Speculation is in the air, but it’s not on Wall Street or at some commodity trader’s desk at the Chicago Mercantile Exchange. It comes from China. Earlier this week, both foreign and domestic media reported that two of China’s national oil companies (NOCs), Sinopec and PetroChina, (the country’s two largest oil exploration companies) could merge. If true, it would create an oil industry giant that would rival ExxonMobil as the world’s largest oil major in terms of market capitalization. Currently, ExxonMobil’s market cap is a staggering $368 billion, while PetroChina’s market cap is $238 billion and Sinopec’s is just under $95 billion, respectively.
The news came amid recent reports that Beijing is planning to consolidate its oil and gas industry, including its oil majors. Adding substance to the merger rumors, on Monday, China’s Economic Information Daily reported that the country’s state assets regulator might cut the number of state-owned enterprises to 40 from 112 through mergers and restructuring. The report, however, didn’t mention PetroChina or Sinopec by name. Monday’s speculation follows a February Wall Street Journal report that Beijing was considering merging the two NOCs.
As media reports were filed and speculation increased, shares of both energy giants surged by ten percent. Both PetroChina and Sinopec officials, for their part, quickly denied any merger claims. “Neither the company nor its controlling shareholder has ever received any information, written or verbal, from any government authority,” Sinopec said in a statement to the Hong Kong Stock Exchange (HKEx). PetroChina issued a similar statement to the Shanghai Stock Exchange (SSO). Both PetroChina and Sinopec are traded on the HKEx as well as the SSO and the New York Stock Exchange (NYSE).
Reporting on the news, Reuters said that this is the first time Sinopec and PetroChina have “formally downplayed Chinese and foreign media reports over the past few months that Beijing is considering merging Sinopec’s parent with China National Petroleum Corp., (CNPC) which controls PetroChina.”
Some have said that the two oil majors actually not denying earlier rumors of a merger gives credence to its possibility, while others claim that merging the two companies would go against Beijing’s stated policy of allowing markets to play a greater role in the allocation of resources, hence market liberalization. In fact, in recent years Beijing has taken steps, albeit small ones, to allow greater reform in the oil and gas industry that has been dominated for decades by its NOCs.
In March, Jiang Xinmin, a deputy director at the Energy Research Institute of China’s National Development and Reform Commission (NDRC) said that smaller independent refiners would be allowed to import their own crude oil, instead of having to rely on the large NOCs for feedstock supplies. Xinmin said that China will further open up its energy import and export market in an orderly manner. Analysts within China mostly claimed that this would have little impact to help deregulate the industry.
However, a different scenario is playing out as global oil prices have plunged by around 50 percent since mid-June and China’s oil majors are feeling the pinch. The same day that merger speculation reports broke, PetroChina reported an 82 percent drop in first quarter profit due to lower global oil prices and inventory write-downs at its refining division. Likewise, Sinopec reported this week that its profit plunged by 85 percent in the first quarter.
While it is an inexact science at best to try to predict what energy planners in Beijing will do, no doubt these dismal figures from two of the country’s three oil majors add weight to merger rumors. A merger of these two energy behemoths would add impressive economies of scale across their upstream, mid-stream and downstream sectors and make it an even more formidable competitor on the global world stage.
A merger could also help President Xi Jinping’s anti-corruption campaign that has recently targeted top oil company executives. Perhaps a consolidation of these two NOCs would make it easier for Beijing to micro-manage and control its oil sector. Surely, oil majors ExxonMobil, BP, Shell, Chevron, Total and Petronas, just to name a few, will closely watch these developments unfold.
