As China deregulates oil products and crude oil wholesaling in line with its WTO commitments, analysts foresee an accelerated opening-up of the local oil market.

 

China's new policies to deregulate oil products and the crude oil wholesale market will bring in new market entities, who will serve as "agents" to facilitate further reform and liberalization of the segment, said David Ernsberger, Asia editorial director of Platts, an energy information and market research provider.

 

"Based on this fact, the deregulation is surely a shot in the arm for the industry," Ernsberger said.

 

The Ministry of Commerce (MOFCOM), China's business and trade watchdog, published two rules the Processed Oil Products Market Administration Rule and the Crude Oil Market Administration Rule on its website on Wednesday, granting foreign and private capital access to oil products and crude oil wholesale. The two rules will take effect from January 1, fulfilling China's commitment to the World Trade Organization (WTO).

 

In line with its accession rules, China had to deregulate the wholesale of oil products the business of distributing petrol and other oil products from refiners to filling stations by the end of this year. The wholesale business has long been dominated by two State-owned conglomerates China Petrochemical Corp, or Sinopec, and China National Petroleum Corp (CNPC), parent of US-listed PetroChina Co.

 

Zhao Yuanheng, BP (China) spokesman, told China Daily that deregulation of the oil market is expected to diversify oil product supply and facilitate the availability of energy for China.

 

The wholesale deregulation will enhance market-oriented competition, which can help enhance product and service quality, and benefit customers at the grass-roots level, the BP (China) spokesman said.

 

More freedom?

 

While analysts hailed the new policies, some potential new comers appealed for more market freedom.

 

"The oil product and crude oil market will be opened up soon. We are eager to learn whether and when the import license control can be lifted simultaneously," said a Dalian-based oil trading company official on condition of anonymity.

 

"Since we have to meet certain criteria for applying for the wholesale license, it is absolutely a difficult mission for newcomers to enter the segment without import licenses or refinery support," the industrial source said.

 

According to MOFCOM's regulations, new applicants should have either an import licence or refineries in order to engage in the oil product wholesale business. For the crude oil wholesale business, they have to either own an exploration licence or have an import licence, plus storage facilities. If companies are not eligible for these requirements, they can only co-operate with qualified partners, such as Sinopec or CNPC.

 

The international trade division of MOFCOM did not elaborate as to whether or when import and export controls on oil products and crude oil will be lifted.

 

Under the circumstances, import permissions do not automatically come along with the wholesale deregulation. Ernsberger said that newcomers would have to face an awkward situation figuring out where to get oil products.

 

However, the deregulation will certainly motivate them to think about how to enter the segment.

 

"Now companies with new wholesale licences will be motivated to facilitate import control lifts and reform the pricing mechanism of the oil business," he said. "They will serve as agents to lobby for further deregulation of the sector, because they have every incentive to do so."

 

Local oil makers, traders and refineries will be more enthusiastic than those foreign oil giants in facilitating further liberalization. "That is because global oil giants can always start business by relying on close connections with Chinese market leaders, such as Sinopec and CNPC," Ernsberger said.

 

Cao Xiaoxi, chief engineer of Sinopec Economic and Development Research Institute (EDRI), said although the wholesale market needs deregulation, it also has to be regulated, to some extent, to fend off speculation.

 

This phenomenon should not be taken as a continuation of monopoly or even market protectionism, given the nature of the energy industry, Cao argued.

 

"Even in market-oriented Western countries, the oil industry is under the control of several giants and does not boast full competition," he said. "This is because the oil business is capital- and technology-intensive."

 

The Sinopec EDRI analyst foresaw that after the wholesale deregulation, there would be more foreign, State-owned and private enterprises tapping the wholesale business.

 

"But there won't be many new players in the short term, because of the restraints on oil imports and the difficulty of setting up refineries," Cao said.

 

In the long run, the market segment will be fully deregulated, Cao said. "People may find it not so difficult to apply for import licenses in the future."

 

(China Daily December 8, 2006)