Anticipated entry of multinationals to herald a quantum leap in filling station offerings

Fuel retail industry insiders in China are an excited lot these days, anticipating what they see as the coming epochal change.

They visualize dull filling stations transforming into shiny, glittering modern metal-and-glass structures.

These will offer not just eye-pleasing design and architecture, but an array of enhanced products and value-added services - changes that could transform the industry and support economic growth.

China's gasoline retail sector is set to transition to the digital age on the back of deepening reform and opening-up, the insiders say.

Conceivably, cars will run on better, if pricier, gasoline. And instead of a dreary ambience, filling stations will sport bright new looks.

There will be convenience stores, fast-food kiosks, shopping arcades, even mini cinemas. And the time and distance between fuel outlets could shrink substantially as they mushroom all over the country.

Details are still hush-hush, but what insiders see coming to the sector is the entry of multinationals, mega investments and stiffer competition. As a larger number of players vie for pieces of the same pie, consumers may benefit in terms of cheaper and better services. All this will likely compel State-owned oil behemoths to shape up or ship out.

Global energy giants Royal Dutch Shell and BP are expected to invest more in gas stations in China after the government lifted restrictions on foreign investment in the sector on June 28.

The removal of policy barriers is part of the National Development and Reform Commission and Ministry of Commerce's creation of a new "negative list" that eases restrictions in various sectors, including banking, automotive, commodities and agriculture.

The opening-up of fuel retail is considered a landmark event in the energy sector. Of the nearly 100,000 filling stations nationwide, more than half are owned by two State-owned oil giants: China National Petroleum Corp, or PetroChina, the nation's largest oil and gas producer by annual output, and China Petroleum and Chemical Corp, or Sinopec, the world's largest refiner.

In contrast, only around 3,100, or 3.1 percent, are currently operated by foreign companies, mostly joint ventures with Sinopec or PetroChina. The jointly owned gas stations sell products from their Chinese partners or their joint venture refineries.

Until now, a foreign entity was allowed to own only 30 fuel stations outright. The rest needed to be joint ventures with local partners as the majority shareholders. This rule applied even when foreign players wanted to sell different kinds and brands of oil and gasoline from multiple vendors.

But all that is going to change now, since the government has scrapped the rule. So the foreign players' share is expected to increase rapidly.

Observers foresee investments spawning purchases of land, construction of modern filling stations and creation of new jobs. Related figures and financial details are yet to emerge, but there is a consensus that this is going to be a big deal.

International oil giants like Shell are more confident of entering China's oil retail market. They will likely operate more wholly owned stations across the country, says Li Li, energy research director at ICIS China, a provider of analysis and research into China's energy market.

Li says that with the restriction removed, foreign companies will see more options for oil and gas supplies and a higher market share by providing high-end products and value-added services.

"Foreign operators might still need to rely on local refineries initially, and their pricing would depend on the form of their cooperation with local companies," she says.

"The choice of local partner, collaborative model and a reliable source of petroleum products is also crucial to their success in the market."

China has vowed to further lower the total number of restrictions on foreign investment to 48 from 63, especially in the service sector, infrastructure, railway passenger transportation, international shipping, grain purchases and wholesale businesses.

"We believe the lifting of restrictions is definitely good news for the international oil and gas companies, a positive move that brings competition into the industry," says Min Na, who analyzes the oil and gas industry for Bloomberg New Energy Finance.

"With more competition, companies will focus more on the quality of their services and products and customers can eventually also benefit from it."

To enter China's fuel retail sector, multinationals are expected to take routes like joint ventures, wholly owned new ventures or dealerships that are appropriate to local market conditions, Min says.

The prospects of future growth associated with the lifting of curbs have enthused oil companies. For instance, Royal Dutch Shell tells China Daily any level playing field will create more space and opportunities for international retailers in China, and customers will have more options to choose from.

"We will continue to employ joint venture, wholly foreign-owned enterprise or dealership models, whichever are most competitive and best serve our customers," the company says.

Shell currently operates more than 1,300 gas stations in nine provinces and three municipalities in China. Its footprint covers Beijing, Tianjin, Shandong, Hebei, Shanxi, Shaanxi, Sichuan, Guangdong, Zhejiang and Henan, as well as the Hong Kong and Macao special administrative regions.

"We have proved that we can effectively serve our customers together with our joint venture partners, as well as through our own operations. We will be happy to use any business models available to us that will help us reach even more customers in the future," it says.

According to Chen Cuiwei, Shell's president of retail business in China, despite the current fierce competition in China's gas station sector, there is much room for growth compared with the scene in developed countries.

based on Shell's positive brand reputation in China and increasing vehicle ownership in the country, the timing is good for expanding the scale of its play in the gas station sector, she says.

According to ICIS, close to half of China's 100,000 gas stations are privately owned. The majority, especially in the northern market, have seen their sales and profits decline due to higher labor costs and stiff competition.

Against this backdro, foreign brands with their premium tags and experience in management, backed by deep pockets, have a positive outlook for the country's petroleum retail market. The key to success, they believe, is the right cooperative model.

Hanna Hofer, president of BP ChinaRetail, says the company believes that a more open market will attract more investment and, ultimately, benefit consumers with better quality and more choices.

BP announced earlier this year that it will partner with Shandong Dongming to add 500 filling stations in Shandong, Henan and Hebei to its fuel retail portfolio.

Bloomberg New Energy Finance believes more cooperation between foreign companies and independent refineries could be created under the new policy. "We'd expect more of this kind in the future," says Min.

According to Min, the opening up of the gas station sector will also bring more competition to the doorstep of State-owned oil companies. The latter have been dominating China's fuel retail business but, once the market opens up, their profit margins may fall in the short term.

As of now, however, sales and profits of PetroChina and Sinopec dwarf those of private and foreign competitors, says Li Yan, an analyst from Oilchem, an online tracker of the energy and petrochemicals industries.

By the end of this year, PetroChina will likely have 22,000 gas stations nationwide, or around 21 percent of the total, while Sinopec will own 31,000.

"These companies are vertically integrated and are experienced in operating in this industry. They still have their competitive advantage in the China market," she says.

"In addition, as the world's largest auto market, China's demand is still growing and different companies could all benefit from a bigger pie."

Li Li agrees, saying that while many oil giants, including BP, Shell, ExxonMobil, Total, Chevron and Rosneft, have been eager to enter China's petroleum retail market in the past decade, the entry threshold is much higher now compared with years ago. That's because China's gas stations have seen their valuations soar in recent years.

While the anticipated developments may present more opportunities than challenges for foreign oil giants, instant expansion right from the word go is easier said than done, considering that the existing players have established themselves for many years, securing a good geographical layout, she says.

Min believes that, with more market players, there could be more innovation in the industry. "Some of the international oil companies have acquired electric vehicle charging businesses, including Shell's purchase of Dutch-based NewMotion, the owner of one of Europe's largest electric vehicle charging networks, and BP's acquisition of the UK's largest electric vehicle charging company, Chargemaster, which operates over 6,500 charging points across the country.

"Considering that China is the world's largest EV (electric vehicle) market, this combination of factors could bring more innovative business models to the industry in the long term."

Because electric vehicle sales are expected to boom around 2025, all gas stations are expected to see a slump in sales around that time. Multinationals eager to enter China's fuel retail business may want to factor in this aspect, she says.

But until electric vehicles become commonplace, the oil trade will continue to dominate the vehicle fuel industry. It is conceivable that companies will try to set up hybrid or convertible facilities wher gas stations double up as charging points, insiders say.