China’s moves to slash reliance on the internal combustion engine signal tough times for the country’s oil majors. A push into new energy vehicles (NEVs) — including battery-powered and hybrid cars — could curb demand for black gold. Sinopec and PetroChina will be hardest hit. The policy will also add to downward pressure on global crude prices.
The People’s Republic is ultimately hoping to outlaw traditional gasoline-fueled cars entirely, cleaning up the air and relieving it of dependence on oil imports. There is no official deadline for the move, but Wang Chuanfu, founder of Chinese electric vehicle maker BYD, reckons the ban could come as early as 2030.
As a battery maker poised to profit from the shift, Wang’s guesstimate is certainly self-interested, and probably wishful thinking. Electric cars accounted for less than 2 percent of China’s market share in 2016, and a bottleneck in battery production will hamper the transition.
But there is no doubting China’s determination to push the pace. The Ministry of Industry and Information Technology says NEVS should account for a fifth of auto sales by 2025. As soon as 2019, regulators want automakers to make NEVs at least 10 percent of total sales. That means China’s $440 billion retail fuel market is in for a bumpy ride.
Giant problem
Sinopec will be hit hardest. Gasoline sales made up around a quarter of total revenue at the group’s listed unit China Petroleum & Chemical Corporation in 2016, and the energy giant runs almost a third of the country’s 100,000 or so service stations. These hubs boast more than 23,000 convenience stores, a valuable sideline. Non-fuel sales could grow by as much as 25.5 percent a year in the period 2016 to 2019, according to research by brokerage CLSA. There are plans to launch a Hong Kong IPO for the group’s marketing unit, but the outlook has clouded of late. There is no public prospectus, and the offering — expected to raise around $12 billion — now looks unlikely to materialize this year.
PetroChina will feel the pinch too. It controls some 20,000 petrol stations, and sold more than 62 million tonnes of gasoline last year, worth about 357 billion yuan at 2016 prices. PetroChina is slightly less dependent on refining than Sinopec – gasoline sales made up roughly a fifth of revenues. However, investors appreciate the higher margins the company earns from refining and other downstream operations when oil prices are subdued, as they are now.
If one fifth of auto sales are absorbed by the NEV market in 2025 as planned — assuming China hits its target of 35 million units sold that year - that would rob gas stations of 7 million automobiles, enough cars to support the equivalent of 3,500 gas stations, according to a conservative Breakingviews calculation.
When combined with new environmental and industrial policies, a successful EV push could make a real dent in long-term global oil demand. Absent government intervention, S&P projects China’s oil consumption would probably balloon to 41 million barrels of oil a day by 2050, compared to 10.9 million barrels a day in 2015. On the other hand, if Beijing manages to meet all its ambitious published targets for electric vehicles, emissions reductions and industrial efficiency upgrades, oil demand would attain barely half those levels, the study shows. Sinopec, PetroChina, and even upstream operator CNOOC could be vulnerable.
Tricky maneuver
There is time to plan. It might be decades before the fleet of combustion engines actually shrinks. Even so the big Chinese players are already looking to diversify. Downstream operators might recalibrate refineries to focus on petrochemical products like plastics, while pushing further into natural gas. Sinopec says it is exploring geothermal energy and biomass, too. Offshore markets could help as well; exports of gasoline and diesel from Chinese refineries have been rising for the past few years.
Another strategy might be restructuring the retail business to accommodate electric vehicles. Perhaps the gigantic network of service stations could be converted into charging stations; drivers waiting for cars to charge, or swapping batteries, might shop at the convenience stores too. Sinopec is working with State Grid to offer charging services, state-backed China Daily reported earlier this year. Unfortunately in these areas the oil incumbents have little or no advantage over other competitors. Gas stations aren’t particularly convenient places to recharge compared to, say, parking lots.
Whichever route they take, energy conglomerates will still enjoy massive financial scale and unparalleled influence in the halls of government. It seems unlikely Beijing will stand aside and let them collapse. Even so, investors will watch closely to see if the oil majors can shift gears before it’s too late.