Caltex weighs licence options

PUBLISHED : Monday, 20 March, 2006, 12:00am
UPDATED : Monday, 20 March, 2006, 12:00am

US firm looks ahead if Citic Resources fails to secure mainland approval for fuel retail venture

Caltex says it will look at other options if its would-be partner Citic Resources Holdings fails to secure the central government's approval for their planned fuel retail venture on the mainland by early June.

The regional chief of US energy giant Chevron's unit gave the warning after Caltex and Citic Resources agreed to defer the expiry date of their agreement for the latter to invest in Caltex's mainland operations three times in eight months. The delay would give the companies more time to negotiate with mainland regulators on the interpretation of certain investment rules.

'I think [by the time the latest extension expires], it should be time to decide whether to proceed or drop the co-operation, it has already been more than a year [since we signed it],' Peng Xiaofei, chairman of Caltex Companies (Greater China), told the South China Morning Post.

'Co-operating with Citic Resources is one option [for us to expand in China] ... if this fails, we have to consider other options.'

Caltex signed a deal in January last year to let Citic Resources buy a 50.5 per cent stake in its mainland fuel retailing operation for US$45 million to comply with a new investment regulation in China. The operation would then apply for a retail business licence.

While China committed to opening its fuel retail sector to foreign players by December 2004 as part of its World Trade Organisation accession promises, Mr Peng said it issued a circular in April that year stipulating that foreign firms owning more than 30 retail stations must have domestic partners with controlling interests.

It is understood that China did not make clear the degree of market opening in its WTO commitment in 2001.

Caltex, which had more than 40 stations in China either in co-investment with local government entities or under wholly owned units, was forced to find a local partner to satisfy the requirement.

Caltex and Citic Resources failed to win approval a year after filing an application with the government.

As the approval is a condition Citic Resources' agreeing to invest in Caltex's mainland operation, they deferred the expiry date of the deal to June 7 from October 7 last year.

'A very big problem is that [the government] told us that Citic Resources is a Hong Kong registered and listed company,' Mr Peng said. 'So they are saying we are 100 per cent foreign-owned and, hence, not satisfying their requirement.'

Citic Resources is a unit of the central government's largest investment vehicle, China International Trust and Investment Corp (Citic Beijing).

'We believe Citic Resources has good relationships with the government,' Mr Peng said.

The two companies have discussed many options on how to structure the deal, such as asking other Citic Beijing mainland units to participate, but found no mutually satisfactory solution.

'This deal is done by Citic Resources and they want to be the co-operating party,' Mr Peng said. 'There are technical issues, as well as internal issues, on the part of Citic Resources and on our side, but we are still discussing.'

A Citic Resources spokeswoman said the approval was delayed because it was the first time a wholly foreign-owned entity, such as the proposed co-operation with Caltex, had applied for a fuel retail licence in China. 'We are trying our best to gain approval,' she said.

Hu Jingyan, director-general of the Ministry of Commerce's foreign investment administration, would not comment.

This is not the first time outsiders have believed that Citic Beijing's Hong Kong vehicles can gain preferential advantage to enter restricted mainland industries.

In 2002, Citic Pacific was forced to sell its entire 60 per cent stake in a 32,000km fibre-optic network to Citic Beijing after it failed to obtain a licence to operate the network, as overseas firms were banned from operating value-added telecommunications services on the mainland at the time.