As China's oil market opens up, an increasing number of domestic and foreign traders are expected to tap the lucrative trade, but players still remain cautious in making bold expansions.

The companies' reservedness, say industry experts, comes out of the uncertainty over which restrictions over the finished oil market the government will eliminate during the opening process.

Complying with its WTO (World Trade Organization) commitment, China loosened certification restrictions for dealing in finished oil last November. In further efforts to introduce more market mechanisms to its oil sector, China will further clear up the limits in the wholesale market of gasoline, diesel and fuel oil by the end of 2006.

The second-largest oil consumer after the United States, China last week slightly dropped retail gasoline prices after a 4 per cent increase in diesel retailing earlier this month and an 8 per cent jump in gasoline sales in March.

"The frequent adjustments in finished oil prices reflect the country's effort to peg the domestic prices more closely to the international crude price, which have witnessed a moderate retreat," Gong Jingshuang, a senior industry analyst with a research institute under China National Petroleum Corp (CNPC) told China Daily yesterday.

He also partly attributed volatile finished oil pricing to the government's intended warning to market players who might indulge in speculation activities if the price continued rising.

"The price fall will, to some extent, as a signal to oil dealers that there is great risk amid the juicy investment returns available with the soaring crude prices," he added.

Despite the warning, said industry watchers, there will be a flood of investors attracted by the huge potential market that fewer restrictions on oil business operations will unlock.

Anticipating possible heated competition between oil dealers in China's finished oil market when the country frees up the wholesale business at the end of next year, established players, such as market leaders Sinopec and PetroChina, are moving to safeguard the advantage they have so far enjoyed.

Sinopec, Asia's top oil refiner, which operates three out of five fuel filling stations across the country, signed an agreement with a UK-registered corporate management company last June to jointly tap non-oil business at the oil giant's more than 30,000 filling stations in China.

The move aims to expand Sinopec's business portfolio as well as to enhance services at its filling stations, thus increasing its market share in the country's finished oil business, said industry analysts.

Most other domestic and foreign market players still remain reserved in decision-making due to uncertainty over whether the government will completely eliminate restrictions in the sector. Analysts predict no big changes to the existing market pattern which has been dominated by the duopoly of Sinopec and PetroChina.

"Despite the move to free up the finished oil market, the central government still will keep in hand some controls over the backbone industry that radiates far-reaching significance to the world's fastest-growing economy," Zhang told China Daily.

Gong agreed with Zhang, saying: "There will still be regulations for domestic and foreign dealers operating in the finished oil business when the market is opened up not all market players will be able to meet the government's standards."

In an effort to stabilize the fast-growing economy and ward off inflation, the government is to price finished oil not much higher than the current level - which stands lower than the finished oil price on the international market.

"The recent decrease in gasoline retailing prices is a major effort by the government to ease the pressure of inflation, which might be driven up by the rising consumer pricing index (CPI) in other sectors," said Zhang.

Consequent squeezed investment returns are also expected to keep some oil dealers prudent in their market operations.

Zhenhua Oil Co Ltd is part of one of China's largest trade enterprises - China North Industries Corp (Norinco), which has already been authorized by the government to operate fuel oil trading business.

According to executives, company plans to participate in gasoline and diesel trading on the Chinese market and to deepen its fuel oil sector in a couple of years are yet to be finalized, depending on how far the government opens the market.

"We are closely watching the government's moves," said a business director surnamed Li from the company, "and there is no specific timetable for our business expansions, because our decisions will be finally determined by the central government's policies."

The company obtained a diesel importing quota of 10,000 tons at the beginning of the year, and expects to start its diesel business in a matter of months once "the market appears preferential."

Analysts also remain cautious in making any rash estimates of future Chinese oil prices.

"It is difficult to make a projection (for the future finished oil prices)," said Gong from PetroChina.

"But it is certain that the domestic finished oil price will run parallel to the international oil prices," he added.

Idemitsu Kosan Co Ltd, a Japan-based oil trading company which has imported fuel oil from Japan to the Chinese market since the 1990s, said the Chinese Government's move to open up the finished oil market will not have an obvious effect on its business operations.

"It will make little sense to us unless all of the market, pricing system and importing certification of the finished oil business are marketized," said Atsuo Sato, representative of the Japanese firm's Beijing office.

The company imported 500,000 tons of fuel oil from Japan to China's shipping companies last year, according to the Japanese representative.

As the market continues expanding, and the government loosens restrictions on business dealers, China's privately-owned oil firms are also eyeing the finished oil business, monopolized by Sinopec and PetroChina.

Zhao Youshan, president of Harbin Longqing Petrochemical Trade Co Ltd in northeastern China's Heilongjiang Province, has great expectations for the central government's move to further open up the finished oil market.He believes it will give a bigger say to the country's privately-owned oil firms.

"We are constructing five fuel service stations province-wide to sell finished oil products," Zhao said

According to Zhao, the privately-owned oil firm is a dominant presence in Heilongjiang's finished oil business, importing some 2.5 million tons of crude oil annually from its own oilfield in Russia to process at local refineries.

An office director from Hubei Tianfa Petroleum Co Ltd, China's largest non-State-owned oil company, said the opening-up of the wholesale finished oil sector will help privately-owned oil firms gain a stronger footing in the market.

Yan Xinlin, vice-president of the medium-sized privately-owned oil firm Nantong Chuandong Petroleum Co in East China's Jiangsu Province also applauded the government's pledges to introduce more market mechanisms into China's finished oil business, but said there had been little change.

"To date there hasn't been any direct effect from the government's moves in opening up the finished oil market," Yan told China Daily.

(China Daily May 31, 2005)