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Speculation of restructuring in China's oil and gas industry

Talks have been held as Beijing faces increasing pressure to change the industry

Possibilities talked about range from accelerated divestments of non-core assets to full-scale mergers between the leading companies, CNPC, Sinopec, Cnooc and Sinochem.

The talks, which are preliminary and continuing, come as Beijing faces increasing pressure to overhaul a vast state-run oil industry squeezed by falling energy prices. The government has also committed to reform state-owned companies as part of a broader economic restructuring and improve weak corporate governance.

Still oil-industry officials and government advisers are pushing back against the merger talks, which have been met with scepticism from economists who believe China needs more competition to nurture growth and expand the world’s second biggest economy.

Analysts say there are no scale advantages that would come from merging CNPC and Sinopec, especially for CNPC, which is already as large as ExxonMobil on most measures, except for returns.

Not only would combining the two largest oil companies in China cut competition, but there is little evidence to show it would improve efficiency. 

A break-up makes more sense than consolidation. What the industry needs is competition, innovation and decentralisation, which encourage more commercial decision-making, said Hong-Kong-based analysts at research company Bernstein.

“While this is unlikely to happen given the strategic importance of oil to the state, we do see the possibility of accelerated re-structuring in the form of divestment of non-core assets,” they added. The biggest question now should be how to introduce more competition into the industry, not less, Zhang Wenkui, an influential government advisor told local media.

Beijing has also started shuffling the heads of its biggest national oil companies (NOCs), an expected move that nevertheless could add to the uncertainties the oil giants face and hints at significant changes ahead.

Corruption investigations have already led to major changes in the leadership at the Chinese oil majors, which are now much weaker politically.

But the latest changes affected Fu Chengyu, China’s most famous oilman, known for leading an audacious failed takeover bid for US company Unocal when he led Cnooc in 2005. He retired as chairman of Sinopec in May. Along with the departure of Wang Tianpu, Sinopec vice chairman, the company has a gaping hole in its management. Fu’s replacement, Wang Yipu, brings in a government minister with no experience of running an oil major. 

CNPC is also in flux following the retirement of chairman Zhou Jiping, who will be succeeded by Wang Yilin, Cnooc’s chairman. Still a promotion for Wang to run China’s biggest producer cements his reputation as a rising star within the Chinese communist party. Cnooc’s $15bn takeover of Canada’s Nexen in 2013 – the biggest foreign acquisition by a Chinese company to date – bolstered Cnooc’s place on the global stage and won its executives accolades from the government. 

With management in flux, it could be the ideal moment for the government to mandate its agenda. 

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