Chinese Petroleum Corporation Business Information, Profile, and History

Company Perspectives:

With the vision to become a safe, clean, and competitive international energy conglomerate in the 21st century, CPC is persisting to provide an efficient energy service to Taiwan people by all means.

History of Chinese Petroleum Corporation

Chinese Petroleum Corporation (CPC) is a state-owned enterprise that is responsible for the Republic of China's petroleum industry. CPC is involved in many oil-related activities, including the exploration, production, storage, refining, transportation, and marketing of petroleum products in Taiwan. The company sells gasoline through about 600 CPC-owned service stations in Taiwan and also services the aviation and boating industries through its refueling stations. Scheduled to privatize by 2001, CPC worked to strengthen operations and sought strategic alliances in the late 1990s.

Civil War and the Birth of CPC in the 1940s

CPC's origins are closely allied to the Kuomintang or Nationalist Party government and the great political changes that took place in the history of the Republic of China. The Kuomintang took power on the Chinese mainland in 1928, 17 years after the last Chinese dynasty, the Qing, was replaced by the Republic of China. The SinoJapanese War began in 1937 and was superseded by World War II in which the Chinese continued to fight against the Japanese. The year 1945 saw the defeat of the Japanese and simultaneously the end of 50 years of Japanese colonial rule in Taiwan, formerly Formosa. There ensued a civil war on the Chinese mainland between the Communist Party of Mao Zedong and the Kuomintang followers under Chiang K'aishek. It was at this time that CPC was founded. When Mao finally won the civil war in 1949, 1.5 million people who supported the Kuomintang left for Taiwan and joined the six million Taiwanese already resident there. CPC also moved from Shanghai to Taiwan at this time and was charged with the important task of developing oil refining facilities, supplying energy, and promoting the petrochemical industry there.

Between 1953 and 1990, Taiwan's economy was transformed from a predominantly agricultural one to an economy based on manufacturing and service industry. The government was accused of being authoritarian and unrepresentative--martial law was in existence until 1987--but the economic development brought about was unparalleled in this part of the Far East. CPC was called upon to provide the high quality petroleum products and petrochemical feedstocks essential for Taiwan's developing industries, and its achievements undoubtedly played an important role in the economic transformation that has been brought about in the country; CPC grew to become the nation's largest enterprise. Over the years CPC's principal activities expanded to include exploration and drilling for, and production of, petroleum; the refining of crude oil and the manufacturing of petrochemicals; the storage, transportation, and marketing of petroleum products and petrochemicals; and the operation of pipelines for the provision of crude oil, natural gas, and petroleum products.

From the outset, the Taiwanese authorities played a particularly active role in the economy of the country. In 1952 the first planners of Taiwan's economic future determined that 56.6 percent of total industrial production should be in state hands. Centralized economic plans were developed and administered by the government and a substantial portion of Taiwan's heavy industry and financial institutions were assigned to the public sector. Despite the fact that the private sector invested heavily in developing industries, so much so that it gradually took over 90 percent of industry--state ownership of industrial output fell from 46.2 percent in 1952 to ten percent by 1989--key industries were to remain firmly under government control. Enterprises such as CPC, which were regarded as high risk, strategically important, liable to be monopolized, or vital to the economic development of the country were to remain part of the public sector and thus all their operations would be supervised by the Ministry of Economic Affairs.

Taiwan's energy resources were scarce in quantity, relatively inaccessible, and insufficient for domestic needs. Minor supplies of natural gas and petroleum existed, but on a limited scale, and it was CPC's task to utilize Taiwan's steadily depleting natural energy resources to their best effect and to produce an adequate supply of energy for the future.

In 1958, under central government directions, the foundations for Taiwan's now-booming petrochemical industry were laid. The petrochemical industry was to supply the basic and intermediate petrochemical raw materials to the hundreds of small industries which were to prove so vital to Taiwan's economic development. The Kaohsiung Refinery, directly owned by CPC, established plants in 1958 for the production of sulfur and sulfuric acid and these were followed by the production of benzene, toluene, and xylene in 1960 in Chiayi. From these, such products as naphtha and rubber solvents were made in order to supply the needs of the domestic market. Kaohsiung, in the south of Taiwan, was the island's largest port and principal industrial complex. It subsequently became the site of many large chemical and plastics firms and it was where CPC's major facilities were situated. It was in Kaohsiung that the first naphtha cracking plant was put into operation in 1968 as a product center for the southern petrochemical complexes.

