Why China Seeks To Consolidate The State-Controlled Energy Companies
Bidness Etc looks at how lower crude oil price has impacted the Chinese state-owned energy companies, causing the Chinese government to consider consolidation of the state-controlled oil giants, like PetroChina and Sinopec
China is planning to merge and consolidate its state-owned oil companies into a single entity. The plan has come due to the 50% plunge in the crude oil price since June 2014.The merger would allow these companies to achieve economies of scale and operate more efficiently amid falling crude price. The merger decision is being considered despite facing disapproval from the companies.
China at the moment is considering a mega merger of China National Petroleum Corp, the parent company of PetroChina Company Limited, and its main domestic rival China Petroleum & Chemical Corp, also known as Sinopec.
These oil companies purchased several assets at high prices but since the fall in crude oil price, value of the purchased assets has gone down substantially. CNOOC has already indicated that it would decrease its capital expenditure budget by 35% year-over-year amid falling crude oil price.
Many analysts feel that CNOOC would be most vulnerable to the fall in crude oil price, primarily because of adopting an aggressive strategy of buying assets. In 2013 CNOOC bought Nexen Inc. for $15.1 billion. If the merger of CNOOC and Sincohem takes place then CNOOC would gain additional refining operations and an added source of revenue, safeguarding it against the falling crude price.
These oil companies earlier believed in specialization and focused primarily on an area of expertise. As reported by the Wall Street Journal, CNPC’s area of expertise was exploration and production. On the contrary, Sinopec focused more on refining.
However, since the last 15 years, the companies to compete effectively had decided to diversify and broaden their horizons. Hence, the companies expanded and created overlapping operations. This led to a greater tussle amongst the companies, which according to officials of the consolidation program resulted in a waste of resources and operational inefficiencies.
The exact date of when the merger process would be initiated has not been given. The President of China Xi Jinping has two years remaining in office now and he is looking forward to make them productive to help the merged entity compete with global companies.
According to officials of the consolidation program, with the major drop in crude oil price, it now is important to make the operations more efficient by eliminating the waste that would otherwise result from redundant staff and projects.
One of the officials regarding the consolidation program said: “We want to create a big Chinese brand to better compete overseas, we want our own ExxonMobil.” If the merger takes place then it could eliminate competition.
Another problem that could be faced is whether the government to improve efficiency would sell off more assets and cut back on the workforce of the companies. PetroChina’s workforce is seven times larger than that of Exxon Mobil but revenue is lower compared to Exxon. Hence, it might be necessary to reduce the workforce.