China Petrochemical Corp (Sinopec Group) and China National Offshore Oil Corp (CNOOC), the nation's second and third largest oil companies, have set up a joint venture to import crude oil. The joint venture makes CNOOC the fifth largest crude oil importer in China.

Following the move, CNOOC is also likely to gain government approval to build a large refinery and market oil products this year, company executives said.

Both of these steps are crucial for CNOOC to become an integrated oil company, covering the production, refinery, trade and marketing of oil and gas products.

CNOOC's managers said the new joint venture, which was set up at the end of April, is able to import 12 million tons of crude oil a year.

This represents 14.3 percent of the total 91 million tons of oil imported by China last year.

CNOOC holds a 60 percent stake in the joint venture while Sinopec takes 40 percent. The joint venture has a registered capital of 200 million yuan (US$24 million).

The managers said the first batch of oil is scheduled for delivery to China in the third quarter of this year.

At present, most of China's oil imports are purchased by four government-designated state-owned oil traders, namely Chinaoil, Unipec, Sinochem and Zhuhai Zhenrong. In 2002, the government allocated import quotas to a few non-state companies as part of China's commitment to the World Trade Organization. The quota for non-State trade has increased by 15 percent annually, and reaches 10.9 million tons this year.

Before the joint venture was set up, CNOOC had an import quota of 400,000 tons under the non-State trade terms.

Along with the joint venture, Sinopec has also signed an agreement to import and refine CNOOC's equity oil from foreign countries. Equity oil refers to the amount of oil CNOOC can get from its shares in foreign reserves.

CNOOC has about 5 million tons a year of equity oil after it bought stakes in several oil fields in Indonesia. Most of the crude has been sold on the international market.

"The joint venture provides access to the domestic market for our products in foreign countries," said Fu Chengyu, president of CNOOC, "It is especially important for the security of China's energy supply."

Analysts said the deal allows CNOOC to extend its business scope and secure windfalls in oil trading.

The business strategy reflects the company's ambition to become a top-notch international company able to vie with global players such as ExxonMobil, BP or Royal Dutch/Shell.

More importantly, the move is also regarded as a prelude to the company gaining government approval to market refined oil products, analysts said.

"It is only natural for CNOOC to get a license to run a retail and wholesale oil products business now it has access to oil imports," said Zhang Peng, an oil analyst with Southwest Securities.

CNOOC has applied to the central government to build its first refinery. The refinery, based in Huizhou in South China's Guangdong Province, will be able to produce 12 million tons of oil products a year.

(China Daily June 28, 2004)