Oil Crises in the 1970s

Petroleum, as the most popular form of energy in Taiwan, was always regarded as essential to national defense as well as to the everyday needs of industry and ordinary people. The Taiwan petroleum exploration division and the offshore petroleum exploration division were formed by CPC to explore petroleum resources in Taiwan both onshore and offshore. However, in light of the scarcity of crude oil and gas in and around the island, exploration activities were extended by CPC in 1970 to Southeast Asia, the Middle East, Africa, Australia, and South America under joint ventures with international companies and host countries. In Indonesia, CPC--under the name of OPIC (Overseas Petroleum and Investment Corporation)--worked jointly with Conoco; in the Warim Concession and in the Ecuador Amazon region, oil has been found under a joint venture with the company Conoco, Ecuador Ltd., and four other companies. Throughout the 1970s Taiwan grew ever more reliant on imported oil, in spite of the first oil price shock. The world energy crisis at this time, in conjunction with the worldwide economic recession which followed, proved to be the most testing time ever for CPC. It became essential to emphasize energy conservation and to try to diversify foreign sources of oil and other fuels. Oil had become important both as a source of energy and as a component of the country's import bill. Having leapt from 2.6 percent to 10.3 percent of the total import value between 1973 and 1979, oil imports made a further leap between 1979 and 1980 from 14.7 percent to 20.6 percent and stayed at these levels for four years. These changes were largely out of the control of the government, however, and the second oil price shock, followed by the difficult years of the early 1980s recession, gave new impetus to reduce the dependence of Taiwan on important hydrocarbons.

At the end of 1983, the Council for Economic Planning and Development approved CPC's $85 million proposal to increase oil exploration in Taiwan and abroad. CPC therefore put forward plans to sink land and offshore wells in search of both oil and geothermal resources&mdash+ans which were to be carried out with increasing vigor and expertise in subsequent years. The most important figure in CPC's history at the time, Chen Yaosheng, a chemist, was a director for CPC in the Chinese Government Procurement and Service Mission in New York in the early 1970s before being made vice president of CPC in 1978 and president in 1982. He was a key figure in leading CPC through the most difficult years since its inception--he was made chairman of the board in 1985.

It was under Chen's leadership that CPC undertook one of its most important projects to date. Taiwan's natural gas supply had been diminishing and lagging behind the rapidly increasing demand. According to CPC estimates, known reserves would be exhausted before the end of the century. The decision to import liquefied natural gas (LNG) was taken in 1979, and CPC conducted feasibility studies together with other government organizations to establish the economic effects of importing LNG. These endorsed the decision and CPC invested $800 million in the construction of an LNG receiving terminal on the coast of Yung An Hsiang in the Kaohsiung area, on reclaimed land. The terminal's purpose was to handle the transportation inland--via a 350-kilometer gas trunkline from Pingtung in the south to Keelung in the north of the island--of imported LNG for long-term household, industrial, and business consumption. It also aimed to extend the life of Taiwan's own natural gas deposits. In 1986 CPC signed an agreement to import 1.5 million tons of liquefied natural gas per year from Badak, Indonesia. The 20-year contract was signed with Pertamina, the Indonesian government-owned petroleum company, for supply starting in 1990. Market strain was also slightly alleviated by the production of natural gas from offshore wells at the end of 1986.

As part of the government's strategy of diversifying and securing reliable sources of energy supplies of crude oil for the refineries, CPC entered into long-term contracts (LTC) with politically stable oil-producing countries with the aim of maintaining constant supplies. This was in addition to its usual practice of procuring crude oils from the Middle East through major international oil companies. In 1990 36 percent of imported oil came from Saudi Arabia and 19 percent from Kuwait. However, these countries were considered by Taiwan as likely to come under the political influence of the People's Republic of China, governed from Beijing, and therefore constituted an insecure source of supply for the Republic of China, governed from Taipei. Indeed, in 1989 Saudi Arabia announced that in accordance with the new OPEC quotas, it would be cutting shipments of crude oil to Taiwan by 40 percent. It was precisely the fear of adverse political influence on the supply of crude oil which led CPC to reduce its suppliers to those regarded as most reliable and least susceptible to political influence from Beijing.

