China's two largest oil producers will team up with the country's jet fuel supplier to establish a new aviation oil company to introduce more competition into China's jet fuel market.

China National Petroleum Corp (CNPC), and China Petroleum and Chemical Corp (Sinopec Corp), parents of Hong Kong-listed PetroChina and Sinopec respectively, will set up a joint venture with China Aviation Oil Holding Company (CAOHC).

The new firm will supply jet fuel to mainland airports, according to an official from the Beijing-based CAOHC, which now holds a near-monopoly over the country's jet fuel market.

"It is a restructuring of the aviation oil company by introducing more shareholders," CAOHC's spokesperson told China Daily yesterday.

According the spokesperson, CAOHC will take 51 percent of the new joint venture, CNPC will own 21 percent, and Sinopec Corp will control the remaining 29 percent.

However, officials at CNPC and PetroChina said they were unaware of the joint venture proposition, although Sinopec Corp officials confirmed the news. They said the move was a small step for Sinopec Corp and will not affect its core businesses, which are focused on petrochemical production, and oil and gas exploration.

The CAOHC spokesperson said the idea for the new venture was raised as early as 2002 by the General Administration of Civil Aviation of China (CAAC) in an attempt to produce a more consolidated and competitive industry.

The spokesperson said the merger had nothing to do with the futures trading scandal at its Singapore-based affiliate, China Aviation Oil Corp (Singapore), which lost US$550 million in speculative trading last year.

The spokesperson declined to give details of a timetable for the venture's establishment.

But some local media reported that the new company should be established by the end of this month.

When asked about the specific management arrangements that might result in a change of senior management within the three oil giants, the spokesperson declined to comment, saying: "That is too sensitive for the moment."

According to a new industrial policy initiated by the CAAC in April, a campaign to attract investors to participate in China's jet fuel market will take affect from August 15, according to the CAAC website.

Inspired by the new policy, industry sources said the country's fourth-largest airline, Hainan Airlines Group, is also mulling over a link up with CNPC and Sinopec Corp to set up a new jet fuel supply firm.

A Hainan Airlines official surnamed Huang yesterday said the company had not yet produced a detailed plan.

"There are still a few days left before the new policy comes into effect, and we have not devised concrete objectives based on the new government document," Huang said.

CAOHC currently supplies most of the jet fuel to the mainland's airports, with a small proportion sold by local oil dealers, according to Gong Jinshuang, a senior analyst with CNPC.

CAAC statistics show that jet fuel formed the bulk of the costs for China's airlines. In the first quarter of this year, the amount spent on jet fuel was 27.8 billion yuan (US$3.4 billion), up 17.3 percent year-on-year.

Industry analysts said the new joint venture will help break CAOHC's monopoly, and will help to fend off fierce competition when the government frees up the wholesale refined oil market next year to foreign players.

"The joint venture will make the Chinese jet fuel company more competitive on the world stage, but the market will not show a great change following the government's new policy and more mergers," Gong told China Daily yesterday.

Gong said this is because of the special conditions pertaining to China's jet fuel sector, which is a limited market based only at the country's airports.

"The jet fuel service station is not like a common gasoline or diesel service station, where you have plenty of cars queuing up," Gong explained.

Han Xuegong, another CNPC analyst, said it was still difficult for independent oil dealers to get involved in the jet fuel industry because large investments are needed for what is essentially a risky business.

(China Daily August 9, 2005)