Consolidating China’s Big Oil Companies

Published on Author santangeloz17

With oil prices around $60 a barrel, oil companies around the world are consolidating to try to create economies of scale by engaging in opportunistic buying of weaker firms. China’s oil companies are also trying to find ways to increase efficiency in order to maintain profit margins. One option is to create a megamerger among its big state oil companies in order to compete against large international oil giants such as Exxon Mobil and BP. Chinese government economic advisers have been weighing in the possibility of this megamerger. This megamerger will allow China’s oil companies to experience economies of scale.

By decreasing domestic competition in China, China hopes it will increase 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. efficiency. China has four large oil companies, CNPC, Sinopec, Cnooc, and Sinochem. In the past, each of the four oil companies specialized in a specific aspect of the oil drilling and refining process. Recently, they have recently began expanding and overlapping, creating inefficiencies such as redundant staff and projects.

This attempt to consolidate oil companies is an attempt to re-energize the nation during times of slowing economic growth. Since China’s  president Xi Jingping has been in office, his goal has been to try to revamp the economy by making China’s largest firms more competitive globally.

Source and Image: Wei, Lingling, and Brian Spegele. “China Considering Mergers Among Its Big State Oil Companies.” The Wall Street Journal, 17 Feb. 2015. Web. 17 Feb. 2015.

4 Responses to Consolidating China’s Big Oil Companies

  1. Mergers don’t necessarily enhance efficiency — indeed the track record is that few generate promised cost savings. And in what operations are there economies of scale? That there’s overlap doesn’t guarantee that such remain unexploited. For example, if exploration benefits from economies of scale, the horizontal expansion into new areas may mean those have been fully reaped.

    Now sometimes a well-run firm can buy a poorly run one, or a company rich in cash can buy one that is cash-poor, rubbing up against its debt covenants and about to flame out. The article doesn’t provide evidence on either point.

    Next, if there’s poor capacity utilization, then why weren’t firms able to trim costs prior to the merger? Sometimes a merger changes the politics within a firm and allows such changes – but ofttimes not. In any case, that strikes me as the more likely explanation, that in a global downturn in the industry there’s lots of excess capacity, and mergers will allow that to be shed. That depends on the extent to which these national state-owned enterprises (national SOEs) face standard commercial pressures to show a profit.

    My sense is that these firms have amassed a lot of profits which they have retained rather than paid to their shareholder, the national government. So my own hunch is that they will fritter away these reserves rather than cut costs. They’ll look prescient if oil prices rebound and the industry recovers quickly. If not, well, they’ll have blown a lot of money by keeping underutilized capacity. But this introduces one further motive: the government could use restructuring as a way to get its hands on the cash. This is not uncommon in M&A activity in the US. There’s no reason the same logic won’t apply in a “socialist” system where in fact SOEs have been extraordinarily tenacious in protecting their turf.

  2. I really wonder what kind of economies of scale you can attain when the companies are already that large. It seems that whatever synergistic benefit might emerge would deal far more with market power than expense control.

  3. I agree with Christian. Although the companies are not fully integrated (meaning the entity controls up-stream, mid-stream, and down-stream activity), I see a merger providing only marginal benefits, especially since all four entities are already under the control of a socialist government. My understanding may be incorrect, but it seems to me that there is little difference between a fully integrated energy corporation in a capitalist country and four separate entities under the control of a socialist government.

  4. Could this megamerger lead to unfair prices for consumers due to decreased competition? I would be interested to see if a merger like this would allow the state run oil companies to compete with the international giants you mentioned, such as BP and Exxon.