Subject: Fwd: WSJ/Sinopec/SOE
From: "James Bulger" <[email-masked]>
To: "Devon Archer" <[email-masked]>, "Hunter Biden" <[email-masked]>
Cc: "Michael Leonard" <[email-masked]>
Date: Tue, 17 Feb 2015 16:45:25 -0500

Take a look at this article

---------- Forwarded message ----------
From: *Eileen Kerwin* <[email-masked]>
Date: Tuesday, February 17, 2015
Subject: WSJ/Sinopec/SOE
To: James <[email-masked]>, James Bulger <[email-masked]>

BUSINESS
<http://www.wsj.com/public/search?article-doc-type=%7BBusiness%7D&HEADER_TEXT=business&mod=flashline>
China Considering Mergers Among Its Big State Oil CompaniesGovernment
economic advisers are conducting a feasibility study of options for
consolidation
[image: Drivers wait to fill their tanks at a Sinopec gas station in
Zhengzhou, Henan province, Feb. 9, before China was set to raise retail
prices after global oil prices recovered some 20 percent in the past two
weeks.]ENLARGE
Drivers wait to fill their tanks at a Sinopec gas station in Zhengzhou,
Henan province, Feb. 9, before China was set to raise retail prices after
global oil prices recovered some 20 percent in the past two weeks. PHOTO:
REUTERS
By
LINGLING WEI And

BRIAN SPEGELE
Feb. 17, 2015 7:30 a.m. ET
2 COMMENTS
<http://www.wsj.com/articles/china-considering-mergers-among-its-big-state-oil-companies-1424176242#livefyre-comment>

BEIJING—China is considering forging megamergers among its big state oil
companies, seeking to create new national champions able to take on the
likes of Exxon Mobil  <http://quotes.wsj.com/XOM>Corp. and produce greater
efficiencies at a time of low prices.

At the request of China’s leadership, government economic advisers are
conducting a feasibility study of options for consolidation, according to
officials with knowledge of the research. One involves potentially
combining the country’s largest oil companies, China National Petroleum
Corp., or CNPC, and its main domestic rival, China Petrochemical Corp., or
Sinopec, the officials said. Other options look at merging two other major
energy companies, China National Offshore Oil Corp., or Cnooc, and Sinochem
Group.

No timetable has been set for a decision on whether or when to proceed with
the various proposed mergers, said the officials. Spokespeople for the four
Chinese oil companies and the State-owned Assets Supervision and
Administration Commission, which oversees the largest state enterprises,
declined to comment or didn’t respond to queries.
Advertisement

The possible mergers would be the latest consolidation of state companies
blessed by the government as it tries to regear a slowing economy for a new
phase of growth. As part of that effort, President Xi Jinping
<http://topics.wsj.com/person/J/Xi-Jinping/6475>, now more than two years
in office, is trying to revamp major state firms to make them more
competitive globally.

Though the government has taken some tentative steps to allow more private
and foreign capital to flow into infrastructure, resources, banking and
other areas long the preserve of state firms, Mr. Xi has said state
companies remain an “important pillar of the national economy.” The
government “must ensure they thrive,” Mr. Xi said in remarks in August.
Bigger and stronger state companies, according to officials and scholars
familiar with the leadership’s thinking, are viewed by Mr. Xi as key to
China’s reclaiming its prominence in the world.
Advertisement

Mergers could also boost efficiencies in an economy increasingly burdened
by excess capacity—a problem that has caused Chinese manufacturers to
compete against one other by cutting prices. Late last year, the government
announced a plan to merge the country’s top two state-owned railcar makers
with a goal of making the combined company capable of competing with
Siemens  <http://quotes.wsj.com/XE/XETR/SIE>AG in Germany and Canada’s
Bombardier  <http://quotes.wsj.com/CA/XTSE/BBD.B>Inc.

The four oil companies—CNPC, Sinopec, Cnooc and Sinochem—have long
dominated every phase of the industry; for years each had a geographic or
business area of specialty. For instance, CNPC focused on exploration and
production, and Sinopec on refining. Over the past 15 years, in response to
earlier reform plans to spur competition, they’ have expanded into the
others’ turf, creating overlapping operations that span exploration,
refining to running gas pumps.
RELATED

   - Oil Prices Edge Higher
   <http://www.wsj.com/articles/oil-futures-trade-near-friday-close-1424068921>
   - Europe’s Oil Companies Get a Boost From Their Refineries
   <http://www.wsj.com/articles/europes-oil-companies-get-a-boost-from-their-refineries-1424104067>
   - Pemex Delays Refinery Upgrades Due to Budget Cuts
   <http://www.wsj.com/articles/pemex-delays-refinery-upgrades-due-to-budget-cuts-1424131058>

“They’re increasingly fighting among each other,” said one of the officials
with knowledge of the consolidation plan. “That has led to lots of waste
and inefficiency.”

