from small independent oil firms and lack good training," said Liu Xiaoli, a senior analyst with the energy research institute under the National Development and Reform Commission, the nation's top economic policy panning body.

Company sources were not available to talk about whether the new oil group has obtained government approval for overseas oil business.

Gong Jinshuang, a senior analyst with the country's largest oil producer, China National Petroleum Corp, said any oil company, if not big enough, should remain cautious before expanding in the oil sector, especially into overseas activities, because "it is highly risky and has great uncertainty."

The government said in a document at the beginning of this year that it is vigorously encouraging diversification in China's oil industry, which has been monopolized by the State-owned petroleum majors.

The country's largest private oil holding company, Great United Petroleum Holding Co, was formed by more than 30 private firms in June, which wish to gain a larger presence in the oil sector both at home and abroad.

(China Daily 09/20/2005 page9)

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