During former PetroChina Chairman Jiang Jiemin's tenure PetroChina spent almost $16 billion on acquiring overseas assets to meet China's growing demand. Photo: Bloomberg
PetroChina Co. (857), the oil producer that became the first $1 trillion company, is the target of a widening anti-corruption probe that threatens the biggest shakeup of China's oil industry in 15 years.
Former Chairman Jiang Jiemin, who left PetroChina in March, was removed from his post as head of the state assets regulator and is under investigation, the official Xinhua News Agency said Sept. 2. Five days earlier, PetroChina said it removed four senior managers after authorities started a probe.
The investigations add to the woes of a company that's lost more than $768 billion in value -- almost as much as the Dutch economy -- since 2007. The stock fell the most in two years on Aug. 28 in Hong Kong as the scrutiny adds risks to a business already weighed down by a slowing economy and government controls on fuel prices.
"The probes and their possible escalation could potentially cause a huge reshuffle in PetroChina and its parent," said Laban Yu, a Hong Kong-based analyst at Jefferies Group LLC. He said the government's actions were reminiscent of the investigation of former Railway Minister Liu Zhijun, which led to the breakup of the railroad ministry and an industry reorganization.
The PetroChina probes follow last month's five-day trial of ousted Politburo member Bo Xilai on bribery, embezzlement and abuse-of-power charges. The new investigations highlight President Xi Jinping's willingness to tackle graft, which he has said threatens the communist party's 64-year grip on power. In July, a court gave former Railway Minister Liu Zhijun a suspended death sentence for abuse of power and taking bribes, the ministry having been dismantled earlier in the year.
"The government is looking to seriously overhaul monopolistic state-owned enterprises and the energy sector is among those being targeted for structural reforms," said Joseph Cheng, a professor of political science at City University of Hong Kong. "The new government first needs to show it is serious about tackling corruption."
China broke up the former Ministry of Petroleum Industry in 1998 and established China National Petroleum Corp., the parent of PetroChina, and China Petrochemical Corp. Most of the country's oil and gas exploration assets went to CNPC, while China Petrochemical got refineries.
"It's possible that the central government may use the investigations as an opportunity to break up PetroChina and CNPC into some smaller companies and allow private money to get in," said Yu at Jefferies.
The government uses its big three oil companies, of which PetroChina is the largest, to control domestic fuel prices and secure energy supplies from overseas to meet the burgeoning needs of the world's second-biggest economy. PetroChina spokesman Mao Zefeng in an e-mailed response to questions said the company looks after the interests of all shareholders.
Jiang, appointed chairman of PetroChina in May 2007, presided over its $8.9 billion Shanghaishare sale in November that year, when the energy company's shares topped the $1 trillion mark. The share sale came a month after the Dow Jones Industrial Average (INDU) crossed the 14,000 mark for the first time and before the global financial crisis sent equity markets into a tailspin. From the start to the end of Jiang's tenure, PetroChina shares slumped 80 percent, while Chevron Corp. rose 44 percent and Exxon Mobil Corp. (XOM) climbed 6.6 percent.
Last month, PetroChina reported half-yearly net income, excluding one-time gains, at a nine-year low as government controls on natural gas and oil product prices forced it to sell fuels below cost. Its shares have tumbled 21 percent in Hong Kong this year.
PetroChina, which at $90 billion has the highest debt of any energy company after Petroleo Brasileiro SA, last year employed about 548,000 people, according to data compiled by Bloomberg. That's almost equal to the population of Las Vegas. Chevron, of a similar market value, has 62,000 staff.
PetroChina's volatility-adjusted returns in Shanghai have declined 2.8 percent since it started trading in November 2007, making it the worst performer among the world's oil companies with a market value above $100 billion, according to the Bloomberg Riskless Return Ranking.
"The Chinese government is the invisible hand behind PetroChina's stock performance," Lin Boqiang, director of Energy Economics Research Center at Xiamen University in Fujian province in southeast China. "PetroChina functions like a proxy for the government in stock markets, rather than a representative of investors trying to maximize profit."
PetroChina's slide since 2007 contrasts with its earlier performance after listing in Hong Kong in 2000. Berkshire Hathaway Inc.'s Warren Buffett called PetroChina "absolutely a first-class company" after selling his holding in the company in 2007 for $4 billion, an eightfold gain on his investment. Berkshire Hathaway, which bought the stock in 2003, was PetroChina's biggest shareholder after CNPC.
In the six years before the Shanghai share sale, the company's returns adjusted for price swings in Hong Kong were the highest in the $100 billion-plus group, and eight times more than Exxon Mobil, the world's biggest oil company, the Bloomberg Riskless Return Ranking shows.
The government's probe was extended on Sept. 2 after Wison Engineering Services Co. said its founder, Hua Bangsong, is assisting China's authorities in their investigations. Wison, a services provider to chemical factories and oil refineries, counted PetroChina as a major client. Templeton Asset Management Ltd. also said it had cut its holding in PetroChina to 4.4 percent from 5.3 percent.
None of the officials named in the government's PetroChina-related probes have been available for comment since the investigations were announced last week. No formal charges have yet been made.
PetroChina's slump has weighed on the benchmark 995-member Shanghai Composite (SHCOMP) index, which has declined 6.5 percent this year and is heading for its third year of declines in four. The explorer and refiner has the highest weighting of 8.5 percent on the index, while China Petroleum & Chemical Corp. (386), Asia's biggest refiner and the unit of China Petrochemical known as Sinopec, accounts for 2.7 percent.
The importance and size of the three big Chinese oil companies, which include Cnooc Ltd. (883), the nation's biggest offshore oil and gas explorer, leaves global investors with little choice, said Seth Freeman, San Francisco-based chief executive officer at EM Capital Management LLC.
"The fundamental reason investors buy these companies is because they are so large and important that they are included in most indexes used by institutional investors to benchmark portfolio performance," said Freeman, who invests in emerging markets, including China. "Essentially, investors must buy these companies. In terms of Chinese energy policy, that would be a key risk factor that is normally included in the investment process and an area requiring constant monitoring."
Chinese companies have completed 82 overseas oil and gas purchases worth a total of $101 billion in the past five years, according to data compiled by Bloomberg. The companies paid an average premium of 49 percent for purchases in 2012, compared with 31 percent for all energy deals last year. Cnooc agreed to pay a 65 percent premium to buy Canada's Nexen Inc. for $15.1 billion, the biggest overseas acquisition by a Chinese company, in July of last year.
"There are occasions when everyone's scratching their heads wondering why such a high price is paid," said Jefferies's Yu. "The reason is PetroChina and the others want to protect China's energy security, even though such an insurance may come with a high premium."
During Jiang's tenure PetroChina spent almost $16 billion on acquiring overseas assets to meet China's growing demand.
"It's true our business is deeply affected by China's policy environment, but the interests of all of our shareholders are well protected through good corporate governance and transparent operations," PetroChina spokesman Zefeng said. "We may have bought some assets that were a bit higher in price than average price levels, but we have to make decisions in an ever-changing market."
Since its Shanghai debut, PetroChina's net income has dropped in four of the last six years. China is moving to reform its state-owned enterprises and implemented measures this year to allow fuel prices to more closely track global crude swings.
"The state-owned background is a double-edged sword," said Xiamen University's Lin. "PetroChina's profit margins may improve following the pricing reforms on fuel and natural gas this year and the next few years, but PetroChina's profit level will only stay at where the government allows it to."