Intro4u2u

Summary
Venezuelan President Hugo Chavez has threatened to levy a new windfall tax against foreign energy companies. Though the proposal is well within Venezuela’s capabilities, it will hurt Chavez’s prospects in the long run.

Analysis
Venezuelan President Hugo Chavez threatened Feb. 18 to sue U.S. energy supermajor ExxonMobil Corp. and enact a windfall tax on foreign firms operating in Venezuela.

Caracas is engaged in a legal battle with ExxonMobil over the firm’s attempt to gain compensation for Venezuela’s May 2007 expropriation of the Cerro Negro oil project. Now Chavez is threatening to sue ExxonMobil for what he says are 500,000 barrels of crude that Chavez says ExxonMobil took from the project without paying taxes. (Shortly after Chavez made his accusation, state oil firm Petroleos de Venezuela noted that the amount of oil in question was actually 400,000 barrels.)

Though such a lawsuit could certainly happen, the issue is being raised largely for public consumption. At market rates, 400,000 barrels of Venezuelan crude is “only” worth about $30 million - small potatoes compared to the billions at stake in Cerro Negro.

The threat that carries a bit more weight is the windfall tax. Chavez has had few compunctions about unilaterally changing the tax and ownership laws that govern his country’s oil complex, and has carried out four major tax increases on the industry in the past four years. A windfall tax certainly fits Chavez’s past behavior.

But such a tax could well do Chavez and his government more harm than good in the long run. Oil exploration and production is an expensive business - particularly in Venezuela, where the oil quality is quite poor. Much of Venezuela’s heavy crude is so thick it is actually solid at room temperature; extracting it requires the injection of high-temperature steam into the deposits so the crude will melt before it can be pumped out.

Foreign energy firms in any country must constantly weigh the profitability of their businesses against outlays - in terms of finances, personnel and equipment - that are required to operate. Chavez’s 2007 tax increase made that equation unfavorable not just for ExxonMobil, but also for ConocoPhillips Co., a longtime operator in Venezuela. A new tax increase would only push more firms past their redlines. Since roughly half of Venezuela’s oil production comes from foreign projects, any windfall profits that Chavez chooses to tax now will result in less production and reduced income for the government later.
 

President Hugo Chávez’s call for a windfall oil profit tax will create added uncertainty for foreign companies operating in Venezuela.

Global Insight Perspective  
Significance The Venezuelan president’s threat to sue ExxonMobil follows deterioration in relations between the company and the government over a contract dispute. 
Implications Venezuela has already suspended commercial relations with the company in response to an asset freeze, but President Chávez’s comments that there are no plans for an immediate suspension of oil sales to the United States will provide reassurances that despite the political rhetoric the dispute can be contained.
Outlook Foreign oil companies operating in Venezuela will be watching any signs that the government plans to impose new taxes very carefully. 

Venezuelan President Rails Against ExxonMobil

Venezuela’s dispute with the U.S. supermajor ExxonMobil featured prominently in President Hugo Chávez’s weekly programme Aló Presidente, which was broadcast yesterday from the company’s former Cerro Negro extra-heavy oil project, now called Petromonagas. Venezuela’s President accused the U.S. oil firm of producing and exporting over 400,000 barrels of crude oil without paying taxes over an eight-month period between late 1999 and June 2000. President Chávez also warned that if the allegations are proved then the government could present a lawsuit against the company. In another attack against ExxonMobil, President Chávez accused the company of implementing a strategy to minimise the volume of reserves in situ in an attempt to acquire new areas as well as failing to make necessary investments in technology to increase oil recovery rates. President Chávez claimed that the recovery rate under PDVSA is 12%, compared with the 6% estimated by ExxonMobil.

Relations with ExxonMobil hit a new low last week following news that the company had secured court orders freezing US$12 billion in international assets held by the Venezuelan state oil company PDVSA. The action was intended to prevent PDVSA from selling holdings that might otherwise be used to compensate the major for the loss of its Venezuelan project, even though ExxonMobil’s compensation claim was for less than one-half the value of assets frozen (see Venezuela: 15 February 2008: ExxonMobil and Venezuela Diverge on Compensation as War of Words Continues and 11 February 2008: Venezuelan President Weighs In On ExxonMobil Court Orders; Threatens Supplies to U.S.).

No Immediate Plans to Halt Oil Exports to U.S.

Venezuela retaliated against the asset freeze with the suspension of commercial relations with the U.S. major including halting the supply of 600,000 barrels a month. However, in a more conciliatory tone, President Chávez said yesterday that Venezuela does not have any plans to stop oil exports to the United States, unless it attacks Venezuela.

The potential impact of the asset freeze is still being assessed, but the international credit rating agency Fitch warned on 15 February that it could weaken the credit quality and financial flexibility of two PDVSA-partnered refineries in the United States, HOVENSA and the Merey Sweeny Ltd Partnership (MSLP) between PDVSA and ConocoPhillips. Its concerns were related to the risk of crude-supply disruptions, although the agency affirmed that it continues to regard U.S. refineries as “the natural and economic home” for Venezuelan crude.

President Calls for Oil Profit Tax

Speaking yesterday, President Chávez also called for a windfall profit tax on oil companies operating in Venezuela. The President said that such a tax was necessary if the international oil price remained at between US$80 and US$100 per barrel and called on his cabinet to prepare a recommendation.

Outlook and Implications

The suspension of commercial relations with ExxonMobil and the heightened tone of the verbal attacks against the U.S. government by the Venezuelan government last week created added uncertainty in global oil markets. However, Venezuela’s continued dependence on the U.S. market meant that most industry observers did not seriously believe that the ExxonMobil spat would result in an immediate suspension of all oil exports to the United States. This was confirmed by President Chávez’s comments yesterday although he repeated his frequently expressed warning that in the event of U.S. aggression the taps would be turned off. Further assurances for the markets came from the International Energy Agency (IEA)’s oil market report released last week showing a recovery in Venezuelan oil production. The IEA’s February report put Venezuelan production at 2.4 million barrels per day, slightly higher than the previous month although still well below official figures.

However, President Chávez’s comments on a possible windfall oil profit tax will create added uncertainty for companies operating in Venezuela. The proposal appears to have been influenced by an earlier call for such a tax by the Nobel price winner Joseph Stiglitz and follows a similar proposal by the French President Nicolas Sarkozy last week (see World: 14 February 2008: France Asks IMF to Examine Global Tax on Oil Profits). However, in the case of Venezuela, it follows a series of tax adjustments that have already significantly increased the costs of operating in the country. Higher international oil prices have partly offset these costs and made the contract and fiscal changes introduced by the Chávez government more palatable. News that further tax increases may be on the agenda will therefore create further anxiety for those companies that unlike ExxonMobil have decided to remain in the country.
 

