Beijing's helping hand provides a lift for domestic players
The role a state should play in economics has long been a hotly contested debate, though one need look no further than at China's oil and gas sector to find an example of where government involvement has made all the difference.
'Without the Chinese government's regulations on fuel pricing, China's economy would not have grown so quickly,' said Gordon Kwan, director of brokerage house CLSA's China oil and gas research. 'From an earnings viewpoint, insulating the country from high international oil prices has been a good thing particularly for small and medium sized businesses, many of whom are in the manufacturing sector.'
China's regulated fuel pricing structure has resulted in heavily distorted energy prices, particularly following the strong appreciation of global energy prices in the past year.
In the first half of 2008, the price of China's domestic refined products averaged about US$70 per barrel, well below the international level of US$110 per barrel, noted Mr Kwan.
Despite government subsidies, that price gap has triggered serious losses for Chinese refiners, sending their refining margins into negative territory, as they have been unable to pass on surging international crude oil prices to customers because of the government's control over domestic prices. The upstream market is equally regulated. For starters, the only way for foreign explorers to access the China market is through joint venture partnerships with one of the country's majors such as Sinopec and PetroChina.
But the tightly controlled oil and gas exploration sector has yielded dividends for Chinese domestic players who have been able to accelerate their production capabilities at a time when the world is facing a shortfall of crude, with Opec continuing to cut oil production and the world's ageing oil fields becoming less productive.
Under the country's national energy policy, China is aiming to increase its annual output by 1 per cent each year in contrast to the world's flat production growth rate over the past three years.
Last year, China produced 4 million barrels of oil per day, to become the world's fifth largest producer, said Mr Kwan.
'Oil has become so political that it requires government backing to help access good projects that give economies of large scale,' he said. 'In China, where the industry is more about national energy security rather than the price of oil, the government-backed oil majors have better access to such projects.'
Consequently, Chinese upstream players are some of the industry's strongest and most competitive, ploughing profits into their capital expenditure in contrast to their international peers who often use their income to buy back stock.
Mr Kwan said the operating income Chinese explorers such as PetroChina and CNOOC made per barrel of oil equivalent was far higher than their international rivals due to better asset quality and economy of scale.
In 2007, PetroChina made US$22.90 of operating income from every barrel of oil equivalent it produced while CNOOC's was at US$26.70. US majors Exxon and Chevron only earned US$14.60 per barrel of oil equivalent and US$13.40 per boe, according to CLSA research.
