Oil Supply to Be Diversified

China became the world's second largest oil consumer only next
to the United States in 2005. The dependence on imported oil
reached 47.6%.
   According to the commitments made upon the WTO accession,
foreign companies would be allowed to make the retail sale of
oil products three years after WTO accession and the wholesale
of crude oil and oil products from December 11, 2006.
   Most experts say that the opening of the wholesale market does
not mean the full opening of resources (oil supply). "First of
all the opening can not be done at once. Then the opening of the
wholesale market does not stand for the opening of the import
right and the opening of oil resources. "According to the
Chairman of Guangdong Oil/Gas Chamber of Commerce, the problem
of oil resources has yet no fundamental solution, the full
competition in the entire market is not yet formed and there is
still need for the gradual improvement of policies.
   Some experts are however quite optimistic. "The problem of
oil resources is no longer a big issue." Owing to the reduction
of the international oil price since the second half of 2006,
they say, the supply deficit of oil products in the domestic
market has already been eased.

  Domestic refineries

At the oil dealer summit conference held in Weihai of Shandong
province in October 2006, some private oil companies said that
they planned to buy oil products from local refineries in
Shandong and Shaanxi provinces after the opening of the
wholesale market.
   According to policies formulated in the past, crude oil
imported through non-public trade should be handed over to
refineries in Sinopec and CNPC for processing. In this way even
if some private companies managed to get crude oil import quotas,
they had to transfer them to the two local oil giants (Sinopec
Group and CNPC) at a reduced price. Furthermore, oil products
produced in local refineries should also be sold to these two
local oil giants for retail sale.
    "As the wholesale market is opened, local refineries should
be allowed to establish wholesale companies, make downstream
extension and sell oil products themselves," said a Deputy Chief
Engineer of Sinopec Economics & Development Research Institute.
   Besides, the policy of handing over crude oil imported by
non-public companies to refineries of the two large oil groups
for processing will also be eliminated. The new general manager
of CNPC has foreseen that the practice that all imported crude
oil is processed in CNPC and Sinopec will be smashed. Local
refineries will get the right for the processing and sales of
imported resources and occupy some of the oil product market
shares held by the two oil giants.
   It is stipulated in principle in the "Specific Program for
the Medium and Long-term Development of the Refining Industry"
that refineries with a single-line capacity of less than 8.0
million t/a will no longer be constructed in China. Ordinary
private refineries can hardly achieve such scale, but when they
have crude oil in their hands to refine, they can participate
in the competition of the refining sector through improving
equipment, increasing facilities and expanding capacity.
   The amount of crude oil that is allowed for the import through
non-public trade is 16.68 million tons in 2007. Its proportion
in the total crude oil import is not big (only 10%). Besides,
the total refining capacity in some local refineries in Shaanxi
and Shandong provinces is not big either. The market share held
by their oil products is not more than 10%. Due to the high oil
price, some local refineries have suspended or semi-suspended
production. The amount of crude oil processing in the two oil
giants already accounts for around 98% of the national total.
   According to the projection made by a deputy general manager
of CNPC Refining & Sales Company, "foreign oil companies may also
get into the refining sector by merging some local refineries."
   In addition to local refineries, state-controlled refining
projects not constructed by the two oil giants will also produce
impacts on the present oil product market.

  Overseas import

On November 1st, 2006 the Chinese Government readjusted the
export tariff rate for crude oil and the import tariff rate for
oil products. The import tariff rate for oil products is reduced
from 5%-6% to 2%. An export tariff of 5% is imposed on the export
of crude oil. The government is further encouraging import and
restricting export to meet the domestic demand through macro
control.
   The readjustment to import tariff rates has reduced the
import cost of oil products in domestic companies. According to
estimates made by experts, after the readjustment to import
tariff rates, the import cost of gasoline is reduced by around
RMB140 per ton and the import cost of diesel is reduced by around
RMB250 per ton.
   Compared with the cost of domestic oil products refined from
imported crude oil, the cost of imported oil products after the
import tariff readjustment is still high and therefore has no
competitive edge. Experts say that it is intended to protect
domestic refineries. Should the cost of imported oil products
be equal to the cost of imported crude oil, some domestic
refineries would suffer direct pressure from foreign advanced
refineries because their oil processing cost is higher than the
international level.
    "Opening is inevitable. Nevertheless, an unduly quick
opening of the import right would produce great impacts on
domestic refineries, "said an expert from the Research Institute
of Market Economics, the State Council Development and Research
Center. What should be done today is to have a moderate increase
in the proportion of gasoline and diesel in the import of oil
products and promote competition in the domestic market. Despite
a considerable import amount of oil products in China, the major
imported variety is fuel oil. The import proportion of gasoline
and diesel is very small. Companies not belonging to the two
large oil groups are hard to make import of gasoline and diesel.
The mode of competition has therefore not yet been formed.
   As the refining and chemical sector in China has a high
threshold, many foreign companies including Shell, BP and Exxon
Mobil have chosen peripheral countries and regions to construct
refineries. They take Korea and Singapore as springboards to get
oil products into China after the opening of the oil market.

  Sustained deadlock

According to CNPC, after private companies and foreign companies
get the right for the import and export of crude oil and oil
products, the control of the two local oil giants on the supply
balance of domestic oil resources will be weakened.
   Experts point out that if the domestic price has real-time
linkage to the international market there will be no boundaries
between the domestic market and the international market and it
will be easy to achieve the diversification of oil resources in
China. Nevertheless, in case the present oil product pricing
system does not change, the position of oil product import as
one of the oil product sources after the opening of the oil market
w