Foreign Involvement in Gas Stations

Summary:

As the demand for oil in the Middle Kingdom grows, so does the involvement of foreign oil companies like Total, BP, SHELL, ExxonMobile, Lukoil and Rosneft in China. These companies have partnered with China's heavyweight oil companies, China Petroleum and Chemical Corporation (Sinopec) and China National Petroleum Corporation (Petrochina), to build new gasoline stations all over China. Almost all of these activities are confined to the conversion of existing gas stations rather than new ones.

In contrast, Shanghai plans to add gasoline stations at a snail's pace. Market leaders Sinopec and Petrochina, with a combined 96 percent of the market, concentrate on renovating their old stations in the SAR.

As part of a diversification drive along lines seen elsewhere, the American fast food company McDonald's has partnered with Sinopec and will start building drive-thru restaurants at Sinopec stations near large and medium-size cities.

Not to be outdone, CNPC is looking to branch into real estate.

A Burgeoning Petroleum Market

China's automobile production has tripled in the last five years. Output in 2006 reached over seven million units. It is projected that China in 2010 will produce more than ten million automobiles and trucks. By that time, analysts predict that the Middle Kingdom will be the number two auto producer in the world.

Obviously, gasoline consumption in China is on the rise. However, the country's domestic sources of oil are currently on the decline. China's Da Qing oil field is drying up. In line with its WTO commitments, Chinese government has taken very cautious steps to allow the entry of foreign oil companies into the Chinese market.
Making good on its December 11, 2006 promises, the Chinese government opened the country's wholesale and crude and refined oil products markets in January of 2007.

While the wholesale market has been opened for foreigners, the government has still kept tight controls on the market, including its pricing mechanism, an analyst told Real Estate Club Shanghai. The mechanism is controlled by the National Development and Reform Commission. If price controls were relaxed, foreigners would have an easier time in the market, the analyst continued. However, Foreign companies would not be the only companies that would benefit from such a relaxation, a decision maker at one foreign oil company giant told Real Estate Club Shanghai. In fact, domestic oil companies stand to gain more from a relaxation of the pricing mechanism because while prices are currently out of line with foreign prices, it is the domestic companies experiencing significant losses.

Foreign companies are not just pursuing wholesale opportunities -- the retail market interests them as well. Total, BP, SHELL, ExxonMobile Lukoil, and Rosneft have partnered with Sinopec and Petrochina and Sinochem to open gas stations in China.

Foreign companies may not independently develop proprietary networks of over 30 stations each (a severe limitation in their view), and are therefore obliged to have local partners. Noting this, France-based Total has announced plans to create 500 gasoline stations over the next six years in two joint ventures in China's northern and eastern regions. BP in joint ventures with Sinopec and Petrochina respectively is in the process of establishing about 1,000 stations in the provinces of Zhejiang and Guangdong. Royal Dutch Shell in a JV with Sinopec is opening 500 stations in Jiangsu province. Most recently Rosneft, the Russian energy giant, has teamed up with Petrochina to build 300 gas stations in northern China.

Although the very large majority of these developments are simply the re-branding of existing stations, there can be no doubt that the need for the development of Greenfield sites presents opportunities for real estate companies and developers. Real estate companies can help with station location, land purchase and/or linking developers who build gas stations with the oil companies.

Shanghai: Still have room

Like the other parts of China, the Shanghai government will allow over 100 new stations in 2005-2010.
"There are about 770-odd gas stations in Shanghai," reads the 2005-2010 Shanghai Five-Year Plan. "The plan is to reach 900 by the end of 2010, mostly setting up along the highway and suburbia."

Sinopec controls 71 percent of these stations and Petrochina 25 percent, a Shanghai-based analyst told Real Estate Club Shanghai. These companies are focusing more on renovating old stations than building new ones.
Interestingly, the opening of the wholesale market to foreigners will not improve supply to independent gasoline stations to receive, the analyst introduced above stated.

Petrochina and Sinopec (and their foreign partners it seems) only supply gasoline and diesel fuel to their own stations, including the ones that they control indirectly.

Looking Forward:

It is not only the foreign oil companies like Total, BP, SHELL, etc. who seek to profit by partnering with Chinese oil companies. The American fast-food giant McDonald's is also seeking a piece of the action through diversification programs involving non-fuel sales.

In the summer of 2006 McDonald's and Sinopec announced a strategic alliance. McDonald's drive-thru restaurants will be constructed at some Sinopec gasoline stations. The first restaurants will be opened in large and medium-size cities like Beijing, Shanghai and Guangzhou. Other alliances for non-fuel activities could also be formed.

On a different note, Chinese real estate company Greenland Group last year purchased a coal trader and an oil operating company, which has received oil wholesale certification.

Another Chinese real estate company, Zhong Rong, has purchased oil leases in Canada and Oman.
About 18 other China real estate companies are ready to follow the lead of these two.
Petrochina is reportedly trying to enter the real estate industry, perhaps partnering with Lujiazui Group.

Reported in January 24, 2007
http://www.rec-shanghai.com/index.php?option=com_content&task=view&id=37&Itemid=9