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Petrol giants 'not striking oil in HK' ( 2003-09-04 11:06) (China Daily HK Edition)
Car drivers in Hong Kong, who have to fork out among the world's highest prices for petrol at the pumps, must share the suspicion that the oil companies are laughing all the way to the bank. But senior oil-company officials in this free-enterprise town have been trying to dispel this widely held notion with a passion that is almost as intense as that of the social activists who have been clamouring for the break-up of what they call the oil-companies' oligarchy. Among those at the centre of the long-running controversy is Peng Xiaofei, chairman of Caltex Companies (Greater China) Ltd, a unit of Chevron Texaco, one of the world's most powerful oil companies. With a disarming smile, the casually attired Peng says that contrary to popular belief, the oil companies in Hong Kong are facing many challenges. "We are not making a whole lot of money," he says, pointing out that government tax, at 70 per cent, on petrol fuel is largely responsible for the high price. Other factors that have helped boost prices include the high cost of land and labour. On top of that is the cost of shipping the petroleum products from overseas refineries, including those in Singapore, Thailand and South Korea, Peng says. The public "misconception" about oil companies making "tons of money" is simply not true, Peng says. "Our return on sales averages about 4 per cent. This is not a high (profit) margin for us." Such public "misconception" usually flares up in a volatile market marked by wide swings in the prices of crude oil. Many social activist groups in Hong Kong have charged that the large oil companies, which have a dominant share of the local market, are usually quick to raise prices at the pumps when crude prices are on the upswing and slow to lower prices when crude prices are heading down. Widespread allegations of price collusion between oil companies in Hong Kong have led the government to consider introducing more players into the marketplace. At present, the Hong Kong market is dominated by three global oil companies: Caltex, Shell and Exxon. Other players include two mainland oil companies. But their share of the market remains insignificant. But three is already a crowd, according to Peng. "We are faced with severe competition in the marketplace." What's more, he adds, the (Hong Kong) market is mature. "There is not a lot of room for growth." Hong Kong is such a small market with "so many players". Indeed, the market for petrol fuel in Hong Kong has been shrinking as a whole. Although petrol consumption went up by 6.5 per cent in 2002, the demand for diesel fuel tumbled 20 per cent, reflecting the scale of the economic downturn, Peng says. "Diesel consumption is a good indicator of the state of the economy" because it is an essential fuel for a wide range of business activities. For that reason, Peng says he does not think it's a good idea to introduce more players into the market and provide more sites for new petrol stations. He says that Hong Kong already has more petrol stations than it needs, resulting in a lower average sales volume per site than the mainland. Oil-company executives have warned that the introduction of more competition into the marketplace by the government could trigger a price war that would cause some companies to withdraw, resulting in even less players in the field. "Greater competition will hurt everybody," Peng says. He strongly disputes allegations of price fixing by the oil companies in Hong Kong. Such a practice would be in violation of the US anti-trust laws, he says. "Price fixing simply doesn't exist among oil companies." But Peng says that pricing in the oil business is highly transparent and competitive. "We are always watching our competitors' prices and adjust ours accordingly. All of us have to follow the international oil price movements. What's more, we obtain our suppliers from a limited number of sources. Quite often, we happen to be buying from the same sources." Peng says that oil companies in Hong Kong are fully aware of their environmental responsibilities. Caltex, for example, was the first oil company to introduce ultra-low (0.005 per cent) sulphur petrol in the Hong Kong market. "We try very hard to make sure that we can contribute to environmental protection." The mainland market looks very different from that of Hong Kong's, Peng notes. "We believe that it is going to be a huge market for us." He cited the 22 per cent incremental increase in oil demand up to 2020 that will be coming from the mainland. That represents a quarter of the total growth in world demand, he says. China has already become a major importer of crude oil. Peng says he expects that by 2010, the mainland will be a "dominant influence" on crude prices. Caltex operates petrol stations in Guangdong Province and is the largest importer of LPG (liquefied petroleum gas) on the mainland with a 25 per cent share of the entire market. In addition, it is a major supplier of lubricants in 30 cities on the mainland. The US company is also involved in offshore projects in joint ventures with mainland oil companies. Peng says that the scope of operation for foreign oil companies is strictly confined. The market is dominated largely by the two State-owned oil companies, which have a strong influence on pricing and other issues. The mainland oil market "is not a level playing field" for foreign companies, he says. The mainland has agreed to open the petroleum retail market to foreign participation within three years after its entry into the World Trade Organization and to open the wholesale market for petroleum products after five years. But the oil industry is of great strategic importance to the mainland, Peng says. However, how far it will be open to foreign participation remains a key question. Meanwhile, Caltex is seeking to rapidly expand its LPG business which is not subject to the same restrictions as that for oil. After completing a large LPG terminal in Guangdong, the company is setting up retail operations in Shantou, where a terminal has been built.
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