China Zhenhua Oil: Rising Chinese Oil Buyer and Trader to Take Note on

Zhenhua oil

China’s Zhenhua Oil has successfully acquired 4% of Abu Dhabi National Oil Co.’s (ADNOC’s) onshore concession. The equity stake was previously controlled by the fallen star CEFC China Energy Co. Ltd. (more on CEFC)

The deal allows Zhenhua Oil to peer with other five oil super majors and NOCs including BP, Total, China National Petroleum Corp (CNPC),INPEX, GS Energy and ADNOC.  (more on the deal)

China Zhenhua  - A Chinese Oil Player on the rise

Financial details of the deal were not made public, but the previous agreement between CEFC and ADNOC was a 40-year contract of total investment amount US$1.8Bn. And equity oil acquired by Zhenhua is around 4 million barrels per year, based on ADNOC’s previous projection on onshore concession’s 2018 and 2020 production figures (1.8 MB/d in latter 2018, 2 MB/d in 2020)—that is about a mid-size oil field in China.

After the deal, Zhenhua Oil will become the fifth Chinese oil companies of over 10 mt/y production capacity. Many then comment that the “Fifth Barrel of Oil” in China has been born.

But in fact, by the deal Zhenhua Oil will have around 13.2 mt/y production capacity, exceeding Yanchang Oil’s 11.2 mt/y. It is already China’s forth bigger oil company.

Chinese Oil Industry: Monopolies Gradually Diversified

Previously, China has three major NOCs as integrated oil monopolies, collectively referred to as the “The Three Barrels of Oil” (san tong you). These hydrocarbon powerhouses are CNPC, Sinopec and China National Offshore Oil Co. (CNOOC).

Ranching Oil a fourth player (or referred to as the additional “Half Barrel of Oil”) Yanchang Oil who is a smaller, regional-focused and a unique case (with a specific historical background dated back to the communist party’s old time).

Their monopoly positions were given under Chinese laws. These companies—especially the “Three Barrels” are the only players allowed by the authority to conduct a series of hydrocarbon business in the country—including upstream hydrocarbon exploration, oil&gas imports (initially) and downstream fueling.

The “three” also own monopoly position in oil and gas transportation infrastructure from gas pipeline to LNG terminal.

Over the past 3-4 years, some of these sectors have been opened to allow more players—most expected is the open up of transportation infrastructure with third-party access. But, essentially, the three remains in powerful positions in the market.

Alternative Players Rising

Little known though, there are much more Chinese firms active in the overseas hydrocarbon exploration and production (E&P), something that Beijing has always been growingly in favor of as it provides a stronger sense of energy security.

Several non-three-barrel players have been quietly expanding in the international arena—in fact—for over a decade, forging four hydrocarbon powerhouses now collectively referred to as the “Four Small Barrels”—Yanchang Oil, Zhenhua Oil, Sinochem, and Zhuhai Zhenrong.

These companies are all with “unique” background. Most notably, Zhenhua Oil and Zhuhai Zhenrong are with defense background, and their shareholders are originally military or defense-based state-owned companies. Zhenhua Oil, for instance, is a subsidy of Northern Petroleum International Company and the 3rd daughter company of Norinco—a world leading defense manufacturer and contractor.

“No wonder”

Indeed, when made its first debut in the international oil arena, it was in Iraq, where Zhenhua Oil inked its first product share agreement (PSA) in 2008, through a joint venture with CNPC in AL-WAHA Petroleum Corp.

Since 2016 and 2017, a series of alternative tycoons are on the rise and caught the attention of the global market, with increasing international activities. Besides the fallen CEFC, there are Guanghui, United Energy, Geo-Jade Petroleum, Fosun, Haimo Technologies…that own oversea oil assets.

The rise of alternative players has, in return, pushed the domestic market to reform. As the stronger oversea players now seek policy support from the energy regulator for their business operation in China.

Zhenhua Oil, for instance, became the first player in China that won in a “window trading” in CNOOC’s LNG terminal. 

In this way, development of these alternative players could be soil for a more open oil and gas market in China.

Who is China Zhenhua Oil

If you never hear about them, now it is time to pay attention.

This low-key company has developed some serious international portfolio.

It is worth to note that last year, Zhenhua almost strike a deal with Chevron to purchase the latter’s gas field at Bangladesh which is estimated worth of US$2 Bn. The deal did not come to reality due to Chevron intended to keep the field and increase investment.

But the deal exhibits Zhenhua’s future ambition. Just months ago, the firm set up its natural gas business unit, clearly eyeing on international upstream gas assets. Investors and traders should take note.

We will be talking more on the Chinese gas buyers next time.