Chapter 3. Korea-China FTA and Korea’s Oil Industry
B. Characteristics of Petroleum Corporations
When it comes to comparisons between Korea’s and China’s oil industries, the differences between petroleum corporations should be taken into account. Companies producing and exporting petroleum products in Korea are all privately-owned. Given that their product quality and efficiency are considered superior to those of Chinese petroleum companies, they have advantageous export competitiveness. Indeed, until now, Korean petroleum companies have had the upper hand in the trade between Korea and China. But it could be difficult to retain such competitiveness over the long-term, considering the advantages Chinese petroleum corporations will likely retain. This possibility needs to be considered when judging the impact of the Korea-China FTA on the oil industry in Korea.
There are two major strengths identified in CNPC, Sinopec, and CNOOC—the three major producers of petroleum products in China. First, they are vertically-integrated companies that produce a significant amount of crude oil. As suggested by numerous studies on corporate structure,18 vertically-integrated firms that own the whole value chain—from the production of materials to production of end goods to sales—are very favorably placed for gaining market share of end goods.
Recently, as a means advancing China’s oil refinery industry through competition, the Chinese government expanded the rights of privately-owned refinery facilities to process and export crude oil. Until last year, the crude oil refining capacity of China’s three major petroleum corporations only accounted for 70%. The profitability of these corporations has been aggravated due to low oil prices coupled with a relatively inferior competitiveness in the refinery sector, putting the Chinese oil industry at a disadvantage. However, as shown in Table 3-4 and Figure 3-2, the fact that these petroleum corporations possess a significant crude oil production (upstream) assets indicates that the Chinese oil industry is vertically-integrated. If oil prices increase in the foreseeable future as expected, the existing vertically integration may pose a serious threat to Korean oil refinery companies in the Chinese and global market.
18 Spengler (1950) found that monopolies increase the production of end goods by eliminating the double marginalization through vertical integration. Stigler (1951) saw the motive for a corporation becoming vertical integration in an unstable competition market as a way of securing market dominance. Greenhut and Ohta (1979) stated that the vertical integration of petroleum corporations in the U.S. contributed to the increased production in duopoly.
Table 3-4. Current Status of Oil Production of Three Major Oil Companies in China (Unit: 10,000 tons)
Categories
From January to September 2015 Year-on-year growth rate (%)
CNPC Sinopec CNOOC CNPC Sinopec CNOOC
Crude oil
production 9,783 3,695 4,186 3.3 -2.4 20.4
Sales of petroleum
products 11,930 14,075 - 1.5 1.9 -
Production of
ethylene 360 827 - -2.5 5.3 -
Source: CNPC Economics and Technology Research Institute, 2015 國內外油氣行業發展報告 (January 2016)
Figure 3-2. Asset Structures of China’s Two Major Petroleum Corporations (As of 2015)
Source: CNPC Economics and Technology Research Institute, 2015 國內外油氣行業發展報告 (January 2016)
원문 번역문
탐사/생산 Exploration/Production 정유/화학 Oil refinery/Chemicals
판매 Sales
수송 Transportation
본부/기타 Headquarters/Others
Second, the production of petroleum products in China is mostly done by public oil corporations. As mentioned above, the Chinese government gave permissions to private companies to import and process crude oil starting from last year. However, as most of the refinery facilities are state-owned, China’s state-owned oil corporations will continue to dominate production for the time being. Together with the non-marketability of the price system within China, this may block Korean petroleum products from entering into the Chinese market.
Depending on the Chinese government’s oil market policies, state-owned oil corporations might become engaged in investment and sales activities. They would likely get direct or indirect support from the government.
Therefore, Chinese government policies could determine the effects of the Korea-China FTA on Korea’s petroleum industry.
Recently, under the One Belt, One Road19 initiative in conjunction with the 13th Five-Year Plan (FYP)20, the Chinese government begun demolishing inefficient and antiquated refinery facilities to nurture the oil refinery industry as an export industry. However, the expansion of new refinery facilities in China is projected to increase. Table 3-5 shows the construction and expansion of refinery facilities planned up until 2020. Many of the projects will be conducted by state-owned corporations. As a result, the development of oil refinery industry led by China’s state-owned oil companies may be another critical variable that will hinder Korea making inroads into the Chinese market.
Table 3-5. China’s Plans to Construct and Expand Refinery Facilities During the 13th Five-Year Plan
Year Corporations
Construction (10,000 tons/year)
Regions Status
2017
CNPC 500 Central
China
Reconstruction and extension
CNOOC 1,000 Southern
China
Reconstruction and extension
2018
CNIGC 400 Northeastern
China
Permitted to construct
Sinochem 300 Southern
China
Permitted to construct
CNPC 300 Northern
China
Permitted to construct
19 The One Belt, One Road initiative was mentioned for the first time when Chinese President Xi Jinping visited Kazakhstan in 2013. As a development program, it has two routes: Silk Road Economic Belt (overland), bridging between Central Asia and Europe, and 21st Century Maritime Silk Road (sea), connecting Southeast Asia, Europe, and Africa. Through the initiative, China aims to accelerate the exploration of energy, resources, and markets overseas while exporting products, facilities, and labor abroad (p. 4, No. 79, Trade Brief, Institute for International Trade, December 17, 2014).
20 2016~2020
Dalian Hang
Lung Group 1,500 Northeastern China
Permitted to construct
2019
CNPC 450 Central
China
Environment impact assessment
CNGC 1,500 Northeastern
China
Permitted to construct Jiangsu
Shenghong 1,600 Eastern
China
Permitted to construct
2020
CNPC 1,600 Southern
China
Partial operation in 2018
CNPC 300 Northwestern
China
Reconstruction and extension
CNOOC 600 Eastern
China
Reconstruction and extension
CNPC 1,500 Southern
China
Delay in construction Others
(excluding CNPC)
1,500 Eastern
China
Permitted to construct
Source: CNPC Economics and Technology Research Institute, 2015 國內外油氣行業發展報告 (January 2016)
Figure 3-3. Refining Capacity by Chinese Oil Corporations During the 13th Five-Year Plan
Source: CNPC Economics and Technology Research Institute, 2015 國內外油氣行業發展報告 (January 2016)
원문 번역문
천만톤/년 10 million tons/year
연장석유 Extended oil
신화 Xinhua
기타 Others