China’s oil industry inches closer to reform

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April 3 – The Ministry of Commerce (MOC) recently issued two guidelines on how domestic and foreign companies can apply for wholesale crude and refined oil licences.

According to The People’s Daily, these guidelines are set to bring about de facto market deregulation but analysts say that without reform of the oil-pricing mechanism, new players will be hesitant to enter the market.

“The two guidelines give maneuverability to the market regulations issued by the Ministry of Commerce late last year, deregulating the wholesale oil product industry. Previously, there were only general principles for market deregulation, which were not operational,” Niu Li, a veteran economist with the State Information Center (SIC) affiliated to China’s top economic planner, the National Development and Reform Commission, told China Daily.

Domestic companies will now have their application go through a review of 40 working days; reviews for foreign companies will be four months. The guidelines detail the MOC’s Regulation of Crude Oil Market Management and its Regulation of Refined Oil Market Management released in December. The regulations were designed to open up China’s wholesale oil market, traditionally dominated by CNPC and Sinopec.

The two regulations stipulate that oil product wholesalers must have one-time annual crude processing capacity of over 1 million metric tons. And all applicants should own an oil product depot with a minimum storage capacity of 10,000 cubic meters. The previous restriction on the number of gas stations a private company must own has been lifted.

Although the market has been deregulated to a certain degree, the number of newcomers will depend on their profit-making capacity. China’s current oil product pricing mechanism does not guarantee a decent profit margin and therefore is not luring new players, Niu said. The Chinese government keeps a tight grip on the pricing of major oil products, keeping the price below the global level to avoid supply fluctuation and inflation.

We’ve been seeing more and more focus put on the oil and gas industry as China moves towards complete market deregulation. Given the current market situation in China, the major State-owned energy companies look to benefit the most from the new rules and guidelines. For more information, please see our posts from March 14 and February 27.