China is inching towards a market economy in the petroleum sector

Petroleum Accounting and Financial Management Journal, Summer 2002 by Wasan, Sonia, Crumbley, D Larry

China is entering a new phase of economic growth in which its global gross domestic product is likely to grow from 13.2% in 1997 to 20.8% in 2020. Starting in September 1999, the World Bank conducted a study of the Chinese economy and stressed the need for China to become open to the outside world and make the transition from a planned economy to a market economy. This transition would require the strengthening of the infrastructure (such as telecommunication networks, railways, electricity grids, and sustained energy resources) and would also entail the realignment of its existing energy sector and the establishment of a modem regulatory framework for the oil and natural gas industry.1

Forecasts suggest that by 2010 China will experience a shortage of more than 10 million tons of oil and will need to find a way to reduce this demand and supply gap. Oil imports are projected to increase from just over 20% to nearly 80% of crude oil product energy demand between 1997 to 2020.(2) Due to the huge consumption of coal as domestic fuel, air pollution is so high that out of 338 cities investigated, only 33.1% reached the national second-class standard for air quality, and 40.5% exceeded the third-class standard. In addition, 30% of China is polluted by acid-rain. In reorganizing its oil and natural gas industry, China should promote the development and consumption of clean fuels. Domestic production of oil and natural gas could play a crucial role in meeting the growing energy demand. While natural gas is likely to replace coal as a means of power generation and as a clean domestic fuel, oil production must also meet a large part of the growing transport fuel demand.3

Oil and Gas Regulatory System

Being operated as a monopoly, there was no formal oil and gas regulatory system in China until 1982, when the government introduced one to promote foreign investment in the oil and gas industry. In 1986, the oil and gas industry was brought under the Mineral Resource Law. Under the present oil and gas regulatory system, ownership and management of resources resides in the central government. A licensing system requires any entity interested in oil and gas exploration and production to pay a fee for securing a license. The current system is still in transition from a planned economy to a market economy and still needs a better defined regulatory system to ensure a smoothly functioning oil and gas sector.4

Present State of Reforms

The government of China began reforming its oil and gas sector in an endeavor to develop competitive markets that would attract foreign investment and technology and ensure sustained growth of energy resources. As a part of this transition from a planned economy to a market economy, the government carried out a major restructuring in 1998, which ended the onshore monopoly of China National Petroleum Corporation (CNPC) and transferred refining assets from CNPC to China National Petrochemical Corporation (SINOPEC). CNPC was assigned western and northeastern onshore and shallow water areas. SINOPEC was assigned southern and eastern onshore and shallow water areas. China National Offshore Oil Company (CNOOC) retained offshore rights in water deeper than 30 meters. China National Star Petroleum Corporation (STAR) retained the rights to explore and develop resources in all onshore and offshore areas. The purpose of all this was to separate business activities from regulatory components.5

On March 31, 2000, STAR merged with SINOPEC and became a whollyowned subsidiary of SINOPEC. CNPC had a public offering in April 2000, forming PetroChina (stock symbol PTR), SINOPEC in October 2000 (stock symbol SPN), and CNOOC in February 2001, creating CNOOC, Ltd. (stock symbol CEO), an independent producer. Thus, there are now three publicly traded companies: SPN, PTR, and CEO. Each is still majority-owned and controlled by the Chinese government. Currently only the three state-controlled companies are granted rights to develop the mineral resources. Foreign-owned companies participate through partnerships or joint ventures with the three Chinese companies. Significantly, however, the state-controlled companies are working towards profit targets rather than plan volumes, and they are evaluating the profitability of fields and wells.6 At the end of 2001, 20 executives from PetroChina attended a month-long course in petroleum accounting and other topics at the University of Texas, Arlington.

Establishing guidelines to encourage and improve resource conservation and utilization is another indication that the Chinese government is paying greater attention to the exploration and development of hydrocarbon resources. The Ministry ofLand and Resources (MLR), which took over the responsibility of planning and administration of land and marine resources, is now regulating the development of hydrocarbon resources.

Oil reserves of 4.2 billion tons have been discovered over the past five years, with the total being close to 21.3 billion tons since the energy reforms began in China more than 20 years ago. Gas reserves have increased to 2,600 cubic meters with the share of natural gas increasing to 3% in 2000 from 1.8% in 1985. International operators in 2000 signed contracts worth $7 billion in investments for offshore and onshore exploration and development.7 With 24 billion barrels of oil and 48 trillion cubic feet of gas,8 China ranks thirteenth in terms of world resources and production.