As Hong Kong and Shanghai indicies hit record high once again (when America was sound asleep) and crude oil less than a dollar away from its all time high at $83.90, it's time to reexamine the Chinese oil industry. This also comes at a time when CNOOC Limited (HKG:0883), China's largest offshore and third largest petroleum/natural gas producer by market cap, is increasing its downstream operations.
CNOOC Has A Gas Station
CNOOC opened its first gas station in Huizhou, Guangdong, on Tuesday. The oil company, focused solely on offshore exploration and production earlier this decade, is slowly becoming more integrated via a series of projects through 2008, which opening retail outlets is a part of. This move also marks CNOOC's entry into China's petroleum market in South China, a market traditionally dominated by Sinopec Shanghai Petrochemical Co. Ltd. (HKG:0338), the second largest integrated oil producer in the country.
The question now is: how will CNOOC, Sinopec and the Chinese oil industry play out in the near future?
PetroChina vs. The Other Big 3
Warren Buffett's disposal of PetroChina shares was a renewed and clear enough hint to the company's long-term growth prospects (PetroChina was up Thursday, set record at HK$15.48 as investors await A-share buying frenzy in Shanghai a few months down the line) since the government put a stake through the company's heart in 2005, when the right to bid for onshore Iranian oilfields was given to Sinopec over its competitors. PetroChina Company Limited (HKG:0857), the largest oil and natural gas producer in China by reserves volume and market cap, is about to face a brick wall. Although PetroChina owns one of the largest oil fields in the world, the Daquing oil fields, the government has given the company little perks and subsidies recently (as opposed to Sinopec and CNOOC), and as a result investors have little to look forward to.
Why CNOOC Is More Attractive
Than Sinopec
Sinopec has a stronghold in South China (as mentioned above) that not only include oil refineries, but also fiber and polymer synthesis plants. The firm also has an established retail chain, owning more than 28,800 gas stations in 19 different provinces. How, then, is CNOOC anticipated to compete against Sinopec (this is similar to the movie "300", except it's 1 vs. 28,800)? The answer, it seems, comes from the sea.
CNOOC Offshore in Nigeria and Iran
In addition to the 5 new projects developed last year (of which, as mentioned, opening retail branches is one) that is expected to be in full swing by the end of 2008, CNOOC has two backup plans that it can tap into if anything went wrong: 1. the offshore oil in Nigeria, which CNOOC purchased back in 2006, increased its overall reserves by 25%; and 2. Also in 2006, with Sinopec's purchase of onshore oil from Iran, CNOOC won the bid for the Pars natural gas fields offshore. This is the largest natural gas field known to man, and represents a 885% increase of overall reserves. The potential is huge.
CNOOC has not yet begun production in Iran as it (meaning Iran and its new partner in crime CNOOC) may face sanctions from the US. However, it is highly unlikely that this deal will drop out because of any geopolitical intervention, but that is pure speculation. Regardless, CNOOC is likely to find itself in a position of high growth ahead of Sinopec. Its move into the retail market reflects its confidence: there's no slowdown in demand for petrol in China and its downstream operations are growing at a faster rate (+34%) than its upstream business. So what should CNOOC be scared of?
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