SOCIALIST MARKET ECONOMY: ENERGY C H I N E S E P E T R OL E U M I N D U S T RY S I N O P E C C O R P S I N O P E C C O R P. CHINA PETROLEUM & CHEMICAL C O R P O R AT I O N SOCIALIST CHINA Chinese petroleum industry is controlled by 3 major - - players all of whom are state owned incl. CNOOC, CNPC (PetroChina), Sinopec; Over the years China has retained firm control of key & strategic industries in the country; These industries have been under absolute state control: power generation Mining i.e. Coal Oil & Petrochemicals Telecommunications etc. COMPANY BACKGROUND (SINOPEC) One of the largest integrated energy and chemical company in China China Petroleum and Chemical Corporation (Sinopec Corp.) is the largest refiner and petrochemical producer in China. Public company listed in Hong Kong, New York, London and Shanghai Parent company is state-owned China Petrochemical (Sinopec Group), Government of China controls about 75% of the company through the Sinopec Group. Its businesses include: oil and gas exploration and production; crude oil processing; oil products trading, transportation, Distribution and marketing; petrochemicals manufacturing. owns more than 29,055 gas stations 643 franchises COMPANY PERFOMANCE Turnover 1,600,000 GROSS PROFIT MARGIN BY PRINCIPAL OPERATIONS BY SEGMENT 35.0% 1,400,000 30.0% 1,200,000 25.0% GROSS PROFIT MARGIN 20.0% 1,000,000 15.0% 800,000 10.0% 600,000 5.0% 0 2005 2006 2007 2008 2009 Turnover 824,005 1,061,58 1,205,86 1,495,14 1,345,05 -15.0% Others -10.0% Marketing & distribution 200,000 Chemicals -5.0% Refining 0.0% Exploration & Production 400,000 PROFITS & RETURNS RETURNS PROFITS 25.00% 90,000 80,000 20.00% Percentage 70,000 60,000 15.00% 50,000 10.00% 40,000 30,000 5.00% 20,000 0.00% 2005 2006 2007 2008 2009 Return on Capital 12.50% 12.58% 11.66% 5.15% 11.13% Employed Return on Net 19.31% 20.30% 18.16% 8.70% 16.33% Assets 10,000 0 2005 2006 2007 2008 2009 Operating Profit 71,517 81,250 85,496 26,336 84,431 Profit 43,743 53,773 55,914 28,525 61,760 COMPETITORS Exxon, BP and Royal Dutch/Shell However foreign companies have established strategic partnerships with Chinese companies Intra-competition among the SINOPEC Group of companies 20,000 private / Independent gas stations SPC has managed competition well because of the government's price controls and its proximity to large customer base SUPPLIERS Coal Suppliers Company Logo Supplier Name SDIC Xinji Co., Ltd Yangquan Coal Industry (Group) Co., Ltd WanBei Coal-Electricity Group Co., Ltd Other suppliers China Shenggui Valve Co.,Ltd Aquachem Industrial Limited SINOPEC Yizheng Chemical Fibre Co., Ltd. Sinopec International Pingdingshan Coal (Group) Co., Ltd. Guangzhou Taida Steel Tube Co. Jiangsu Xuzhou Mining (Group) Co., Ltd. Huainan Mining (Group) Co., Ltd. Shenhua Energy Co., Ltd. Ltd. Jiangsu Sunchem New Materials Co.,Ltd CUSTOMERS Lube products used by aviation, spaceflight, nuclear industry, electronics, military weapons, shipping, automobile, mechanical processing, metallurgical, refining, chemical, and instrumentation areas Asphalt products motorways, urban public roads, airport runways, racing tracks and bridge pavements railway Industry Key Success Factors Category Key Success Factors Integration •Vertical integration is more successful Innovation •Research and development •Technological advancement •Ability to advance in new areas Management •Adaptable management structure structure •Efficient management structure Marketing and •Proximity to the market Distribution related •Strategic partnerships and linkages are critical. •A solid track record •Experience of company personnel to undertake work •Fast technical assistance and Customer satisfaction Skills and capability •Skilled workforce is a major KSF in the sector related •Communication with client •Short delivery time capability and constant liaison with clients SINOPEC KEY SUCCESS FACTORS integrated upstream, midstream and downstream operations strong oil & petrochemical core businesses complete marketing network established a standardized structure of corporate governance adopted a management system of centralized decision-making, delegated authorities at different levels and Business assets and principal markets are located in the east, south and middle part of China, where China's most developed and dynamic economy lies. • business operations handled by specialized business units CHINESE FEATURES / SOCIALIST STATE 1978 Deng Xiaopin • Introduced a program of market socialist reform; China has since grown & became a regional & global economic force; China has recorded double digit real GDP growth since 1980’s; China is said to be contributing app. Half of the Asian GDP; Since the reform, GDP rose from 150 Billion USD to more than 1.6 trillion USD; Under this regime private sector share of GDP rose from less than 1% in 1978 to app. 70% in 2005. 2005 MARKET REFORM Privatisation was almost halted / partially reversed; All strategic industries were consolidated into SOE, the rational being to increase international competitive national industries; There are about 150 or more large SOE reporting to Govt. SOE’s contribute to increased state revenue. Private ownership is in the main restricted to secondary & service industries. CHINESE FEATURES Macroeconomic policies and government regulations government is liberalizing the market entry regulations on petroleum and petrochemicals sector Sector is subject to entry regulations to a certain degree Including issuing of licences Setting maximum retail and distribution prices for diesel, gasoline & jet fuels Imposing of special levies, tax and fees Formulation of quotas for import and export Exchange Rate: China implements an administered floating exchange rate regime based on market supply and demand with reference to a basket of currencies in terms of the exchange rate of RMB. Participation of Multi - Nationals •Partnerships have been established with SHELL & BP in the main. SOE still dominant Market Share of the petroleum industry 2% 7% 8% State owned 44% 43% 13% Sinopec 28.2% PetroChina 12.9% CNCP 7.7% 27% Joint Venture 7.3% Multi-National 0.2% OPPORTUNITIES China has largest automotive market 1,3 billion people; 2nd Largest oil consuming nation; China is concerned with energy security & has vested interest in cleaner & efficient fuels; Country is leading in key alternative fuels research & govt. is investing billions in R&D; Govt. intends to deregulate the sector to address chronic inefficiencies of current distribution. Opportunities exists for foreign oil companies to join forces with the 3 local oil companies on upstream & downstream. CONCLUSIONS The petro-chemical industry is amongst the strategic industries controlled by he state; More especially the upstream activities Multi-nationals are allowed some in downstream activities Since China is not well endowed with crude oil resources, the govt favors meaningful partnerships with other govt & multinationals in oil rich countries; Technological investment Financial investment Opportunities for foreign companies exist in green technologies, JVs & partnerships End! THANK YOU ALL!