Global oil refining capacity is set to expand by more than 10 million b/d over the next 7 years, with new refinery projects in Asia accounting for roughly 40% of this total.1 New Asian refining projects include Indian and SE Asian export refineries, but are dominated by expansions and greenfield projects in China.

Driven by rapid oil product demand growth and a desire to slash feedstock costs, China’s oil refining sector is expanding rapidly and augmenting its ability to refine a wider variety of crude oils. This will have geopolitical implications as China becomes able to use more crude from a wider range of suppliers. China’s growing ability to refine lower quality sour and acidic crudes may also reduce large price differentials between these and higher quality light, sweet crudes.

Additionally, if Beijing continues to control Chinese oil product prices and restrict exports of refined products from China, Chinese refiners may face increasing pressure to invest in refining projects abroad as a way of escaping price controls and enhancing shareholder returns. PetroChina and other major Chinese oil producers and refiners are now partially owned by private investors, who likely will emphasize profit before politics. Fig. 1 shows key motivations for the participants in China’s refining sector modernization.

China’s rising motor vehicle ownership, plans to double the size of its road network, and its domestic firms’ huge fixed investments in steel, petrochemicals, and other energy-intensive basic industries could drive oil imports to 7 million b/d of crude oil by 2020 - double today’s imports.2 Fig. 2 shows an approximation of China’s current oil demand structure based on 2005 data.

China’s refining sector
China currently has more than 6.3 million b/d of domestic refining capacity and imports products such as fuel oil to meet its total demand of 7.4 million b/d of crude and products. Because the Chinese refining industry was built around light, sweet crude supplies from Daqing and other Chinese fields, it lags international refiners’ ability to process lower quality, high-sulfur and high-acidic crudes, which raises feedstock costs and narrows the list of potential crude suppliers. Some Chinese sources estimate that crude oil acquisition can account for 90% of a refinery’s operating cost. Thus, being able to process a wider variety of crudes can have a positive impact on a refiner’s profitability.

China National Petroleum Corp. (CNPC) and Sinopec are China’s two chief refiners, but the Chinese refining industry counts more than 120 individual refining enterprises. One byproduct of the large number of small refiners is that Chinese refineries are much smaller than the international average, processing 52,000 b/d of crude oil, compared with the international average throughput of 114,400 b/d. The Chinese refining sector’s relative lack of consolidation hurts efficiency, as indicated by its high energy consumption per ton of oil refined compared with the rest of the world.

Thus, consolidation and overall refining capacity expansion will be major future trends. The National Development and Reform Commission (NDRC), China’s main energy planner, forecasts that China will add 1.8 million b/d of refining capacity by 2010 while shuttering 400,000 b/d of old capacity at small, uncompetitive plants.3 NDRC notes that, as part of the country’s 11th 5-Year Plan, Chinese firms are slated to build at least eight 200,000 b/d refineries. Much of the new capacity will be intended to refine heavy, sour, and high-acid crude oils, which are more plentiful and often cheaper than the light, sweet crudes existing refineries handle (Fig. 3).
NDRC also notes that Chinese refiners’ product outputs do not match the country’s demand needs, triggering demand for product imports to offset this imbalance (Fig. 4). Product imbalances are particularly acute with respect to gas oil and naptha, which are key feedstocks for ethylene and other petrochemicals. These factors will create business opportunities for engineering and construction firms, technology suppliers, and international producers and refiners who are nimble and have high risk appetites.

Changing crude slates
Chinese analysts state that their country’s oil refining sector needs reforms, including:

Increased refinery flexibility to reduce feedstock cost.
Enhanced capacity for deep processing of heavy oils.
Increased process efficiency.4
Tighter integration between refineries, petrochemical producers, oil ports, pipelines, and commercial and strategic oil storage.

Chinese refining capacity will expand overall by 3.3 million b/d during 2006-11. Roughly 2.55 million b/d of this will come from building new refineries, while the remaining 651,000 b/d will consist of refinery expansions and additions of hydrocrackers to enable refineries to maximize high-value product outputs and hydrotreaters to allow them to process more sour crude.

A key trend is the addition of new refining capacity geared heavily toward heavy, sour, and high-acid crude. Much of China’s original refining capacity was built to handle the output of its workhorse Daqing and Shengli fields, which produce light, sweet crude similar to Indonesia’s benchmark Minas grade. As a result, China’s ability to work with lower quality sour and high-acid crudes has been limited.

In 2006, only 15% of China’s refining capacity could handle sour crude oil of the kind that comes from Iran, Saudi Arabia, and other core suppliers. To put this in perspective, 82% of US refiners can handle sour crude oil, with a lower percentage able to process a large proportion of high-acid crudes.5

Several factors are motivating Chinese refiners to expand their ability to handle sour and high-acid crudes. The primary driver is economic. The price of crude oil is a major operating cost, and if a refiner can lower his feedstock costs, all other things being equal, his profit margins will rise. The discounts on lower quality crude oils can be substantial. In July 2007, for example, high-acid Doba blend from Chad was selling at a discount of $17/bbl relative to Dated Brent, a key international crude pricing benchmark. Lowering crude feedstock price by incorporating such oils can have major bottom line benefits.

In 2006, Sinopec ran 200,000 b/d of high total acid number (TAN) crude.6 Sinopec executives have claimed that experimenting with high-TAN Doba blend from Chad at its new Guangzhou refinery boosted refining profitability. US refiner Sunoco had similar results in 2005 from running heavily discounted Doba. In 2004, Sunoco refineries ran only light, sweet crude, causing average crude costs to exceed the West Texas Intermediate (WTI) benchmark by an average of $1.14/bbl. In 2005, using high acid crude lowered the company’s average crude cost to 15¢/bbl lower than WTI, which substantially improved refining margins.7

Middle East sour crudes also often sell at a large discount relative to light, sweet oils, which are easier to refine and often have higher gasoline and diesel yields. Figs. 5 and 6 show historical price differentials between Dubai and Saudi Arab Medium, both of which are heavy and sour, and Brent and Bonny, both of which are light and sweet. The differentials widened sharply in 2003-04 as Chinese demand for light, sweet crude shot up. During this time, China accounted for a good portion of global incremental oil demand growth.

So refiners have a strong economic incentive to increase imports of sour and high acid crudes. Refining sour crude typically requires refineries to install hydrotreaters and other desulfurization equipment. Refiners have three primary options for utilizing high acid crudes. First, those having large throughputs, such as Zhenhai, Guangzhou in China, and Reliance in India, can run high acid crude through “normal” refineries by blending it with other crudes. This allows refiners to capture economic benefits without retooling facilities.

