LAUNCESTON: The market chatter over forming a giant Chinese oil major through merging PetroChina and Sinopec has ramped up again recently, but the motivations for such a deal struggle to stand up to scrutiny.
The Chinese authorities are mulling joining China National Petroleum Corp, the parent of PetroChina, and China Petrochemical Corp, the parent of China Petroleum and Chemical Corp, better known as Sinopec, the Wall Street Journal reported on Feb. 18.
It should be noted that even if the authorities are considering such a move doesn't necessarily mean it will happen.
However, the fact that the news has made it into the public domain most likely means the possibility is being considered.
It was also reported in other media that a merger between China National Offshore Oil Corp, the parent of CNOOC, with Sinochem Corp was under consideration as well.
The most often cited reason for creating a mega-oil company is to give China the means to compete on a truly global scale, as such an entity would no doubt eclipse Exxon Mobil as the world's biggest non-state oil company.
While both PetroChina, the country's largest oil producer, and Sinopec, the largest refiner, are effectively state controlled, they operate differently to the models of national oil companies, such as those found in Middle East countries.
Currently they compete against each other in everything from oil and gas production, to refining, trading and retail sales.
Both companies have also pushed offshore through partnerships and acquisitions, and those ventures would also be competing against each other.
What is hard to see is how the benefit of creating a single, larger entity could outweigh the costs associated with such a move.
Yes, there would be the obvious synergies in cost savings by combining back office and operations, but only if, and this is a big if, the new combined company is prepared to be fairly ruthless in cutting jobs.
Chinese state-owned enterprises may in some ways resemble Western-style capitalist companies, but in other ways they don't, and the emphasis on providing employment is one such difference.
It's hard to see the government approving the massive redundancy programme that would have to accompany such a merger if Western-style cost savings were to be achieved.
Does China need a company bigger than Exxon Mobil to compete on the world stage?
Probably not, with both PetroChina and Sinopec being quite big enough currently to fund acquisitions and new ventures on the strength of their own balance sheets, not to mention the implicit guarantee from being controlled by the government.
The merger doesn't necessarily make sense from a perspective of needing to scale up, or from the point of view of savings from cost-cutting. In fact, there are a number of reasons as to why it doesn't make sense.