For Chinese buyers

 
 
 

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For Chinese buyers

 

Although coal is the dominant energy source in China, accounting for some 70% of the country’s Total Energy Consumption (TEC) in 2009, oil and gas are also essential energy sources. China is one of the important oil and natural gas producing counties in the world. In 2010, China’s crude oil production exceeded 4 million barrels  per day (mb/d).

Although China is now the world’s fifth largest oil producer, the country has been a net oil importer since 1993. In 2011, China imported over 5 mb/d of crude oil, accounting for about 54% of its total demand.

 

Concerning crude import sources, according to China OGP, China is highly dependent on theMiddle East, which accounted for more than 50% of the total crude oil imports in 2011, followed by Africa (around 24%). By country, Saudi Arabia (20% of the total) was the biggest import source of crude oil in 2011, followed by Angola (12%), Iran (11%), Oman (7%), Russia (7%), Sudan (5%) and Iraq (5%).

China has consolidated its oil and gas production industry around three companies, the top three oil companies in China: 1) CNPC/PetroChina, a state energy giant, whose parent company is China National Petroleum Corp; 2) Sinopec (China Petroleum & Chemical Group); and 3) China National Offshore Oil Corporation (CNOOC). Two of the ten biggest oil companies in the world are Chinese (PetroChina and Sinopec).

China has traditionally protected its own oil and gas companies by not allowing foreign oil companies into China. PetroChina and Sinopec control the refineries that produce 90 percent of domestically-produced gasoline and diesel. They also control a large portion of China’s gas stations and are able to squeeze out independent operators by restricting their supplies of gasoline.

 

1.      CNPC, established in 1988 as a large NOC,  is a comprehensive energy company that has integrated a broad range of upstream and downstream oil and gas businesses. The company also manages technical services for oil and gas development projects, including logistics and manufacturing. In 2010, CNPC’s domestic crude oil production was about 2.1 mb/d (105 Mt/year) and its overseas production was 1.5 mb/d (76 Mt/year), of which the company’s equity share was 0.7 mb/d (36 Mt/year). CNPC also produced 86 Mt of oil products. PetroChina is the internationally listed subsidiary of CNPC.

2.      Sinopec is another major NOC, like CNPC established in the 1980s from the assets of the former Ministry of Petroleum Industry. The company has an integrated system covering oil production, refining and sales. The petrochemical business is also a core activity, including maintaining a comprehensive retail network. Sinopec’s subsidiary, the China Petroleum and Chemical Corporation, went through initial public offerings by listing the stocks in global stock exchange markets. In 2010, Sinopec produced 1.2 mb/d (61 Mt/year) of crude oil, of which 0.85  mb/d  (42.6  Mt/year)  were  from  domestic  production,  and  12.5  bcm  of  natural  gas.  Its refining throughput was 213 Mt in 2010.

3.      CNOOC is the third-largest oil  company in China and was established to exploit China’s off shore oil and gas resources. In 2010, CNOOC crude oil production stood at around 1 mb/d (49.6 Mt/year), of which 80% were from domestic fields. It also produced 15.4 bcm of natural gas, of which around 66% were from domestic fields.

 

Since 2001, the Chinese authorities have licensed hundreds of companies to trade fuel oil inside China.At present there are some 960 state and private companies licensed for such activity, many are end-users.

Far fewer are allowed to import fuel oil, currently some 200. However, during the 2011 annual inspection round only 74 Chinese companies met all the criteria to be able to apply for permission to import fuel oil (which is granted selectively). In 2010, only 30 Chinese companies actually imported fuel oil. For the vast majority of Chinese companies (those that lack connections and favor) the importation process is fraught with difficulties. Many fail to even start because they cannot get permission / facilities from their banks to issue BCL’s or evidence of financial capability. Alicense effectively indicates that a company has legal rights to import, but ‘permission to import’is also required, which brings in a multitude of obstacles and bureaucratic hurdles, especially related to banking outside China.

Price mechanism

The allowable prices ranges of oil products are set by the National Development and Reform Commission’s Price Bureau. China's oil price reforms aim to move gradually towards more market-oriented prices, with the final goal of price formation through competitive markets.

Since the oil market in China is not yet fully competitive, and the ability of society to bear high oil prices remains relatively weak, the government considers that it is still necessary for oil product prices to be regulated by the government. In 1998, China established a mechanism for domestic oil prices to follow the international market. According to this, crude oil prices could be negotiated based on both supply and demand with reference to the prices of a basket of international market reference prices and on the quality of crude. Oil products prices could be set based on international crude oil prices, and taking into consideration processing costs, taxes and appropriate profit margins.

Supplying petroleum products to China

The international supply chain for fuel oil into China (except Government-to-Government business) is fragmented. Russia and the former Soviet Union states are the main suppliers of fuel oil (Mazut M100) that is of the technical specification preferred by Chinese end-users.

Most of the licensed Chinese importers lack international contacts and experience.

Consequently, they are driven into the hands of brokers and intermediaries who they appoint to source product and liaise with suppliers to negotiate terms and smooth procedural issues.

The scale of the trades and the levels of profit and commission obtainable have attracted a myriad of (often dubious) broker companies and individuals to the business. The situation has been seriously worsened by the convenience and ‘virtual’ credibility offered by use of the internet, and further exacerbated by the ease of digital manipulation of documentation.

A consequence of so many brokers and intermediaries acting, or purporting to act, on behalf of buyers in China, compounded by the barriers to gaining permission to import and even bona-fide buyers often being handicapped by China’s rigid and controlled banking sector, is that Russia and others suppliers of fuel oil are highly skeptical of anything related to China.

The supply end is also tarnished with failures, false promises, scams, and failure to perform. This historical friction, distrust, and outright fraud, has created a wide gulf of trust between the suppliers and the end-users. This situation presents a massive opportunity for companies that can clearly demonstrate professionalism, credibility, and capability to the Buyer-end of the supply chain, like our partners and our Title Holder / Sellers.

Banking

As a caution, you need to know that Russian sellers will no longer work with mainland Chinese "companies" using Chinese banks - the buyer must be a Western Company (domiciled in Korea, Japan, HK, Singapore, for example), using a top 50 Western bank (but not HSBC HK).  That buyer can then forward sell to their Chinese mainland buyers.
However, our Seller and their marketing department have helped properly domiciled buyers outside of China, with mainland Chinese off-take buyers, "crack the code" on how to use Chinese bank capital via a Western bank to facilitate a fuel oil purchase.  
Many Chinese buyers / companies now have off shore Subsidiaries, say in Hong Kong, which are Independent from the on-shore companies.  And, they will operate with a Western Bank/TOP 50.
The HK Buyer Co, using an SBLC or BG from TOP 50 banks as collateral / security, contracts with the Seller to provide M100/99 to their "buyer" in China.
The Chinese "buyer" posts a DLC with the HK Buyer Co in one of the TOP 50 banks via whatever bank they want to use inside China. This bank (TOP 50) puts a "fence" around the DLC from China, which allows them to provide an SBLC or BG from the HK Buyer Co to the Seller.
The Contract is with the HK Buyer Co and the Seller, and the HK Buyer Co pays for the product ON LOADING via an MT103 or wire transfer when they receive Full POP on a fully loaded vessel, ready to set sail.
It's then shipped on a CIF Basis to a port close to China - the HK Buyer Co takes over the fuel or the vessel and moves it the rest of the way into a Chinese Port.  Their Chinese "buyer" pays them for the product in whatever manner they work out.

For more detailed info please contact us at info@petroleumktrading.com