In addition, certain crude blends complement each other when blended. Angola’s acidic Kuito, for example, blends well with sour Saudi Arab Light because the Saudi dilutes the Kuito’s acidity, while the sweet Kuito reduces the product stream’s sulfur content and maximizes valuable middle distillate yields.8 Refiners can also blend sodium or potassium hydroxide into the crude stream to reduce acidity. Finally, new refineries dedicated to a high-acid feedstock such as PetroChina’s Guangxi refinery, which uses the Sudanese Dar Blend, are built from corrosion resistant steels.

New supply geopolitics
The global oil supply is gradually getting heavier and more sour. Being able to handle crudes from a wide range of suppliers will give Chinese refiners greater strategic and economic flexibility.

As Fig. 7 shows, China is drawing its crude oil supply from an increasingly diverse array of sources. Many are heavy, sour, or acidic. A large proportion of Chinese offshore production from Penglai and other fields is acidic - 15% of total domestic production - while African crude streams also are increasingly acidic. China takes roughly one third of its crude imports from Africa as it works to diversify away from the Middle East.

China’s primary Latin American oil suppliers, Venezuela and Brazil, are also “complex” crude suppliers. Brazilian offshore production is predominantly acidic, while Venezuelan oil is often simultaneously heavy, sour, and acidic. Venezuela wants to boost its crude exports to China, but the transportation economics remain uncertain. However, a study by Roy Nersesian of Columbia University and Poten & Partners notes that the economics of using very large crude carriers that offloaded in the US Gulf of Mexico to carry Venezuelan crude on their “backhaul” voyage compares very favorably to the costs per barrel of carrying Venezuelan crude to US Gulf refineries on smaller Aframax tankers, as done in the current trade.9 Thus, if China continues to expand its heavy and sour refining capacity, it would become economically feasible to greatly expand the Sino-Venezuelan oil trade, should both sides agree to do so.

Finally, Middle Eastern supplies are likely to occupy an increasing percentage of the global oil supply in coming years, and these barrels are almost unanimously sour and relatively heavy. As Chinese refiners enhance their ability to deal with high-acid, sour, and heavy oils, it is likely that China’s commercial and geopolitical oil relationships with complex crude producers in Africa and the Middle East, as well as Venezuela and possibly Canada, will deepen.

Product price reform
Domestic oil product pricing reforms will have a major influence on Chinese refining development. Chinese refiners are trapped in a tough situation, as they must pay international prices for imported crude oil, but must sell diesel, gasoline, and other products at government controlled prices within China.

China’s largest refiner, Sinopec, has a small crude oil production of its own relative to its refining capacity and is thus particularly exposed to high international crude prices, causing it to lose an average of $1.09/bbl of crude refined in 2006. In contrast, US Gulf Coast refiners enjoyed margins of $10-16/bbl during that time (the long term global average is closer to $5/bbl).

Chinese refiners are torn between several critical demands, each of which is tough to address in isolation, much less as a whole. First, they face economic demands, as they need to make money and to some extent serve shareholder interests. Second, there are political demands since they are national providers of motor fuels. If Chinese refiners cannot meet the bulk of product demand, international oil companies will balk at selling refined products at a loss to China and Chinese product importers will have to bear the cost difference. Third, Chinese refiners are burdened by the social demand of keeping farmers, fisherman, car owners, truckers, shippers, and other constituencies satisfied. Indeed, one Chinese energy analyst characterizes the situation as: “If you wish to discuss economics, you must also discuss politics.”

Finally, Chinese refiners must deal with an increasingly competitive market in which they face both domestic competition and foreign refiners as China opens its internal oil and products markets as stipulated by the World Trade Organization. China’s oil wholesale market was opened to domestic and foreign investors in January 2007.

There are catches, however, as oil wholesale licenses are not useful unless accompanied by oil import and export licenses, which typically are controlled by CNPC, Sinopec, and affiliated operators and are tough to acquire. Companies wishing to engage in the oil wholesale business in China must also maintain at least 1.25 million bbl of storage capacity, posing another barrier to entry.10

Some Chinese analysts fear product market liberalization because they believe stronger foreign firms might displace Chinese companies and that foreign ownership might rise in the strategic refining sector. They also fear that it would lead to increased product imports and higher foreign exchange expenditures because products are often more expensive per barrel than crude oil. Chinese oil product markets are evolving despite continued price controls. Private firms are now getting licenses for product wholesaling - an area that was formerly the exclusive domain of CNPC and Sinopec. In the first 6 months of 2007, China’s net refined product imports averaged roughly 450,000 b/d, largely from Singapore.11

That said, the Chinese government is gradually reforming its price controls in ways that are moving Chinese refined product prices closer to international price parity. Prior to 1998, NDRC simply capped prices. In June 1998, NDRC began using after-tax import prices plus domestic transport cost as the basis for fixing benchmark retail prices for oil products. Sinopec and CNPC then used this baseline price to reach a final retail price, which was allowed to fluctuate within a very narrow range. Beginning in October 2001, NDRC adopted a system whereby domestic refined product prices were based on a “price basket” of New York, Rotterdam, and Singapore product prices and allowed to fluctuate within a ± 8% price range.

NDRC’s newest product pricing method, adopted in late January 2007 uses a “cost plus” system to determine refined product prices (Fig. 8). Under this scheme, Brent, Dubai, and Minas crude oil prices serve as benchmarks, upon which NDRC adds a fixed profit for refiners. The new method’s key benefit is that it adjusts domestic product prices more quickly in response to international crude price fluctuations.

The prior regimes all caused Chinese refined product prices to seriously lag international crude prices, so that during crude price spikes, Chinese refiners paid full international prices for crude but could then not recover their cost with domestic product sales. This was a serious disincentive to refining sector development and is likely a key reason that NDRC adopted the new “cost plus” system despite its short-term disadvantages from the consumer’s perspective.

It is tough to say when Chinese oil product prices might near parity with international prices. One recent barrier to further price liberalization is that recent fears of inflation have driven NDRC to refuse any further fuel price increases for the time being.

That said, as Chinese oil demand grows, the government’s insistence on subsidizing oil product prices could become increasingly unsustainable, causing powerful economic forces to drive Chinese product price liberalization, although perhaps not to full international parity in the near-term.

First, Chinese refiners may shift some operations overseas to escape price controls and enhance shareholder returns. This could take the form of joint investment in overseas projects, which would reduce capital available for projects desired by state regulators in China. Or, Chinese refiners could build wholly owned plants abroad, which would have an even more pronounced impact on refining project capital availability in China. Such moves have not yet occurred on a large scale, but it will be interesting to see how Beijing reacts if refiners look to shift operations outside of China. One possibility is that the government might force them to import product equal to that which they would have produced, which would erase most economic gains from investing in overseas refining projects.

