The Structure of China's Oil Industry
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May 2016 The structure of China’s oil industry: Past trends and future prospects Michal Meidan OIES PAPER: WPM 66 OIES Research Associate The contents of this paper are the authors’ sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its members. Copyright © 2016 Oxford Institute for Energy Studies (Registered Charity, No. 286084) This publication may be reproduced in part for educational or non-profit purposes without special permission from the copyright holder, provided acknowledgment of the source is made. No use of this publication may be made for resale or for any other commercial purpose whatsoever without prior permission in writing from the Oxford Institute for Energy Studies. ISBN 978-1-78467-057-3 i The structure of China’s oil industry: Past trends and future prospects Contents Figures ................................................................................................................................................... ii Tables ..................................................................................................................................................... ii Glossary ................................................................................................................................................. 1 1. Introduction ....................................................................................................................................... 3 2. The origins of China’s oil and gas industry: From self-sufficient to inefficient ......................... 3 3. The 1970s and 1980s: A more complex and diversified oil industry ........................................... 6 3.1 Policy priorities for reforming the energy sector ........................................................................... 7 3.2 Decentralizing control .................................................................................................................... 8 3.3 Adapting the energy bureaucracy ............................................................................................... 10 CNOOC: The first oil company .................................................................................................. 11 Sinopec and the corporatization of the Chinese downstream .................................................. 12 CNPC: China’s Upstream incorporated .................................................................................... 13 Sinochem: a trader with Chinese characteristics ...................................................................... 15 3.4 Formal arrangements and informal procedures .......................................................................... 16 4. Going out for oil and gas................................................................................................................ 19 4.1 Inklings of dependence on imported oil ...................................................................................... 21 4.2 The outbound push gains momentum … .................................................................................... 22 5. 1998: Ministerial reshuffles benefit the NOCs ............................................................................. 25 5.1 Restructuring and vertical integration in 1998: the birth of the giants ......................................... 28 5.2 Who’s in charge? Delineating responsibilities between the government, NOCs and their subsidiaries ....................................................................................................................................... 29 5.3 The government–corporation nexus ........................................................................................... 32 6. Revamping the institutions … again ............................................................................................. 38 6.1 The Strategic Petroleum Reserve ............................................................................................... 40 6.2 The government gets behind outbound investments .................................................................. 41 6.3 Oil-backed loans ......................................................................................................................... 44 7. Fighting corruption at the oil companies ..................................................................................... 46 7.1 The NOCs’ fall from grace........................................................................................................... 48 7.2 Corporate musical chairs ............................................................................................................ 50 8. NOC reform 3.0 ................................................................................................................................ 51 8.1 The NOCs will adapt to a slightly more competitive landscape .................................................. 52 8.2 Beijing will open the upstream, but production is set to decline ................................................. 53 8.3 The NOCs go global, again ......................................................................................................... 54 9. Conclusion ....................................................................................................................................... 55 Figures Figure 1: China’s energy production by fuel source 1953–80 ................................................................ 6 Figure 2: Primary energy production and consumption (mtce) 1953–80 ................................................ 7 Figure 3: Oil production and consumption (mt) ....................................................................................... 8 Figure 4: Map of China’s oil infrastructure ............................................................................................ 18 Tables Table 1: Party/Government officials with ties to the oil industry ........................................................... 34 Table 2: Government officials promoted into the oil sector ................................................................... 35 Table 3: Promotions from industry to government ................................................................................ 36 Table 4: China’s Oil Executive Reshuffle, 2011 .................................................................................... 48 ii The structure of China’s oil industry: Past trends and future prospects Glossary boe barrel of oil equivalent bpd barrels per day CCP Chinese Communist Party CDB China Development Bank ChinaOil China National United Oil Corporation CNODC China National Oil Development Corporation CNOOC China National Offshore Oil Corporation CNOOC Ltd China Offshore Oil Corporation Ltd. CNPC China National Petroleum Corporation COCOM Coordinating Committee for Multilateral Export Controls (an organization of western states aiming to control strategic exports to Communist countries) E&P Exploration and Production EBL energy-backed loan ELSG energy leading small group EOR enhanced oil recovery FDIs Foreign Direct Investments FYP Five Year Plan GNPOC Greater Nile Petroleum Operating Company ICBC Industrial and Construction Bank of China IOC international oil company IPO initial public offering M&A mergers and acquisitions MLNR Ministry of Land and Natural Resources MOC Ministry of Coal Industry MOE Ministry of Energy MOEP Ministry of Environmental Protection MOFERT Ministry of Foreign Economy Relations and Trade MOFCOM Ministry of Commerce MPI Ministry of Petroleum Industry mt million tonnes mtce million tonnes coal equivalent NDRC National Development and Reform Commission NOC National Oil Company 1 The structure of China’s oil industry: Past trends and future prospects NORINCO China North Industries Corporation ODI Overseas Direct Investment PAB Petroleum Administrative Bureau PLA People’s Liberation Army PRC People’s Republic of China RMB Renminbi, the Chinese currency SAFE State Administration of Foreign Exchange SASAC State-owned Assets Supervision and Administration Commission SDPC State Development and Planning Commission SEC State Economic Commission SEO state energy office SEPA State Environmental Protection Administration SETC State Economic and Trade Commission Sinochem China National Chemical Import and Export Company Sinopec China National Petrochemical Corporation Sinosure China Export and Credit Insurance Corporation SIPC Sinopec International Petroleum Exploration and Production Corporation SOE State-Owned Enterprise SPC the State Planning Commission SPR Strategic Petroleum Reserve Unipec China International United Petroleum and Chemical Corporation WTO World Trade Organization y/y year on year 2 The structure of China’s oil industry: Past trends and future prospects 1. Introduction China is now the world’s largest oil consumer and importer. While this gives the country significant clout in the global oil market, its weight is compounded by the fact that in 2013 it was also the world’s fourth largest oil producer – after Saudi Arabia, the USA, and Russia. China’s oil sector has been dominated by three large state-owned oil companies who have been developing the country’s domestic reserves, building and operating pipelines, managing China’s increasingly sophisticated downstream, and filling its strategic petroleum reserves (SPR). These companies employ millions of workers, enjoy ministerial status—meaning that they outrank a number of other bureaucracies–and close connections