Some strange business going on at one of China’s biggest oil companies

The loss of four senior management officials in the past week at China’s largest state oil company China National Petroleum Corp.  is still shrouded in mystery, serving to fan even more speculation about their resignations.

On Tuesday, CNPC’s listed subsidiary PetroChina announced in a brief statement that three senior management officials had resigned following ongoing investigations by the government. Among them was Li Hualin, secretary of PetroChina’s board of directors and chairman of Kunlun Energy, a relatively new gas subsidiary that has been making huge strides in China’s gas distribution market in the last two years.

The other two officials who resigned were Ran Xinquan, executive director and a vice-president at PetroChina and Wang Daofu, its chief geologist. Ran previously headed PetroChina’s Changqing Oilfield Bureau subsidiary while Li used to run the Daqing oilfield, two of the company’s biggest production assets within the country.

The announcement followed the resignation of Wang Yongchun, a vice-president at CNPC, after news broke a day earlier that he was being investigated by the government for serious disciplinary violations. Wang  previously headed the Daqing operations, as Li did, after cutting his teeth managing the Jilin oilfield.

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Little is known about the circumstances surrounding the investigations, although one local media commentary quoted an industry source suggesting tracing Wang’s current imbroglio to his previous positions.

Hence speculation the investigations may relate to the improper award of contracts for oilfield services and other work at the fields. Another theory suggests the dismissals may involve a commercial real estate deal in Daqing that turned sour.

While state oil giants in China are generally upheld as national corporate models for other state-owned enterprises, they have not been without scandal. As Bernstein Research said: “PetroChina is an enormous organization. It is also unlikely to be the only organization with corrupt executives in China.”

In 2007 Sinopec’s then chairman Chen Tonghai was arrested for taking bribes and subsequently was handed a suspended death sentence for corruption.

In his illuminating book The Party, about the workings of the Chinese Communist Party, Richard McGregor alludes to the real reason Chen was targeted:  severe oil product shortages across China that started in 2005 because high crude oil prices squeezed refiners’ margins, prompting them to cut runs and restrict domestic supply.

Sinopec, the largest refiner, relies on external supplies for nearly 80% of its crude feedstock and was losing money on every liter of gasoline and diesel it sold at the pump because of domestic product price caps.

Faced with an angry citizenry, the government had no choice but to announce unprecedented cash handouts to Sinopec, and rival PetroChina, to help cope with the losses.

“When Chen took on senior leaders during the fuel crisis, he handed his enemies an excuse to bring him down,” McGregor writes.

In the latest firings, the damage to CNPC seems minimal. The company swiftly moved to replace the dismissed officials and assured investors it was business as usual.

The company has seen significant management change at the top this year, after its former Chairman Jiang Jiemin was picked to head the ministry-level State-owned Assets Supervision and Administration Commission, which oversees management of state-owned enterprises. Jiang was succeeded by Zhou Jiping, who previously served as CNPC general manager.

When the former head of China National Offshore Oil Corp. Fu Chengyu was appointed new chairman of Sinopec, the largest refiner, his presence was expected to energize the company and make it more streamlined, transparent and less cumbersome.

In contrast, Zhou’s ascent to head CNPC has been seamless and unfussy, with analysts expecting few departures from the company’s previous trajectory. The fact that Zhou has not been implicated in any of the scandals, suggests the issue is probably not due to “systemic failure in leadership”, according to the Bernstein report.

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