Second, the Chinese government will face spiraling subsidy cost increases. In 2005, with oil prices lower than today’s and Chinese refiners processing roughly 5.72 million b/d, the government had to reimburse refiners 104 yuan/bbl of oil processed, at a total cost of 30 billion yuan ($3.7 billion).14 By 2012, China likely will be refining and consuming as much as 9 million b/d of oil. This means that conservatively assuming a need for 100 yuan/bbl in refining subsidies, the Chinese government would be paying the equivalent of roughly 330 billion yuan in subsidies (about $43 billion at current exchange rates).

Foreigner squeeze
Will Chinese refining growth create commercial opportunities for foreigners? Chinese companies are learning fast and are willing to proceed alone if international partners don’t bring enough to the table or move too slowly. Royal Dutch Shell was originally slated to partner with China National Offshore Oil Co. (CNOOC) on the 240,000 b/d Huizhou refinery but pulled out after 3 years of talks, leaving CNOOC to forge ahead by itself. Similarly, although Sinopec is keeping foreign partners ExxonMobil and Saudi Aramco for its 240,000 b/d Fujian project planned for 2009, plans for a follow-on JV in Guangzhou seem to be dead, and Sinopec looks ready to proceed alone.12

The trend of foreign firms being “squeezed out” of China’s refining-petrochemical industry is being hastened by Chinese companies’ rapidly growing construction and engineering expertise. Sinopec Engineering alone has completed more than 450 refining and petrochemical process units over the past 30 years.13 While this figure lags the track record of foreign engineering and construction firms such as Foster-Wheeler and KBR, it shows the considerable refining experience and expertise rapidly becoming resident in China.

Western specialty firms still have niche markets for certain heavy lift capabilities, providing catalysts and supplying other advanced process technologies and equipment. Yet the big-ticket plant construction market is closing fast to outside firms. One Beijing-based refining and petrochemicals consultant notes that Chinese firms are building more than 80% of the ethylene steam cracker capacity currently under construction. By contrast, only 50% of the capacity that came online during 2004-06 was Chinese built, and projects included Western companies such as Shell, BASF, and BP as partners.14

This indicates that in the future, foreign firms’ value added to potential Chinese refining and petchem partners will be determined primarily by their ability to provide either feedstock supply or access to downstream markets overseas. Since most Chinese projects for the next 5 years are aimed at the domestic market, supply-rich national oil companies will have a big advantage over private international oil companies in securing future refinery-petrochemical investment deals in China. Chinese refineries’ moves to partner with Aramco and Kuwait Petroleum Corp. also help protect the national oil supply because a supplier is unlikely to cut supplies to refineries in which it holds investment stakes and which provide gateways to a huge oil products market.

A global powerhouse
The Chinese refining sector is unique because, while it is already the world’s second largest after the US, it still has substantial upside growth potential. Even a conservative demand growth of 5%/year means that Chinese oil demand will expand by more than 300,000 b/d, or the equivalent of a large new refinery each year for some time to come. China also is the centerpiece of the refining and petrochemical industry’s eastward shift, which is driven by strong demand, national desire for self-sufficiency, and more permissive industrial policies than those of Western countries.

China’s refining industry growth will have several key commercial implications. First, as Chinese demand for sour crude rises as an overall proportion of crude consumption, growing Chinese pull on sour crude supplies may help reduce the current price differentials between sweet and sour oils. Higher Chinese sour crude processing capacity also will increase Chinese refiners’ crude acquisition options and could shift trade patterns for Middle East and Venezuelan sour crudes.

Increased Chinese sour crude purchases of about 3 million b/d by 2012 could also provide major support for the new Dubai and Oman sour crude contracts. Finally, products surging onto the market after 2010 from new Chinese and Indian refineries could greatly lower regional refining margins. Depending on refiners’ ability to export products, margins could be affected as far away as the US West Coast and Gulf of Mexico markets.

In short, China is positioned to lead the emergence of a new Eastern center of gravity in the world oil refining and petrochemical industries. Just as strong and sustained Chinese oil demand growth is reshaping the global upstream and oil shipping businesses, so too will it affect the refining and petrochemical businesses.

References

1. John van Schaik, “Global Refining Capacity Set to Expand,” International Oil Daily, Feb. 9, 2007, Lexis-Nexis (http://web.lexis-nexis.com).
2. The US currently imports 10-12 million b/d of oil and products.
3. Wang Yusheng, “Panorama of China’s Oil Refining Industry in 2005,” China Oil & Gas No. 1, 2006, p. 51.
4. “Refinery Netbacks: Gold Coast Margins,” Oil Market Intelligence, May 15, 2006, Lexis-Nexis, (http://web.lexis-nexis.com).
5. Petroleum Intelligence Weekly, accessed July 17, 2007.
6. “Sunoco runs more high-acid crude, posts record profit,” Oil Daily, Aug. 4, 2005, Lexis-Nexis. (http://web.lexis-nexis.com).
7. “Refining Characteristics: Kuito,” Chevron, (http://crudemarketing.chevron.com/characteristics.asp?kuito).
8. Roy Nersesian, “The economics of shipping Venezuelan crude to China,” The Oil and Gas Review, Business Briefing: Exploration and Production, 2005, Issue 2, (http://www.business-briefings.com/pdf/1736/nersesian_lr.pdf).
9. “New Guidelines for Foreign Firms,” China Energy Weekly, Mar. 28, 2007.
10. “China consumes record amount of crude, refined oil in first half of 2007,” Xinhua, July 24, 2007, obtained through Open Source Center.
11. “China’s oil refining industry posts loss of 30 billion yuan in 2005,” People’s Daily Online, Feb. 14, 2006, 12. “Chinese refining still tough nut for foreigners,” Petroleum Intelligence Weekly, Mar. 19, 2007, Lexis-Nexis,
13. “Bechtel-Sinopec Engineering Inc.-Foster Wheeler consortium awarded China petrochemical contract, Mar. 15, 2001, 14. John Richardson, “Construction Crisis? What Crisis? China Leads the Way,” John Richardson’s Asian Chemical Connections, Aug. 14, 2007,  
 

The first release of Japanese fourth-quarter 2007 GDP showed the economy growing at a faster-than-expected pace, despite the slowing global economy.
 

