Sinopec Corporation: Two Billion Yuan Question∗
China Petroleum & Chemical Corporation (“Sinopec”) is listed on stock exchanges in Hong Kong, London, New York, and Shanghai.1 Sinopec is an integrated energy and chemical company comprising businesses in five segments:
Exploration for and production of crude oil and natural gas;
Refining crude oil;
Distributing and marketing of refined oil products;
Manufacture, distribution, and marketing of petrochemical and inorganic chemical products; and
Trading and research and development. At the time of writing, Sinopec was China’s second largest producer of
petroleum and natural gas and the largest manufacturer of petrochemicals. Its BBB credit rating was Standard & Poor’s highest among Chinese enterprises.
Sinopec’s 2002 Annual Report (p. .. ) declared: “The Company has been focusing on capturing profit growth and expanding opportunities, optimizing its capital allocation and investment activities … thereby increasing shareholders’ value and returns. In the year to come, the Company strives to achieve new breakthroughs in expanding resources and markets, reducing cost, improving efficiency and disciplining investments.”
A major challenge for a vertically integrated company is the management of internally produced items that are used as inputs into downstream operations. Sinopec’s refining segment’s principal input is crude oil. In 2002, the refining segment acquired 28.98 million tons of crude oil from Sinopec’s exploration and production segment, while purchasing 75.17 million tons from external sources. The external purchases comprised 53.81 million tons from imports, 14.96 million tons from PetroChina (China National Petroleum Corporation), and 6.4 million tons from CNOOC (China National Offshore Oil Corporation).
The government of China considers oil to be an important strategic resource. In 1959, China’s first major oil field was discovered at Daqing in the northeast of the country. By the mid-1990s, with rapid economic growth and the eventual decline of production from onshore fields, China became a net importer of oil.
The government controls imports and exports of crude oil through licensing. Only Unipec (a 70% subsidiary of Sinopec), China National United Oil Corporation (a 70% subsidiary of PetroChina), Sinochem (China National
I thank Wang Zhaoning and Bai Chong-en for very helpful advice on this case. The following corporate review is based on Sinopec’s 2002 Annual Report.
© December 2003, I.P.L. Png