WTO Entry Opens Chinese Market


SINGAPORE-Chinas admission to the World Trade Organization on Dec. 11, 2001 will bring down tariffs and trade barriers, and is opening the country to more direct foreign investment. Chinas oil industry is undergoing major restructuring and rationalization in order to compete, while BP, ExxonMobil, Shell and other multinationals are moving fast, industry executives told the 8thAnnual Fuels & Lubes Asia Conference here last week.

The greatest effects of Chinas entry into the WTO are in the areas of lowered tariffs and non-tariff trade barriers, and access to Chinas services marketplace, Li Run-Sheng, senior economist and vice president of PetroChina Co. Ltd., told the conference.

Tariffs on lubricants, gasoline and crude oil will go down. The tariff on base oils will be cut to 6 per cent in 2002; the tariff on finished lubricants and greases will drop from 9 percent now to 6 percent. The tariff on crude oil will be eliminated. Tariffs on diesel, kerosene, fuels and naphtha will remain unchanged, but quotas on imports of gasoline, kerosene, diesel and fuel oils will be phased out, and completely removed Jan. 1, 2004. In 2002, China will permit over 8 million metric tons of crude oil and 4 million metric tons of refined oils to be imported by non-state-owned trading firms.

In five years, foreign companies will be allowed to engage in wholesale distribution of crude and refined products, Li said. Retail business in finished products will be permitted after 2005. And franchise businesses will also be open to foreign companies after 2005.

Chinas WTO membership will bring fierce competition for market share in China, Li said. As for the refining business, PetroChina will face more severe challenges…. At present, the oil refining capacities of Korea, Japan and Singapore have already exceeded their own demand. In terms of processed oils in Asia as a whole, the supply also exceeds the demand. Removal of the quota system will bring lower prices and reduce the profitability of Chinese oil refiners, including PetroChina.

PetroChina is Chinas largest integrated oil and gas company, and tenth largest in the world. Established in 1999, its shares have been traded on the New York and Hong Kong stock exchanges since April 2000. In 2001, PetroChina had a 42 percent share of Chinas domestic refined products market. The company is undergoing a major restructuring program to increase shareholders return. Li reports that the company has closed inefficient facilities, streamlined management and cut redundant personnel.

PetroChina is BPs strategic partner in China, Tee Kiam Poon, president, group business development, BP Oil China, said. If you want to be a global player, you cant afford not to be in China.

In the next two to three years there will be considerable turmoil in the Chinese petroleum industry, Tee predicted, but then the situation should improve. The timing to go into China is right now, he said. Although he cautioned that there is overcapacity in lubricants now, Tee recommended action. Do your research, find a partner and a location. Develop your niche, develop your market. The timing is right.

All oil companies operating in China are now facing five key changes, Li said. These are:

1. Management of the industry by the Chinese government will change dramatically. Regulations and laws are beingestablished now.
2. There is a long-term oversupply of processed (refined) oil products. The pursuit of market share will intensify competition.
3. Oil pricing mechanisms will change drastically. Prices will be set by the market itself rather than the government. (Production and marketing cost reduction shall be the key problem for PetroChina to face and solve, noted Li.)
4. The content of competition will multiply. Competition in the refining business will be omnidirectional, Li said. It will be in intelligence, technology, management and services.

5. Finally, pressures will increase to improve environmental protection and product quality.

Generally speaking, said Li, PetroChina has five years of transition at most to strengthen itself. In the refining area, Li said, PetroChina is focusing on integration of business units, upgrading facilities, improving distribution and product quality. We are shutting down small refineries in the PetroChina system, and we are rationalizing refinery assets, Li said, although he declined to disclose which refineries are slated to be closed. Since our IPO [April 2000], we have reduced refining capacity by 6 million tons. We will disclose information [about refinery closures] by 2005. Now we need to balance between refinery [output] and market demand … and adopt foreign refining technology.

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