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Oil giants' mega-merger deal not very likely: analysts

2015-02-26 08:59 Global Times Web Editor: Qin Dexing
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Experts say move would reduce efficiency, undermine innovation

China's two major oil giants, China National Petroleum Corp (CNPC) and China Petrochemical Corp (Sinopec), on Wednesday declined to comment on recent media reports that the country is mulling a mega-merger of the two giants. Analysts have said that the chances of such a merger are very slim.

"A team of advisers" are studying the option of combining CNPC and Sinopec to further consolidate China's oil industry, The Wall Street Journal reported on February 17. The report also said that the advisers are also considering merging another two major oil companies, China National Offshore Oil Corp, or CNOOC, and Sinochem Group.

"They're [the four companies] increasingly fighting among each other," said the report, citing an official with knowledge of the consolidation plan. "That has led to lots of waste and inefficiency," the official said.

Spokesmen from both CNPC and Sinopec declined to comment on the report on Wednesday. The State-owned Assets Supervision and Administration Commission was not available for comment as of press time.

Calls to CNOOC and Sinochem Group also went unanswered on Wednesday.

The report of The Wall Street Journal caused a stir during the past weeklong Spring Festival holidays, especially at a time when the country just saw a mega-merger of two leading bullet train makers.

On December 30, bullet train makers CSR Corp and China CNR Corp announced that the two companies would be merged into a new company, and analysts noted that the move mainly aims to reduce the two companies' competition in the overseas market.

"The merger of the country's two leading bullet train makers has provided a lot of food for thought," Lin Boqiang, director of the China Center for Energy Economics Research at Xiamen University, told the Global Times on Wednesday.

One of the reasons for the merger is that China wants to "create a big Chinese brand to better compete overseas," The Wall Street Journal report said, citing the Chinese official.

But Lin said that there are both pros and cons for the reported merger of the two oil giants. "If the two companies' future strategy mainly focuses on the international market, then they may benefit from the merger. But it may not be a good idea for domestic consumers," Lin noted.

However, shares of CNPC's listed arm on the Shanghai Stock Exchange rose 1.35 percent on Wednesday, the first trading day after the holidays, and shares of Sinopec increased by 3.4 percent, against a 0.56 percent drop in the benchmark Shanghai Composite Index. The two companies' shares on the Hong Kong bourse also reported a slight rise of around 0.3 percent on Wednesday.

In spite of the share rises, analysts said that the possibility for such a merger is very slim.

"Efficiency [of the two oil giants] will be even lower without competition, and innovation in the sector will also be undermined," Han Xiaoping, chief information officer of industry news portal China Energy Net Consulting Co, told the Global Times on Wednesday.

CNPC and Sinopec were founded in 1998 amid the government's push to restructure the energy industry.

If the two giants were merged, the new company will have a share of around 77 percent of the oil and gas production sector, 79 percent of the refinery sector and 90 percent of oil products retailing, news portal finance.sina.com.cn reported on Monday, citing a research note from Citibank.

Citibank wrote in the note that a merger of the two companies would go against the current reform push among China's State-owned companies to allow more private capital and competition. And it also noted that even if the government is studying the merger, it does not necessarily mean that the plan will be finally approved.

"We believe that the likelihood for such a merger is very low," it wrote.

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