With international oil prices having halved in less than a year, those
problems have become more pronounced, giving reform new urgency. Combining
and then streamlining the operations of the major Chinese oil producers
could help reduce waste caused by redundant staff and projects, the
officials said. A combined enterprise could then focus on building up a
better-funded company to compete around the world.

Low oil prices have spurred talk of new deals activity across the globe, as
stronger companies engage in opportunistic buying of weaker firms. Among
big deals last year, Spain’s Repsol  <http://quotes.wsj.com/ES/XMCE/REP>SA
agreed to acquire Canadian oil-and-gas producer Talisman Energy
<http://quotes.wsj.com/CA/XTSE/TLM>Inc. for $8.3 billion.

“We want to create a big Chinese brand to better compete overseas,” the
Chinese official said. “We want our own Exxon Mobil.”

The potential shake-up would cap what has been a tumultuous period for
China’s oil industry. Chinese oil giants—in particular CNPC—have been the
focus of an antigraft campaign championed by President Xi. Leading industry
executives have been detained for suspected graft, and added scrutiny has
helped spur a huge pullback in new investment by wary executives.

A decision to consolidate China’s oil sector by making big state firms even
bigger could end up tamping competition at home and stymie market-oriented
reforms, some analysts said. It is unclear whether a possible consolidation
would be followed by reforms, such as lowering barriers that have
marginalized independent oil-and-gas producers.

“If you are focused on the foreign market, you certainly want to
consolidate because it’s more competitive abroad,” said Lin Boqiang,
director of the China Center for Energy Economics Research at Xiamen
University. “But if just for the domestic market it’s better to have more
competition, because competition leads to efficiency.”

Beijing has started inviting private capital into the oil industry. Sinopec
last year sold a nearly 30% stake in its retail sales-and-marketing unit to
a group of 25 investors, mostly Chinese. But none of the initiatives
involves selling a controlling stake to the private sector.

A bigger challenge is whether the government would allow the combined
entities to improve performance by reducing their huge workforces or
shedding assets, said Philip Andrews-Speed, an expert on energy governance
in China at the National University of Singapore. “That will be the test of
whether this is old state-ism ... or are they really looking for better
performance,” he said.

PetroChina  <http://quotes.wsj.com/CN/XSHG/601857>Co. , the listed arm of
CNPC, has nearly 550,000 employees world-wide, more than seven times as big
as Exxon Mobil Corp. The Chinese company delivered revenue of $361 billion
in 2013, compared with more than $420 billion in sales and other revenue at
Exxon.

These days, all of China’s big oil companies have been under pressure from
prices and from the government to cut costs and focus on improving returns.
For example, Cnooc  <http://quotes.wsj.com/HK/XHKG/0883>Ltd. , the listed
unit of China National Offshore Oil, says it will cut capital spending by
as much as 35% in 2015 as a result of falling global oil prices.
Expenditures at PetroChina and Sinopec are also expected to fall this year.

Marrying CNPC and Sinopec would create one of the world’s biggest
companies. A combined entity at least in the short run could control a vast
majority of China’s onshore oil-and-gas production and would hold total
assets of hundreds of billions of dollars.

In the case of Cnooc, a merger with Sinochem, would give it more refining
operations, giving it more sources of revenue that over time could help
shield it against oil-market volatility. Cnooc is regarded by analysts as
the most vulnerable to the oil-and-gas price drop, in part because it
expanded aggressively abroad, buying assets including Canadian oil-sands
operator Nexen Inc. for $15.1 billion in 2013 when prices were high.

Write to Lingling Wei at [email-masked]
<javascript:_e(%7B%7D,'cvml',[email-masked]');> and Brian Spegele at
[email-masked]
<javascript:_e(%7B%7D,'cvml',[email-masked]');>

-- 
James J. Bulger
Chairman
Thornton Group LLC
14 Beacon Street, Suite 804A
Boston, MA 02108
Office tel: 617.248.944