REFORM AND CHINA'S NATIONAL OIL COMPANIES

Reform and China's National Oil Companies

Reform and China's National Oil Companies

Introduction

In China, the national government has a strong role in the energy sector. Under the central planning system, from the establishment of the People's Republic in 1949 to the initial economic reforms in 1979 championed by Deng Xiaoping, the government directly controlled extraction, generation, transport, and allocation of fossil fuels and electricity. During the transition to a market-oriented economy, the government has gradually, though not always consistently, withdrawn. It lifted controls on energy prices, created energy corporations, and assumed a regulatory role. Like China's other governmental structures, the institutional apparatus for energy policy has been frequently reorganized, with a single ministry responsible for energy in some periods and specialized agencies for each energy type in other periods. In the first three decades of the People's Republic, policy was concerned mainly with increasing supplies of coal, oil, natural gas, and electricity (Cheru 2011, pp. 91-110). In the early 1980s, after proposing ambitious economic development goals that would have outstripped conceivable growth in energy supply, China also adopted strong energy efficiency policies. There have been significant efforts to provide the two-thirds of the population that lives in rural areas with better energy services. In recent years, China has made greater efforts to integrate energy supply and efficiency policy with environmental protection and other social goals, in addition to bold economic development goals. The government faces energy security concerns as the dependence on imported oil and natural gas rises (Yuan and Entwistle 2007, pp. 591-606).

Chinese oil companies like CNPC, Sinopec and CNOOC share a common set of parents: the former Ministry of Petroleum Industry and the former Ministry of Chemical Industry. In the early 1980s (CNPC Research Institute of Economics & Technology 2010, pp. 18-26), the initial years of China's economic system reforms, the Chinese government decided to convert the productive assets of these and other ministries into state-owned enterprises (SOEs). The objectives were to introduce competition, promote economic efficiency and a wider share of ownership, and subject SOEs to market discipline, develop a national capital market, raise tax revenues to the state and reduce government outlays. In this connection, this study will explain the main reforms undertaken by China's National Oil Companies since the early 2000s and identify the remaining challenges for improving their corporate governance practices.

Background of Reform of Oil Companies

The China National Oil and Natural Gas Corporation were formed out of the onshore upstream oil and gas production assets. In 1998, it was incorporated as CNPC, the largest Chinese NOC, the Fifth-largest oil company in the world according to Petroleum Intelligence Weekly in 2009, and ranked tenth in the 2010 Global Fortune 500 listing. Sinopec, the second-largest NOC, was given responsibility for all oil refining, marketing and petrochemical manufacturing capacity, and now dominates China's downstream market. Today, Sinopec is the largest Chinese company in terms of revenue. By comparison, CNOOC is relatively small, reflecting the country's small assets offshore, a new area of activity for ...