looming boom

By+Zhou+Xiaoyan

China Petroleum and Chemical Corp.（Sinopec）， Asias largest oil refiner， is steering the countrys shale gas exploration as well as the mixed-ownership reform targeted at bloated state-owned enterprises （SOEs）.

On March 23， the Chinese oil giant handed in its 2013 financial performances to shareholders. Its net profits stood at 66.13 billion yuan （$10.66 billion） last year， up 3.5 percent year on year， as calculated according to international financial reporting standards.

As growth rate moderates， Sinopec is eyeing future growth in technological innovation and systematic changes. The company has pledged more input into shale gas exploration and will start to open up its mega marketing segment to private capital this year.

tech breakthrough

When announcing its 2013 results， Sinopec proudly claimed it had achieved significant breakthroughs in the exploration and development of a shale gas block in southwest Chinas Chongqing.

Those advances will help China realize commercial development of shale gas sooner than expected， said Fu Chengyu， Chairman of Sinopec Group.

The Fuling field in the southwestern municipality， the nations first large-scale shale gas field discovered in 2012， has 2.1 trillion cubic meters in reserves， according to Sinopec.

“The company will enhance exploration and development efforts for tapping shale gas at Fuling in order to spur the swift de- velopment of Chinas shale gas industry，”Fu said.

The company expects the annual capacity of the Fuling field will reach 1.8 billion cubic meters by the end of 2014 and 5 billion cubic meters by 2015. Sinopec aims to have annual production capacity of 10 billion cubic meters by 2017， equivalent to 10 million metric tons of oil.

Looking to satisfy its growing energy demands， China is turning to shale gas， natural gas trapped within shale formations.

With methane as its main ingredient， it is a clean and efficient source of energy. The gas is collected through a complicated process called hydraulic fracturing， or “fracking.”

Spearheaded by the United States， an ongoing shale gas revolution is helping transform the worlds energy outlook.

The top five countries with the largest minable shale gas reserves are China， the United States， Argentina， Mexico and South Africa. China has about 20 percent of the worlds total shale gas reserves， the largest in the world， according to a report published by the countrys Ministry of Land and Resources. Chinas Sichuan Basin， Ordos Basin， Tarim Basin， the west-Hubei and east-Chongqing area， and Guizhou and Hunan provinces boast huge stores of shale gas， according to a survey conducted by the ministry.endprint

“China has huge reserves of shale gas. If successful industrialized production is realized， it would significantly ease the strain on the nations energy supply，” said Li Shousheng， vice Chairman of the China Petroleum and Chemical Industry Federation.

To tap its reserves， the Chinese Government has unveiled a string of policies to boost production. In March 2012， the government released its 2011-15 plans for the shale gas industry. According to the plan， the country is set to increase its existing nextto-nothing production to 6.5 billion cubic meters a year by 2015， and then to between 60 billion and 100 billion cubic meters by 2020.

China had 285 shale gas wells as of the end of 2013. But to date， China has not started commercial production of the energy.

Sinopec Chairman Fu said the new discovery and development at the companys Fuling shale gas field symbolizes a much earlier than expected entry into large-scale commercial development， which cuts off the 10-year development period originally outlined by the company.

“Given Chinas abundant shale gas resources， we believe this will significantly support and accelerate the implementation of the countrys strategy， increasing the supply of green energy and optimizing the energy consumption structure. It will also deliver benefits to energy conservation， emission reductions and air pollution control，” Fu said.

Business restructuring

Besides relentless technological innovation， Sinopec is courting private capital in an attempt for higher profitability. Its on the way to opening up its sprawling downstream units.

Chinas lifeline industries are largely dominated by the centrally administered SOEs， but the public has been long complaining about their low efficiency contrasted with the high welfare conditions they offer employees as a result of their monopoly status.

The Third Plenary Session of the 18th Central Committee of the Communist Party of China last November unveiled the boldest reform package since the 1990s， including actively promoting mixed ownership and raising non-state share in the economy. Sinopec has become the first SOE to deliver on that promise.

In February， Sinopec unveiled a plan to restructure its massive marketing business. The company said it would sell up to 30 percent of its marketing arm， in a multi-billion-dollar asset restructuring. The stake sale plan was the first time a centrally administered SOE shared lucrative business with private investors.endprint

The marketing segment of the oil giant includes over 30，000 petrol stations—the worlds largest fuel retail network—more than 20，000 convenience stores at those stations， over 10，000 km of oil-products pipelines and a total storage capacity of 15 million cubic meters across China. Revenue from the mega marketing asset amounted to as much as 35.1 billion yuan （$5.66 billion） in 2013.

Sinopec finished setting up a holding company for the marketing assets by the end of March and the company was put into operation on April 1. Auditing and evaluation of the newly formed company will be completed before the end of June and so a plan will be released to bring in capital from around by then. The restructuring process will be finished by the end of the third quarter.

Sinopec chairman Fu said the companys marketing business still has huge potential that has yet to be unlocked.

“Generally speaking， the price-to-earnings ratio of global oil companies sales subsidiary is about 15 to 25. But the number is only eight for Sinopec， which fails to reflect our potential value. After allowing in private or foreign capital， this ‘gold mine will be uncovered，” Fu said.

Fu said Sinopec will use funds raised from the sale to boost shale gas output and upgrade refineries.

Sinopec is seeking both domestic and foreign investors， preferably companies with sales experience in sectors other than energy， but priority will be given to domestic institutions as per the governments policy to share the dividend of Chinas economic growth， Fu said.

The aim of the restructuring is to boost the value of the low-margin marketing business， shore up the groups deteriorating finances and reinforce investment in exploration and production， analysts say.

It is not clear whether Sinopec would establish a partnership by setting up a joint venture or just absorbing money like through an initial public offering and put it into already established business.

Both ways are possible， said Xu Baoli， a researcher with the State-owned Assets Supervision and Administration Commission.

“Private investors may bring in industry expertise to run the marketing business in a more professional way， and help better SOE governance，” said Xu.

Han Xiaoping， Chief Information Officer of China Energy Net Consulting Co. Ltd.， said it is an initial step in a government-driven reform of SOEs.

The venture with Sinopec and domestic private companies will raise industrial efficiency， said Han. “Sinopec has advantages in the upstream refining business. It can establish partnerships with private companies where its refineries are located to save logistics costs，” he said.

Experts say soliciting private participation is a wise move for Sinopec. Globally， most oil giants are shrinking their downstream strategies to focus on high-margin exploration and production activities.

“It is wise for Sinopec to scale back its downstream involvement by introducing outside investors and focusing more on the upstream sector， which can yield more profit，” said Liao Na， vice President of Shanghaibased energy consultancy ICIS-C1 Energy.

Liao， however， warned that private investors should be both active and cautious in investment decision-making because there are no details of assets provided for sale or the model for investment has not been specified.

“The large and medium-sized private companies and the ones which have already established cooperation with Sinopec have a greater chance of taking a piece of the pie.”endprint