Global Insight Perspective  
Significance Japan achieved a strong 3.7% quarter-on-quarter (q/q) growth rate (seasonally adjusted), despite the sub-prime financial turmoil and the sluggish economies of Europe and North America.
Implications That Japan might once again be “out-of-sync” with the world economy clearly works in Japan’s favour now that other countries are slowing. However, Japan’s dependence on heavy industries remains a cause for concern.
Outlook Japan’s competitiveness in global markets should continue, though the stronger yen poses risks, and the unbalanced economy needs a more robust consumer sector in order to achieve sustainable growth.
 

Surprise Finish for the Year
 

After posting strong growth at the beginning of 2007, Japan’s economy soon faltered; the economy shrank in the second quarter, then managed only a weak recovery in the third. With other developed countries slowing at year-end, and global financial markets jittery in the wake of the sub-prime mortgage collapse, it appeared likely that Japan could see another decline in the fourth quarter. Therefore the strong 3.7% performance in the fourth quarter was not only important in its own right, but it also suggests that Japan may be able to avoid - to some extent—the global downtrend.
 

Looking at the fourth quarter surge by sector, it is clear that Japan continues to rely on exports: over half of Japan’s growth of the past year was generated by net exports. On the plus side, this is a sign of manufacturing success: Japanese corporations continue to raise productivity and improve quality, keeping their products competitive on world markets. However, this arrangement also exposes the economy to greater risk. If productivity gains begin to diminish, while lower-wage countries work their way up the value chain, Japan may find itself with no source of growth. This also applies to the capital investment sector; although it too performed well in recent quarters, these expenditures were mostly made by exporters to improve efficiency and increase capacity.
 

Most other sectors posted modest growth in the fourth quarter. Private consumption in particular continued to trend upward but at a sluggish pace. Although preferable to an outright decline, it appears that the much-anticipated shift to consumer-led growth will have to wait for another day. Lastly, residential investment fell sharply, as it did the previous quarter, due to the new safety regulations imposed by the government in mid-year.
 

Outlook and Implications
 

Japan’s dependence on exports and heavy industries has been a concern for years. The new data do nothing to allay those fears, but they do suggest that it may not be a problem in the near term. If there is a significant downturn in global demand, it may be having more impact on second- and third-tier exporters such as South Korea and China, while the demand for high-quality Japanese brand names is relatively unaffected. In addition, exports to oil- and commodity-producing countries have been rising at a fast pace; this is of course a mixed blessing, as Japan must pay more for its raw materials. China also remains an important destination for Japanese exports, though this in turn depends on continued growth of China’s exports.
 

Then there is the yen. After remaining stubbornly weak for years, the yen recently began appreciating - a process that is likely to continue. This reduces the cost of imports and thus could be a boon to consumers, but only if households would begin to spend like their counterparts in other developed countries. If, however, consumption remains weak, then the economy will continue to depend on exporting into an increasingly difficult international environment. Low interest rates from the Bank of Japan (BoJ) will provide some help, but eventually the economy must restructure away from heavy industries in favour on consumer goods and services.
 

Notably, the good performance of the fourth quarter should help put an end to stagnant wages. For years, Japan’s export success has fed soaring profits, but little of these monies have ended up in workers’ paycheques. With unemployment relatively low, and labour markets becoming more mobile, it was clear that wages would eventually have to rise. Additionally, thanks to the surge at year-end, it is more likely to happen sooner rather than later. Even a modest improvement in wage growth - and its positive effect on household spending - could be sufficient to keep the economy on a firm growth track in 2008.

Summary
Human Rights Watch has released a tape it says includes Pakistan’s attorney general saying that the South Asian country’s Feb. 18 parliamentary elections will be rigged. Whether violence breaks out on election day and how the opposition will react to the results remains to be seen, to say nothing of how the Pakistani armed forces will respond.
 

Analysis
U.S.-based human rights group Human Rights Watch on Feb. 15 released what it says is a recording of Pakistani Attorney General Malik Mohammad Qayyum acknowledging that Pakistan’s Feb. 18 parliamentary elections will be “massively” rigged. Human Rights Watch said a journalist made the recording during a telephone interview with Qayyum after the Musharraf regime’s top legal adviser took a second call without hanging up on the first, allowing part of the second conversation to be recorded.
 

The report only further exacerbates what is now a global expectation that the elections will be marred by corruption. It also raises the question of how the opposition - and the Pakistani armed forces - will react to the vote.
 

Stratfor has already discussed the plans for “smart rigging” or “electoral engineering” on the part of the Musharraf government. Furthermore, President Pervez Musharraf reiterated Feb. 15 that protests will be crushed, and that people will need to accept the results - another strong indication that rigging will take place. Given the intense unrest and insecurity of the past year, there are apprehensions as to the outcome of the vote. Will balloting take place? If so, what will participation look like? How much violence - both political and jihadist - will occur on election day?
 

Assuming the polling process proceeds even somewhat satisfactorily, the next major test will be the results. Whether the opposition forces will accept the results to the extent that they refrain from taking to the streets remains to be seen. If not, we can expect several days of agitation, during which the government will attempt to crush the electoral unrest. The country’s army chief already has said that free, fair and transparent polls are the responsibility of the government, and that the army’s role will be to provide security in order to facilitate the process.
 

It is therefore unlikely that the army will assist in putting down any uprising stemming from opposition outrage at a dubious victory for Musharraf and his allies. Instead, the army could eliminate the gridlock gripping the South Asian country by ousting the Musharraf government and holding a fresh round of elections. For now, everything depends on how blatant or widespread the rigging is come election day.

Singapore’s economy recorded its first quarter-on-quarter (q/q) contraction since 2003 in the fourth quarter of 2007 as manufacturing output growth stalled. 
 

Global Insight Perspective  
Significance The economy shrank by 4.8% in annualised q/q terms in the October-December 2007 quarter despite expanding by 5.4% on an annual basis, according to the Department of Statistics. For 2007 as a whole, GDP growth stood at 7.7%.
Implications A sharp slowdown in manufacturing output, particularly in biomedical manufacturing, sapped momentum. Partially offsetting the downturn were the fast-growing financial services and construction sectors. Slackening U.S. growth following the sub-prime loan crisis has accentuated downside risks in Singapore’s external outlook.
Outlook Global Insight expects the downturn to intensify in 2008 as exports slow and domestic demand is crimped by accelerating inflation. Following the expansion of 7.7% in 2007, Global Insight expects growth to slow to 5.2% in 2008.
 

Rockier Times Ahead
 

Singapore’s bellwether economy pointed to trickier climes ahead as growth contracted in the fourth quarter for the first time in four years. According to data published by the Department of Statistics, GDP in real terms contracted by 5.4% year-on-year (y/y) in the fourth quarter of 2007, reversing abruptly from the 9.45% y/y growth rate recorded in the July-September quarter. Full-year growth stood at 7.7%, in line with Global Insight’s current forecasts, slowing from the 7.9% gain recorded in 2006. Meanwhile, seasonally adjusted GDP contracted by 4.8% (annualised rate) in the fourth quarter.
 

