Faced with increasing competition and the need to accelerate national expansion, CNPC recently reduced its retail oil prices.  Will this stimulate reduced prices from Sinopec as well?

The Beijing branch of China National Petroleum Corporation (CNPC) lowered its petrol prices at about 100 gas stations in Beijing on March 10th.  The price cuts ranged from 0.2 Yuan to 0.5 Yuan on various diesel and gasoline products, depending on the geographical location of the stations.  In a sharp departure from previous nationwide price cuts directed by the price regulator, only CNPC's Beijing branch lowered its petrol prices.  China Petroleum and Chemical Corporation (Sinopec), CNPC's major rival, has yet to react.

Beijing highlights the price war over retail petrol.  CNPC said that it will employ a similar pricing strategy in Guangdong Province, and Wuhan.

"Competition is positive for both the industry and consumers.  An adjusted pricing strategy can facilitate competition and industry development," says Wang Shunzeng, secretary of Beijing Petroleum Association (BPMA).  "CNPC only owned 20 gas stations in Beijing in its earliest stage.  That number grew to more than 200 in a few years, but it still lags far behind Sinopec's more than 500 gas stations in the city."

CNPC does not have an advantage in the national gas station landscape either.  Sinopec operates more than 40,000 stations, and CNPC  is driven to strategically expand the number of its gas stations across China.  However, since local governments are strict about the establishment of new gas stations, CNPC cannot rely on new gas stations to expand its business in general.  It is also difficult to expand by acquiring, leasing, or merging existing stations.

In these circumstances, CNPC intends to use price in order to compete, and to regain initiative in the market, especially over end-terminal distribution.  "Although CNPC enjoys an advantage in resources in the upper stream, an open market requires accommodation from distribution and retailing as well," Han Xiaoping, information director of China Energy Net, pointed out.  "When Sinochem opened a new gas station in Beijing earlier this year, it used lower prices as its strategy for penetrating the market.  It immediately attracted hundreds of customers who lined up for petrol.  In a very short period of time, Sinochem’s gas station has become well-known among Beijing drivers, even though it is located far from the city center."

Fierce market competition is also contributing to CNPC's new initiative.  China announced the opening of the crude and refined oil wholesaling and retailing market to foreign oil firms and privately-held enterprises.  The new regulations went into effect on January 1, 2007.  As  consumers gain access to more options, mainland oil companies, including CNPC, need to work on attracting new consumers and securing their existing client base.

CNPC and Sinopec have different business foci and costs that determine their oil prices.  This is one of the reasons why Sinopec has not yet reacted to CNPC's price reduction.  "CNPC mainly operates an upper stream oil business, and generates most of its profit from energy exploration.  Most of Sinopec's refined oil is imported from overseas and is directly affected by international oil prices.  Since SNPC has resources on hand, it has greater flexibility in reducing end-product prices," said Professor Dong Xiucheng, with the School of Business Administration at the China University of Petroleum.

However, Han says Sinopec should consider its own pricing policy.  "Sinopec's oil prices are very high.  The company needs to address how to obtain cheaper oil to sell.  This undoubtedly requires accommodation from government policy, depending on whether it will allow Sinopec to operate crude oil futures position trading overseas.  Presently, since futures trading is risk, the right to engage in it has not been given to the company."

Nonetheless, CNPC's pricing adjustment may not be enough to stimulate a domino effect among refined oil retailers.  Dong points out that, although China has now opened its crude and refined oil and wholesaling and retailing markets, the industry will not see significant changes in the short term, mainly because the problem of oil sources has not been solved.  Since foreign trading of oil is still closed, privately-held oil firms can only obtain oil through several state-owned enterprises or other large companies.  Thus China is still far from a market-oriented competitive landscape in oil.