(MENAFN- Gulf Times) China is considering forging megamergers among its big state oil companies, seeking to create new national champions able to take on the likes of Exxon Mobil Corp and produce greater efficiencies at a time of low prices.
At the request of China's leadership, government economic advisers are conducting a feasibility study of options for consolidation, according to officials with knowledge of the research. One involves potentially combining the country's largest oil companies, China National Petroleum Corp, or CNPC, and its main domestic rival, China Petrochemical Corp, or Sinopec, the officials said. Other options look at merging two other major energy companies, China National Offshore Oil Corp, or Cnooc, and Sinochem Group.
No timetable has been set for a decision on whether or when to proceed with the various proposed mergers, said the officials. Spokespeople for the four Chinese oil companies and the State-owned Assets Supervision and Administration Commission, which oversees the largest state enterprises, declined to comment or didn't respond to queries.
The possible mergers would be the latest consolidation of state companies blessed by the government as it tries to regear a slowing economy for a new phase of growth. As part of that effort, President Xi Jinping, now more than two years in office, is trying to revamp major state firms to make them more competitive globally.
Though the government has taken some tentative steps to allow more private and foreign capital to flow into infrastructure, resources, banking and other areas long the preserve of state firms, Xi has said state companies remain an "important pillar of the national economy." The government "must ensure they thrive," Xi said in remarks in August. Bigger and stronger state companies, according to officials and scholars familiar with the leadership's thinking, are viewed by Xi as key to China's reclaiming its prominence in the world.
Mergers could also boost efficiencies in an economy increasingly burdened by excess capacity € a problem that has caused Chinese manufacturers to compete against one other by cutting prices. Late last year, the government announced a plan to merge the country's top two state-owned railcar makers with a goal of making the combined company capable of competing with Siemens AG in Germany and Canada's Bombardier Inc.
The four oil companies € CNPC, Sinopec, Cnooc and Sinochem € have long dominated every phase of the industry; for years each had a geographic or business area of specialty. For instance, CNPC focused on exploration and production, and Sinopec on refining. Over the past 15 years, in response to earlier reform plans to spur competition, they" have expanded into the others' turf, creating overlapping operations that span exploration, refining to running gas pumps.
"They're increasingly fighting among each other," said one of the officials with knowledge of the consolidation plan. "That has led to lots of waste and inefficiency."
With international oil prices having halved in less than a year, those problems have become more pronounced, giving reform new urgency. Combining and then streamlining the operations of the major Chinese oil producers could help reduce waste caused by redundant staff and projects, the officials said. A combined enterprise could then focus on building up a better-funded company to compete around the world.
Low oil prices have spurred talk of new deals activity across the globe, as stronger companies engage in opportunistic buying of weaker firms. Among big deals last year, Spain's Repsol SA agreed to acquire Canadian oil-and-gas producer Talisman Energy Inc for $8.3bn. "We want to create a big Chinese brand to better compete overseas," the Chinese official said. "We want our own Exxon Mobil."
The potential shake-up would cap what has been a tumultuous period for China's oil industry. Chinese oil giants € in particular CNPC € have been the focus of an antigraft campaign championed by President Xi. Leading industry executives have been detained for suspected graft, and added scrutiny has helped spur a huge pullback in new investment by wary executives.
A decision to consolidate China's oil sector by making big state firms even bigger could end up tamping competition at home and stymie market-oriented reforms, some analysts said. It is unclear whether a possible consolidation would be followed by reforms, such as lowering barriers that have marginalised independent oil-and-gas producers.
"If you are focused on the foreign market, you certainly want to consolidate because it's more competitive abroad," said Lin Boqiang, director of the China Center for Energy Economics Research at Xiamen University. "But if just for the domestic market it's better to have more competition, because competition leads to efficiency."
Beijing has started inviting private capital into the oil industry. Sinopec last year sold a nearly 30% stake in its retail sales-and-marketing unit to a group of 25 investors, mostly Chinese. But none of the initiatives involves selling a controlling stake to the private sector. A bigger challenge is whether the government would allow the combined entities to improve performance by reducing their huge workforces or shedding assets, said Philip Andrews-Speed, an expert on energy governance in China at the National University of Singapore. "That will be the test of whether this is old state-ism or are they really looking for better performance," he said.
PetroChina Co, the listed arm of CNPC, has nearly 550,000 employees world-wide, more than seven times as big as Exxon Mobil Corp. The Chinese company delivered revenue of $361bn in 2013, compared with more than $420bn in sales and other revenue at Exxon.
These days, all of China's big oil companies have been under pressure from prices and from the government to cut costs and focus on improving returns. For example, Cnooc, the listed unit of China National Offshore Oil, says it will cut capital spending by as much as 35% in 2015 as a result of falling global oil prices. Expenditures at PetroChina and Sinopec are also expected to fall this year.
Marrying CNPC and Sinopec would create one of the world's biggest companies. A combined entity at least in the short run could control a vast majority of China's onshore oil-and-gas production and would hold total assets of hundreds of billions of dollars.
In the case of Cnooc, a merger with Sinochem, would give it more refining operations, giving it more sources of revenue that over time could help shield it against oil-market volatility. Cnooc is regarded by analysts as the most vulnerable to the oil-and-gas price drop, in part because it expanded aggressively abroad, buying assets including Canadian oil-sands operator Nexen Inc for $15.1bn in 2013 when prices were high.
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