Implications and Outlook
 

Manufacturing Slows
 

The mainspring behind the slowdown was a sharp braking of manufacturing output growth, particularly in biomedical manufacturing. In final three months of 2007, the sector expanded by just 2.9% y/y, braking from the 11.6% and 9.7% growth rates recorded in the third and second quarters, respectively. A falloff in demand in the volatile biomedical sector, counteracting robust growth in the transport engineering cluster, caused the marked deceleration. However, the manufacturing sector as a whole continues to be undermined by sluggish electronics production. Electronics output rose by 5.3% on the year in the fourth quarter, slowing from the 8.3% annual gain recorded in the third quarter. Electronics account for 66% of total output despite recent deliberate diversification in the export base to counter growing international competition. The slowdown probably reflects the encroaching impact of reverses in U.S. demand in the wake of mounting financial stress sparked by the sub-prime loan crisis. The United States directly accounts for around 15-20% of the Asia-Pacific region’s exports and remains the primary engine of global growth. For the year as a whole, manufacturing output growth is posited at a stable - if unspectacular - rate of 5.8%, down sharply from the 11.9% gain recorded in 2006.
 

Construction, Service Sector Activity Remains Robust
 

The subdued performance of manufacturing was partially offset by stable expansion in the service sector and robust growth in construction. Domestic demand has gained traction, supported by rapid employment growth, attendant wage inflation, and the positive wealth effect generated by a recovery in property prices. In the fourth quarter, total employment rose by 64,200, with growth retaining significant momentum following the 58,600 surge in new positions in the third quarter. The unemployment rate subsequently fell from 1.7% to 1.6%. The service sector grew by 7.7% y/y in the fourth quarter, moderating from the third quarter’s 8.6% pace. For 2007 as a whole, service-sector growth stood at 8.1%. Concurrently, government initiatives to stimulate redevelopment projects, combined with the recovery of the property market from a prolonged slump from 2001 onwards, has spurred construction activity. In the fourth quarter, the construction sector expanded by 24.3% y/y following growth of 20.1% in the previous quarter.
 

Macroeconomic Management Faces Challenges
 

However, accelerating inflation is overshadowing domestic demand growth, while slowing exports could undermine employment growth. Consumer price inflation accelerated to a 16-year high of 4.4% in December despite pre-emptive monetary tightening implemented by the city state’s monetary authority in October 2007. Strengthening demand pressures and supply-side constraints following increases in food and fuel costs has aggravated inflation.
 

Current trends confirm that the cyclical peak of Singapore’s recovery from recent years’ near recession has now clearly passed. Slower global growth and the strong exchange rate will constrain the trade-dependent economy in 2008. Although Singapore has diversified away from dependence on the United States over the past five years, a marked slowdown in the U.S. economy could significantly undermine growth. China’s authorities are also expected to implement more emphatic measures to cool their economy’s breakneck growth in the second half of the year with the risks of a hard landing increasing accordingly. Concurrently, while the momentum generated by the recovery in domestic demand should provide some counterbalance, high inflation, slowing employment, and a moderation in property price appreciation could dent household spending. Further, the ebullient financial sector, which has underpinned growth, could be exposed to the reverberations from the global credit crunch.
 

These conditions present the Monetary Authority of Singapore (MAS) with the need for delicate policy management. Current rates of inflation indicate that further monetary tightening may be necessary, but the MAS will be reluctant to move aggressively for fear of denting domestic demand growth as exports slow. Global Insight’s baseline forecast for 2008 currently calls for growth to slow to 5.2% in 2008

The outgoing president inspired confidence in the Russian populace at his final press conference, while the incoming president announced a liberal economic agenda.
 

Global Insight Perspective  
Significance President Putin held his last annual press conference in the Kremlin yesterday.
Implications Putin confirmed that he will stay in power as prime minister under the presidency of Dmitry Medvedev, an arrangement that will be finalised in May 2008.
Outlook The domestic agenda of Russian leaders is liberal, aiming for the diversification of the economy, reducing the role of the state and instilling the rule of law. Internationally, Russia will continue dragging its heels on conducting international affairs strictly on the basis of existing documents and institutions, thus challenging the more ideational stance of the West.
 

President Vladimir Putin was on top form yesterday as he took more than 100 questions during a nearly five-hour press conference attended by over 1,300 journalists. These press conferences are an annual fixture, but as it was the final one of Putin’s presidential tenure, it worked as an opportunity for the leader to draw a line under his presidency and designate the future directions of Russia’s development, in which he intends to play a key role as prime minister.
 

Domestic Issues: Growing on Success
 

Putin started his press conference with a brief outline of Russia’s economic successes during this presidency, including the 8.1% GDP growth rate, 10.4% real income growth, 21.2% capital investment increase, 50% cut in those living in poverty and booming birth rates. Looking forward, Putin named administrative reform and diversification of the economy as the two paramount goals for Russian development. Putin pledged to adopt an anti-corruption law and increase the salaries of state administrators to remove incentives for corruption. He also indicated that he would change the government system and reallocate responsibilities between ministries and federal agencies, saying that the previous mode of Cabinet structure “had outlived itself.” He stressed the government’s pet topic, diversification of the economy, with much enthusiasm, and dispelled the fears of overburdening the economy with the state, by saying that the proliferating state corporations would be intended as mere vehicles for propelling some ailing industries forward, to be taken to international public offerings (IPOs) and privatised when they had accomplished their role.
 

The liberal economic agenda was further detailed by first vice prime-minister Dmitry Medvedev, the all-but-confirmed presidential successor, at the Siberian investment forum today (15 February). Medvedev announced the “Four I” programme, prioritising Institutions, Infrastructure, Innovation, and Investment. Medvedev pledged further tax reform to foster these areas, as well as the simplification of the legal and tax regimes for small and medium enterprises. He made a point of assuring investors that the state does not intend to dominate the economy in the governmental plans. Of equal importance was Medvedev’s intention to strengthen the rule of law in Russia, a wider-reaching echo of Putin’s plans for governmental reform.
 

If the comments of Russia’s two most powerful men on the domestic issues were essentially music to investors’ ears, their stance on the international affairs was a note of discord.
 