All CPC's purchases took place on a LTC basis, never on the world spot market, and even in the event of an unanticipated additional requirement, the policy was to negotiate incremental supplies under the existing contracts rather than to turn to spot market purchases. CPC claimed that this policy proved particularly successful during the oil crisis of 1979, when major suppliers continued to deliver and even increase their deliveries to Taiwan, while other oil-buying countries suffered from cancellation of contracts and non-delivery. The Taiwanese government also effected a policy of ensuring the maintenance of a 90-day inventory for oil as a further safety net against oil shortages. The overriding concern for CPC was to meet domestic market demands, and therefore the exporting or swapping of oil products only took place when there was a surplus or when it was necessary to achieve a balance of supply or demand. In view of the steady depletion of Taiwan's few natural resources, such policies proved very important; in 1971 37 percent of the island's total energy supply was derived from indigenous resources. However, by 1983 this percentage had been reduced to only 12 percent. Authoritative sources at the time estimated that imported energy would make up 93 percent of the island's total supply by the year 2000. It was in view of this fact that CPC had to address the issue of sourcing so vigorously.

CPC's exploration activities overseas were carried out through OPIC. One of CPC's most successful overseas exploration activities was an onshore venture in Ecuador, where three oil wells of high commercial value were found. Exploration continued in the Philippines, Indonesia, Malaysia, Ecuador, Papua New Guinea, and Australia. Projects included some onshore and offshore ventures in the United States, the Etosha concession in Namibia, and the concession in Sarawak, Malaysia, where a new oil well was found.

Growing Environmental Concerns in the 1980s

One of the most pressing political issues in the 1980s in Taiwan, and one that put CPC very much in the public eye, was that of environmental pollution. Opinion polls at the time placed it as the second most important issue in the view of the populace, behind 'social order' and ahead of political democratization. Taiwan's industrial growth had always been fueled by government incentives, for example tax and customs duty rebates and low interest credits. Between 1950 and 1980 the number of factories increased from 5,623 to 62,474, the fastest rate of increase being in petroleum refining and the chemical and plastics industries. Growing public awareness of the dangers of environmental pollution resulted in demonstrations and protests of an unexpectedly vociferous nature. Demonstrators managed to halt work on the fifth naphtha cracking plant in Kaohsiung, to replace the aging first and second plants, in protest at the pollution it would cause. On this occasion CPC responded by offering to build a swimming pool and hospital nearby in compensation.

More effective and direct action was demanded, and CPC responded in 1989 by setting up an environmental protection division to conduct the planning and promotion of environmental protection programs. Issues that were addressed included the reduction of pollutants from plants, mines, and stations; improved treatment of refinery waste water before discharge; efforts to reduce air pollution and increase noise control; safer disposal of solid waste; and the recovery of escaped oil vapor during transportation. CPC planned to install automatic detection and alarm systems to warn against dangerous emission of inflammable and toxic gases. CPC also paid attention to the landscaping of lands surrounding the refineries in order to minimize the negative impact of huge industrial complexes on the scenery of their locations. For every new plant CPC produced an 'environmental impact statement' assessing possible adverse effects. No project could go ahead without the government's subsequent approval of these assessments. Another important aim was the provision of low sulfur fuel and unleaded and low-leaded petrol for a far more environmentally conscious public than ever before.

Competition Arises in the 1990s

The 1990s introduced many new challenges to CPC. The Republic of China faced pressure to evolve due to trends towards economic liberalization and even greater exposure to world market forces. In 1989 Taiwan entered a democratic era, bringing about drastic changes in social and political structures. Private companies were allowed to sell petroleum products, and plans to privatize state-owned monopolies and open markets to competition commenced.

In 1996 the Fair Trading Law was implemented, and not only was the domestic petroleum market opened further, but a five-year privatization program was adopted, intended to privatize CPC and other government-owned companies by June 2001.

Anticipating increasing local and foreign competition, CPC endeavored to maintain its market share and leadership position by seeking joint ventures and acquisitions. The company also worked to diversify and globalize its operations. In exploration and production, CPC continued its efforts to discover producing oil fields. In 1990 CPC acquired a stake in the Sanga Sanga Field in Indonesia, and by the end of 1998 the field had 380 oil-producing wells. At the end of 1997 CPC and Conoco, through a joint venture, began to explore offshore areas of Taiwan for petroleum resources. By May 1998 four wells had been drilled, though none appeared promising. Petroleum exploration continued in such countries as Ecuador, the United States, Venezuela, Kazakhstan, and the United Arab Emirates.

