China’s shake-up of its energy sector is gathering pace, with the biggest producer announcing it will seek private capital as the government promises to open up state-controlled industries.
China National Petroleum Corp. said yesterday it wants outside investment for as many as six units, including oil and gas exploration. That follows China Petroleum & Chemical Corp. (386), known as Sinopec, saying it would search for investors for as much as 30 percent of its oil retail unit in a sale that could raise more than $20 billion. Sinopec has jumped 12 percent in Hong Kong trading since the Feb. 19 announcement.
Premier Li Keqiang pledged yesterday at the National People’s Congress to allow non-state capital in oil and power projects and to speed development of mixed-ownership entities, echoing comments made in November. Many of the largest energy companies including Sinopec and CNPC earn less on investment or have lower stock market returns than their Western peers.
“China’s state-owned companies, energy industry included, have come to a crossroads,” said Lin Boqiang, director of Energy Economics Research Center at Xiamen University and an adviser to China’s National Energy Commission who has studied the economy and energy industry for two decades. “Sinopec’s move marked the beginning of a large-scale reform that may sweep across all strongholds of state-owned enterprises.”
State-controlled CNPC and Beijing-based Sinopec didn’t name potential investors or what form the investments will take. Some Chinese financial institutions or private equity funds may be interested, according to Gordon Kwan, regional head of oil and gas research at Nomura Holdings Inc.
At the same time, the few international energy companies that could afford to invest may not be interested because of slim profit margins, and companies with smaller market values may not be able to afford it, Kwan said by phone from Hong Kong after the Sinopec announcement.
CNPC and Sinopec earned 6.8 percent and 9.2 percent on invested capital in 2012, respectively, according to data compiled by Bloomberg. By comparison, Exxon Mobil Corp. and Chevron Corp. returned 16 percent and 14 percent. Spokesmen at the Chinese companies didn’t respond to requests for comment by phone.
Attracting private capital may prove difficult, said Zuo Xiaolei, chief economist at Galaxy Securities Co. in Beijing.
“I don’t know how many private investors are willing to spend their money on businesses that they don’t have control of,” Zuo said.
Pollution, Corruption Targeted
China’s leadership is seeking to roll out policy changes while grappling with challenges such as maintaining economic growth, curbing pollution and weeding out corruption. The nation set a 7.5 percent target for growth in 2014, matching last year’s, Premier Li told the annual legislature meeting in Beijing yesterday.
“The reforms will let the market economy play a decisive role and try to create a more transparent and fair competitive environment,” Huang Jing, director of the Centre on Asia and Globalisation at the Lee Kuan Yew School of Public Policy in Singapore, said before the Beijing meeting. “The Chinese leadership is facing tremendous, formidable challenges but also there are a lot of good opportunities.”
CNPC has chosen units including pipelines, refining and overseas business for possible equity partnerships with private investors, the China Securities Journal reported yesterday, citing chairman Zhou Jiping. The board hasn’t decided on the shareholding structure of such partnerships, Zhou said. Li Runsheng, a CNPC spokesman, couldn’t be reached for comment.
30,000 Fuel Stations
Sinopec’s plan, which covers more than 30,000 fuel stations, could raise $20 billion, according to Barclays Plc. Additional restructuring measures may be announced this week, Sinopec has said.
“Big is no longer beautiful, and a shift from quantity to quality is gaining momentum,” said Neil Beveridge, a senior research analyst with Sanford C Bernstein & Co. in Hong Kong.
Sinopec has taken the lead on “the road to reform,” and investor enthusiasm could spill over to PetroChina Co. (857), according to a Feb. 28 note from Nomura. Energy sector change is an “inevitable industrywide theme,” it said. PetroChina could raise about $20 billion selling 30 percent of its gas pipeline to private-sector investors, Nomura said that day.
While the 16-member Dow Jones Oil & Gas 30 Index returned 8.7 percent in the 12 months to March 4, Sinopec returned 0.6 percent and PetroChina was the worst performer, losing 21 percent, according to data compiled by Bloomberg. Mao Zefeng, a Beijing-based spokesman for PetroChina, couldn’t be reached for comment.
Banking to Railways
PetroChina, the listed arm of CNPC, in June sold a 50 percent stake in a Chinese pipeline joint venture to Taikang Asset Management Co. and Beijing Guolian Energy Industry Investment Fund.
China will set measures for non-state capital to invest in projects of state enterprises and allow non-state funds to participate in areas including banking, oil, electricity, railways and resources development, Premier Li said yesterday.
Not everyone is optimistic about the changes. Jefferies Hong Kong Ltd. cut its rating on Sinopec after it announced the plan to seek private investors saying the move was aimed at raising capital. Credit Suisse Group AG said that while it’s a step in the right direction, it wasn’t a “game changer” for restructuring because the government will still have a say in appointing managers.
Changes at state companies won’t happen immediately and investors may be more attracted to such businesses if the state were to reduce holdings to 33 percent, Galaxy Securities’ Zuo said. That would see China remain the largest shareholder, while allowing outside investors to influence decision-making, she said.
To contact the reporter on this story: Aibing Guo in Hong Kong at firstname.lastname@example.org