International Affairs: Minding Its Own Business
 

Vladimir Putin had little surprises with respect to Russia’s international standing, which Putin always argues about from the point of view of international legal documents and institutions. In his typically brusque and cold manner, he defended Russia’s foreign policy, which often causes controversies within the West, while accusing the West of hypocrisy. Putin rejected treating Kosovo as a “special case” and compared it to Northern Cyprus’s four-decade campaign for recognition as an example of the double-standard approach to international issues. He warned that Russia is keeping some ideas for retaliation in case of international recognition of Kosovo’s independence declaration up its sleeve, although it would avoid “mimicking”, or supporting separatist provinces elsewhere. Most notably, he brushed off the Organisation for Security and Cooperation in Europe (OSCE) accusation of not yielding on conditions for the international observation of the presidential election on 2 March as based on wishful premises to which Russia has not subscribed and hence was not obliged to follow. Putin further underlined his commitment to a “constructive dialogue” with the West, retaliating to presidential hopeful Hillary Rodham Clinton’s description of him as having no soul by saying that foreign policy rather requires a leader with a head, “to pragmatically defend the interests of your nation.” Head or soul, Putin certainly has the stubbornness to dig his heels in concerning international affairs and Russian foreign policy imperatives.
 

Third Term, First Term
 

The issue of power succession and allocation came up again and again during the press conference for obvious reasons. Putin reiterated his commitment to work as Prime Minister under the presidency of Medvedev, and do so for the “length” of Medvedev’s presidential term. This last phrase gives rise to two speculations, that Putin does not intend to swap positions with Medvedev at the earliest opportunity, and that he may still run for the presidency after 2012. The gist is, however, that Putin is willing to continue shaping Russia’s development, and believes he will have enough opportunity and authority to do so in the prime ministerial post. Putin also treated the audience to his trademark style of speaking in catchphrases such as suggesting international observers “teach their wives to cook soup” instead of preaching to Russia on democracy. He also adopted a tone of some sincerity when admitting that “taking decisions no-one else can take” is a serious burden and sympathising with U.S. President George W Bush for that as the head of the most influential world state, scolding consequent laughter in the audience. These linguistic and personal touches, and a mixture of apparent sincerity, resolve, roughness and energy make Putin genuinely admired by a considerable proportion of the Russian electorate and guarantee popular endorsement for his plans to continue playing a key role in the development of Russia.
 

Outlook and Implications
 

The press conference shone with the perception that Russians, and Putin as their leader, are happy for themselves, and this impression may not be far from the truth. It builds upon a strong social consensus behind the ruling elite, and the presence of a vision for Russian development by that elite. The vision itself is fairly liberal, with its goals of reducing the state role in the economy, enlarging the investor base, and instilling respect for the rule of law. This understanding does not by itself make Russian leaders easy partners to work with, especially for international political players, but it helps to know of their firm standing and plans. Political certainty has both positive and negative aspects, as a mixture of short-term predictability and risky oppression of dissent, and they will both transpire in the near future as Putin-Medvedev and their encourage continue in Russia’s driver’s seat.
 

Differences between ExxonMobil and PDVSA over how much the U.S. company’s former stake in the Cerro Negro project is worth mean that the dispute that has seen the suspension of commercial relations between the two companies is likely to drag on.
 

Global Insight Perspective  
Significance Comments from the Minister of Energy and Petroleum and head of PDVSA Rafael Ramírez that ExxonMobil is seeking US$5 billion in compensation shows how great a distance there is between the two companies on this issue as well as how disproportionate the freezing of US$12-billon-worth of assets is.
Implications ExxonMobil is renowned for not giving ground in negotiations over contract or fiscal changes and the asset freeze and earlier filing of an arbitration claim against Venezuela will send a clear message to other countries where it operates that the company does not do deals.
Outlook However, by taking such an intransigent approach, the U.S. major risks becoming embroiled in a legal dispute with the Venezuelan government for years to come as well as delaying the receipt of any compensation payment.
 

Companies Differ over Compensation
 

The war of words between the United States and Venezuela is continuing in the wake of the court orders secured by ExxonMobil freezing US$12 billion in international assets held by the Venezuelan state oil company PDVSA (see Venezuela: 11 February 2008: Venezuelan President Weighs In On ExxonMobil Court Orders; Threatens Supplies to U.S.). The action was intended to prevent PDVSA from selling holdings that might otherwise be used to compensate the major for the loss of its Venezuelan projects. However, in a further sign of how far apart the two companies are from reaching a settlement over the compensation dispute, reports today indicate that ExxonMobil had valued its 41.66% stake in the Cerro Negro project at US$5 billion, while PDVSA has put a value on the assets of US$715 million.
 

Venezuela retaliated to the asset freeze with the suspension of commercial relations with the U.S. major, although it continues to supply oil to the Chalmette refinery. Reuters reported that the U.S. Energy Secretary Sam Bodman said yesterday that if it needed to ExxonMobil could access the strategic reserve for oil that would otherwise be supplied by Venezuela. Meanwhile, Venezuela has already received expressions of interest from companies in Europe and China for the 600,000 barrels a month that were formerly supplied to the U.S. major.
 

The U.S. Energy Secretary is not the only government official to have shown support for ExxonMobil over the past few days. Earlier this week, a spokesperson for the U.S. State Department Sean McCormack expressed the department’s “full support” for the major’s efforts to obtain “fair” compensation, but was careful to portray the dispute as a “commercial” one between Venezuela and ExxonMobil and to leave the resolution of the dispute to international courts. This approach contrasts with that of the Venezuelan government, which has been portraying the dispute as a political one between Venezuela and the United States and the asset freeze as an attack against its national sovereignty.
 

Outlook and Implications
 

The legal action taken by ExxonMobil reflects the company’s more aggressive style at dealing with any changes to contract terms in the countries where it operates. It was earlier the only company to challenge a tax hike for projects in the Orinoco heavy oil belt and rejected new contracts for both conventional and heavy oil production. In contrast, companies that have adopted a more conciliatory approach to negotiations with the Venezuelan government have been able to reach amicable settlements. The two U.S. companies that saw their electricity assets nationalised last year received financial compensation and Total, BP, and StatoilHydro have all reached agreements over compensation for fields that they have exited. According to comments from the Minister of Energy and Petroleum Rafael Ramírez, an agreement with Eni over an arbitration claim it lodged over the Dación field is close and talks with ConocoPhillips are also ongoing.
 

The precedent set by agreements reached with other companies suggests that Venezuela would also be prepared to reach a deal with ExxonMobil if it reduced its demand for compensation. However, the asset freeze for assets worth more than double what the U.S. company is demanding in compensation has taken the dispute to a new level and with neither party showing any willingness to back down it is likely to rumble on for the foreseeable future.

Indonesia’s economy grew by 6.3% in 2007 after real GDP expanded by 6.25% in the fourth quarter.
 

