Not Business As Usual: China’s Oil Majors Are No Longer Invincible

Not Business As Usual: China’s Oil Majors Are No Longer InvincibleBy Tim Daiss and Michael J. Economides

CNPC (along with its publically listed subsidiary PetroChina) and Sinopec have seen better days. The two Chinese oil majors have been humbled in recent weeks as the former is being subjected to Beijing’s tightening anti-graft noose and the latter just lost a billion dollar international court case. Only CNOOC for the moment, China’s third state owned oil major, remains unscathed. The Big Three, which have combined yearly revenue of nearly $1 trillion, all have cause for concern.

The fall-out started back in late August when news broke that CNPC vice-president Wang Yongchun was being investigated by China’s Ministry of Supervision for what was simply described as “severe disciplinary violations.”

The news caught many by surprise, especially those who have come to admire China’s oil majors for their tenacity to go where Western oil companies dare not go. The list is exhaustive. As Western majors shy away from large swaths of Africa due to political or security concerns or both, China goes in. As Western oil companies pull up or sell off part of their assets in still troubled Iraq amid Baghdad’s strict oil contract terms that yield smaller profits than some would like, China (much to the chagrin of Western media and US politicians that don’t quite seem to understand what’s really happening) ups its ante there.

Many argue that China’s oil majors have an advantage since they mostly don’t have to answer to shareholders as Western companies do nor do they have the constant irritant from environmental activists and global climate change ideologues. Western oil majors could still learn from China’s proactive hydrocarbon seek and find playbook and boost their own reserves in the process.

President Xi Jinping goes for the jugular

Commenting on Mr. Wang’s predicament, the Wall Street Journal said at the time that the move is the latest investigation into high-ranking officials at Chinese government agencies and state-owned enterprises, amid a campaign by President Xi Jinping, who acknowledged the threat corruption poses to China ‘ s leaders, after he took the Communist Party’ s top post last year.

Bloomberg said the highly publicized trial of former Politburo member Bo Xilai (on bribery, embezzlement and power-abuse charges) has been highlighted by the party as proof of its determination to target graft.

The week before news broke about Wang’s investigation, China Mobile disclosed that a provincial head and former senior executive was also under investigation, apparently for corruption.  A China Mobile investigation may not be too surprising, but some thought that executives at China’s oil majors would be immune from it all.

However, the fallout hasn’t abated. The day after the Wang disclosure, PetroChina said three of its senior executives resigned following investigation by authorities. PetroChina’s stock plunged the following day and the company lost around US$1 billion in market value on the Hong Kong Stock Exchange.

However, a top CNPC executive and three top PetroChina managers weren’t enough for Beijing. More was to follow. On September 11 The South China Morning Post, citing a mainland newspaper, the Securities Daily and a source, reported that all CNPC middle and top management were ordered to surrender their passports, as authorities rush to contain the fallout from the widening corruption inquiry into the oil and gas giant. The decision was an obvious attempt to thwart any nervous CNPC officials from fleeing the country.

And, on Tuesday China’s all-powerful State Council announced that Jiang Jiemin was removed from his post as head of the state-owned Assets Supervision and Administration Commission (SASAC). The statement from the State Council, which also supervises SASAC, came after the Central Commission, the party’s watchdog, placed Jiang under investigation on September 1 over suspected serious disciplinary violations.

China’s Global Times said that Jiang’s alleged crimes have not been specified yet. Jiang was CNPC’s party chief between 2006 and 2013 before being appointed head of the commission in March. He was elected as a member of the CPC Central Committee in November, and is one of the most powerful officials to face investigation for graft since the 18th CPC National Congress.

Sinopec’s loses court battle and influence in Africa

While CNPC’s corruption drama unfolds, Sinopec has also had its share of problems. On September 13 media reported that Sinopec’s subsidiary, Addax Petroleum, lost a ruling at an international tribunal as part of a $1 billion legal battle over an oil field in Gabon.  In its first decision in the dispute, the International Chamber of Commerce’s arbitration court rejected an Addax move to resume operations at the field and prevent Gabon from selling the license to a third party.

Addax accounts for around a third of Sinopec’s overseas oil production. The company said it could win other important claims, but did not elaborate.

Also, in late August both Sinopec and PetroChina took hits when China’s Ministry of Environmental Protection said that they would not approve some of the companies’ new refining projects and plant upgrades. Local media said the move could affect the planned increase in oil production by more than three million barrels per day (bpd). Sinopec chairman Fu Chengyu said it was the harshest penalty Sinopec has ever received from environmental protection authorities since its establishment.

Indeed, its all troubling news for these two oil majors that are used to having their way while as recently as late last year Sinopec was accused of bullying local environmental officials that dared try to force them to comply with laws on the books.

What’s next for China’s Big Three? While nobody knows the answer to that question, it’s strikingly clear that under Xi Jinping’s helm, it won’t be business as usual. Perhaps after all of the blood letting, China’s state oil owned majors will be leaner, and able to do an even better job that they have been tasked to do – secure massive amounts of oil and gas resources for the world’s second largest economy but this time without all of the corruption at the top. Stay tuned.

Michael Economides is Editor-in-Chief of the Energy Tribune