Being part of a downstream LNG project certainly makes sense for Petrochina…

China Oil Giant Aims to Be Global Oil Giant

BEIJING — PetroChina’s bid for a Scottish refinery may seem an odd move for China’s biggest oil producer, but it makes perfect sense for those who know its private ambition: becoming a global trading powerhouse like BP.

The move adds to speculation that an even bigger purchase may be brewing in the Americas, where oil demand is shrinking but trading opportunities abound for a company that has overtaken rival refiner Sinopec amid Beijing’s drive to exert more influence over global commodity markets.

Under Chairman Jiang Jiemin, a leading advocate of China’s “go global” policy of overseas expansion since he took the helm in late 2006, PetroChina has expanded its small teams, recently hiring five veteran Western traders in London to cover crude and products, and looking to expand its one-man desk in Houston.

“There is limited room for us to grow further in Asia as we started from a high base. For the next move, we should be looking at Europe and America, where we started almost from zero,” a senior manager in PetroChina’s trading team told Reuters.

Earlier this month, a local British politician said PetroChina (0857.HK: Quote, Profile, Research, Stock Buzz)(PTR.N: Quote, Profile, Research, Stock Buzz) was in talks with Britain’s largest private firm Ineos for a possible investment in a 200,000 barrels per day refinery in Grangemouth, Scotland, formerly owned by BP, in what could be China Inc’s biggest European investment to date.

As the Chinese firm has no retail or significant upstream operations in the Atlantic Basin, the deal seems clearly tied to its trading ambitions, giving it a source of gasoline and diesel as well as a buyer for some of the over 600,000 bpd equity crude production from parent company CNPC’s overseas operations.

That ambition became clear last month when it unveiled a $1 billion deal to buy nearly half of a 285,000 bpd refinery in Singapore, the pricing hub for Asia, a deal in which the Singapore-based trading unit played a critical role, according to Chinaoil officials involved in the discussions.

Sources and media reported in March that PetroChina was looking to buy Valero Energy Corp’s (VLO.N: Quote, Profile, Research, Stock Buzz) Aruba refinery, a 275,000-bpd plant on an island off Venezuela’s coast that supplies intermediate feedstocks to U.S. coastal refineries.

It is also in final negotiations for a stake in a Japanese refinery.

TRADE TEAMS DRIVE INVESTMENT

To be sure, downstream deals do carry a commercial rationale.

With Beijing maintaining a tight grip over domestic Chinese fuel prices, allowing refiners only a narrow fixed margin, buying refineries abroad is the best way to gain exposure to an upswing in the global economy, particularly with assets cheaper and competition less fierce at the moment.

But PetroChina has clearly put its traders at the front of this drive: its regional trading managers were promoted to senior level advisors on all downstream investments over a year ago, an accord not extended to their peers at Sinopec, for instance.

As a subsidiary of unlisted parent firm CNPC, PetroChina International — also known as China National United Oil Corp, or colloquially as Chinaoil — effectively now acts as the downstream investment arm of the Chinese energy giant.

“We are eyeing international oil majors like BP as a benchmark, where you need a sizeable refining, marketing and trading business to match that of your crude oil production,” said the PetroChina official, but declined to say more.

BP was a cornerstone investor when the Chinese company went public in 2000 and sold its stake in 2004, covering a period when BP’s trading team was widely regarded as the most aggressive and successful of any major oil company, making billions of dollars.

The similarities between the two are striking: PetroChina’s refinery output was 2.33 million bpd last year, similar to BP’s 2.68 million bpd; its total crude oil production was 2.38 million bpd, nearly identical to BP’s.

But BP (BP.L: Quote, Profile, Research, Stock Buzz) marketed and traded a total of 5.7 million bpd of oil products, more than double PetroChina’s 2.5 million bpd of turnover, up 21 percent from 2007, according to company data.

However, its trading prowess hasn’t always been in BP’s greatest interest: BP has scaled back its desks significantly in recent years years following a series of scandals in U.S. markets.

SINOPEC STAR FADES

PetroChina’s trading expansion has in recent years outshone rival Sinopec Corp, which is under shareholder and government pressure to secure upstream reserve as imports make up 70 percent of its crude needs, exacerbating heavy refining losses.

With already sizeable overseas oil assets, PetroChina escapes such notice, freeing it to put its focus elsewhere.

“PetroChina has the luxury to look at downstream assets,” said Yan Kefeng of Cambridge Energy Research Associates. “Chinese companies have long believed that they have little impact in trading. They want to have a bigger say in price making.”

Several years ago, it was different: Sinopec was the early mover, setting up sizeable trading teams in Singapore and London and playing big in benchmark Oman and Dubai crude markets, as well as pioneering arbitrage in Russian and U.K. crude.

But the sudden replacement in 2007 of the flamboyant ex-chairman Chen Tonghai with more cautious 45-year-old Su Shulin, a former oil exploration executive parachuted to the refining giant, has curbed Sinopec’s risk appetite, traders say.

PetroChina’s trading managers, mostly in their mid-to-late 30s, take pride in charismatic CEO Jiang and Chinaoil boss Wang Lihua, in her early 50s, who has run the trading vehicle since 1998 and is one of the masterminds behind the downstream push.

“China is a late-comer in the oil trading world. You need a system to be able to compete. The moves PetroChina is making — Singapore, Scotland — are obviously part of a well-deliberated global plan,” said a London-based trader with rival Sinopec.