Global Insight Perspective  
Significance At 6.3%, annual GDP growth was Indonesia’s highest since 1996, marking a psychological step in the country’s post-crisis recovery.
Implications Real GDP expanded at a 6.25% rate in the last quarter, exactly in line with our forecast. The strong fourth quarter confirms expectations that, as of late last year, the U.S. slowdown had not yet affected Indonesia’s economic performance.
Outlook The impact of the U.S. sub-prime mortgage crisis and broad economic slowdown will start to be felt in early 2008 however, causing a moderate easing in Indonesia’s economic growth. We currently forecast a 6.1% expansion in 2008, followed by 6.0% in 2009.
 

In Line with Global Insight’s Forecasts
 

Indonesia’s fourth quarter GDP reading was in line with Global Insight’s forecast of 6.2% growth in the fourth quarter and 6.3% annual growth in 2007. The actual numbers came in at 6.25% and 6.3%, respectively. The fourth quarter performance was slightly weaker than in the third quarter (when GDP rose by 6.5%), but a minor slowdown in the last three months of the year was expected due to religious holidays, which lowered the number of working days during the period. It is unlikely that the U.S. slowdown had any impact on Indonesia’s fourth quarter GDP performance.
 

Domestic Demand Continues to Accelerate
 

As for sources of growth, trends witnessed during the earlier part of 2007 appear to have simply intensified in the last three months. Domestic demand is accelerating, while net exports are easing slightly. Undoubtedly, the main story remains the steady acceleration in private consumption, coupled by a notable pick-up in fixed investment. Indeed, private consumption growth rose by 5.6% year-on-year (y/y) in the fourth quarter, up from a revised 4.8% in the third quarter, and these were the highest rates since the beginning of 2004. Stabilisation on the inflation front, further interest rate cuts, and the lack of political or notable social disruption during 2007 have all contributed to a general improvement in consumer sentiment, which resulted in more spending on durable goods. Sales of high ticket items, including cars and motorcycles, boomed last year, with industry sources reporting a jump of over 40% in vehicle sales as of late 2007.
 

Equally or perhaps even more encouraging was the positive performance on the investment front. Following a weak 2006, investment spending gathered momentum in 2007 and accelerated notably in the second half as business confidence improved. During the fourth quarter, fixed investment growth reached 12.1% y/y (up from a revised 8.1% in the third quarter). Somewhat surprisingly, the fourth quarter GDP details included a mere 2.0% growth in government consumption. Public spending typically shows a major acceleration in the latter part of the year as it is often concentrated in the second half. However, in 2007 we have seen no such pattern, which has caused a substantial slowdown in government spending for the year as a whole. Although real government consumption rose by 9.6% in 2006, it only grew by 3.5% last year - the slowest rate since 1999. The upside of this, apart from the positive impact weaker spending has on the final budget deficit reading, is that the improved economic performance observed during 2007 had nothing to do with expansionary fiscal programmes. Instead, it was entirely the result of stronger growth in the private sector.
 

Net Exports Ease a Little More
 

Just as domestic demand gathered more speed, net exports lost some momentum during the fourth quarter. This was not so much because of weaker exports (although the growth rate in exports did ease slightly) as faster import growth, which was a result of stronger domestic demand. Export growth fell to 7.3% in the fourth quarter, down from a revised 8.3% in the third quarter, but import growth nearly doubled from 7.3% to 13.6%. Fourth quarter real net exports were 13.9% lower than a year ago.
 

Production-Side GDP Details
 

Not much was changed on production-side GDP, apart from a sharp slowdown in agricultural output during the fourth quarter. Real agricultural output rose by only 3.1% y/y in the fourth quarter, less than half the 7.6% rate recorded in the third quarter. The decline was related to both seasonal factors and weather conditions. Most other sectors maintained growth rates similar to those recorded in the third quarter, which solidified earlier trends. There was strong growth in the service sector, with transport/telecommunications and utilities leading the growth with advances of 17.4% and 11.8% respectively.
 

Outlook and Implications
 

What Will 2008 Hold?
 

Although the headwinds facing the U.S. economy will undoubtedly reverberate around the world and undermine economic performance in most of Asia, we remain optimistic about Indonesia’s near term economic outlook as we move into 2008. That said, we are not quite as optimistic as the Indonesian government, which continues to target 6.4% annual growth in this year’s budget (down from an original approved target of 6.8%). However, thanks to ongoing strength and momentum in domestic demand, the economy should be able to achieve a 6.1% expansion. Data from the Investment Coordination Board show that foreign direct investment (FDI) approvals were up 177% from a year ago during January-October 2007, while domestic investment approvals were up 22% y/y. Given these favourable numbers, there seems to be enough momentum in the pipeline to boost real investment growth to above 8.0% in 2008. Similarly, unless there is a price shock such as an unexpected adjustment to fuel subsidies, consumers should continue to power ahead, providing a significant boost to the economy. Even the outlook for real net exports is not overly bleak, given that favourable base effects should allow import growth to moderate slightly. All in all, 2008 will be a year in which the economy will consolidate earlier gains, while policy makers will focus on promoting price stability and improving the business environment ahead of elections.

Summary
China Petroleum and Chemical Corp. (Sinopec) is stepping up the integration of its subsidiaries in the upstream oil sectors to boost the efficiency of its oil exploration and production activities in Northeast China, China Knowledge reported Feb. 15. To resolve the country’s energy shortage crisis, Beijing is consolidating its control over both upstream and downstream sectors.
 

Analysis
China Petroleum and Chemical Corp. (Sinopec) is stepping up the integration of its subsidiaries in upstream oil sectors to boost the efficiency of its oil exploration and production activities in northeastern China, China Knowledge reported Feb. 15.
 

Two Sinopec subsidiaries - Northeast Oil Bureau and East Oil Bureau - reportedly have signed three cooperation contracts in this region.
 

Beijing’s plans for boosting national fuel supplies to tackle the nation’s fuel shortage crisis can be broadly grouped into two areas: upstream oil exploration and downstream oil refining.
 

China’s upstream energy market historically has been partitioned along geographical lines. PetroChina, owned by China National Petroleum Corp., dominates oil exploration and production activities in the North and West. Sinopec dominates those activities in the South, while China National Offshore Oil Corp. controls those in the offshore regions. Within each of these regions, each energy player has subsidiaries that operate independently - and sometimes competitively against each other.
 

As part of Beijing’s plans for boosting national fuel supplies, not only are geographical limits being lifted between the largest state players, but consolidation of the smaller rivals - often owned by the same parent - is being accelerated, strengthening the Chinese government’s ability to monitor and control all of the country’s energy entities.
 

Meanwhile, a parallel consolidation is taking place in China’s downstream refining sector, so that newly discovered oil can be converted into fuel products for consumption.