In 1998 CPC operated three refineries--the Kaohsiung Refinery, Taoyuan Refinery, and Talin Refinery&mdash well as three naphtha crackers. The company's crude oil purchases came primarily from the Middle East--nearly 62 percent in 1998--though CPC aimed to diversify its purchases and buy from different countries. One of CPC's more successful businesses was its petroleum product sales, particularly motor gasoline, diesel, and fuel oil, which in combination accounted for 70 percent of CPC's total sales. CPC owned and operated nearly 600 gasoline service stations in Taiwan, and the company also supplied oil to more than 1,000 privately operated service stations. Plans to modernize more than 100 existing stations and build 29 new facilities, costing NT$4.6 billion, were carried out in 1998. CPC also had significant boat refueling and aviation refueling businesses, including 36 fishing boat refueling locations along Taiwan's coast.

Demand for natural gas continued to grow in the 1990s, and 1998 natural gas sales increased 27 percent over 1997 sales. Anticipating further demand, CPC began expanding its LNG receiving terminal immediately after the terminal project was completed in 1990. The expansion project, which included extending gas trunklines and enlarging storage facilities, cost NT$19 billion and increased the handling capacity to 4.5 million tons a year by the end of 1996, up from 1.5 million tons in 1990. Another expansion project, scheduled to be completed in June 2000 and estimated to cost NT$27.8 billion, was underway in the late 1990s and included increasing the terminal's receiving capacity and installing a 226-km undersea pipeline network from Yungan to Tunghsiao. The project was designed to boost the terminal's handling capacity to 7.87 million tons of natural gas a year.

Activity for CPC increased in 1999 as the company began making preparations for privatization. Though CPC was mandated to begin privatization in 1999 and complete the process by June 2001, CPC was behind schedule, and Taiwan authorities were considering developing a new timeline. With about 19,000 employees and strong labor unions opposed to privatization, CPC faced slow going. In addition, competition in the domestic petroleum market was growing more intense, and with the full opening of the gasoline market scheduled to take place by 2002, there was no slackening expected. CPC's most formidable rival was Formosa Plastics Group (FPG), the largest manufacturer of petrochemicals in Taiwan. FPG began running an oil refinery in 1999 with plans to start mass production at the complex in early 2000.

In October 1999 CPC established its own petrochemical division with the hope of competing more effectively against FPG and announced plans to increase production of petrochemical products and to lobby for construction of a commercial harbor for shipping petrochemicals. CPC also prepared to battle FPG and its subsidiary, Formosa Petrochemical Co., in the gasoline category. In mid-1999 CPC began selling high-octane (98-octane) gasoline, promoted as being more energy efficient and better for the environment, at more than 300 service stations. Numerous stations also began to offer electronic payment services, and CPC planned to provide full e-commerce services at all its stations by the end of 1999. These efforts were made to impede the aggressive efforts of FPG to take market share from CPC. In mid-1999 FPG announced it would sell its products through the National Petroleum Co., Ltd.'s privately run chain of service stations, the second-largest chain in Taiwan after CPC.

On September 21, 1999, Taiwan suffered from the largest earthquake in its history, which resulted in the deaths of more than 2,100 citizens. CPC's operations were spared for the most part, but the Taoyuan Refinery was shut down due to lack of electrical power. A week later, however, the refinery was running at half capacity and would reach full capacity soon thereafter. Eight of CPC's service stations were also closed because of infrastructure damage. Also in September of that year CPC announced a joint venture project in the Philippines to build an oil refinery. A month later, however, CPC disclosed that it was reviewing the estimated US$600 million project. The announcement came amid increasing conflicts between Taiwan and the Philippines, primarily over air rights.

With the loss of its monopoly and complete governmental support, CPC looked to diversification and globalization of operations as it headed into the new millennium. To compete effectively in an open marketplace, CPC continued to reduce operating and production costs and to streamline operations. The company planned to look for acquisition and joint merger opportunities to boost supplies of petroleum products to Taiwan.

Principal Subsidiaries: Overseas Petroleum and Investment Corporation; China Petrochemical Development Corporation (14.1%); China American Petrochemical Co. Ltd.(25%); CPC-Shell Lubricant Co. Ltd. (49%); Dai Hai Petrol Corporation (35%; Vietnam); Qatar Fuel Additives Corp. (20%; Qatar).

Principal Competitors: Formosa Plastics Group.

Chronology

• Key Dates:

• 1946: Chinese Petroleum Corporation (CPC) forms in Shanghai.
• 1949: Company headquarters moves to Taiwan.
• 1958: CPC expands into petrochemical industry.
• 1968: First naphtha cracking plant put into operation.
• 1979: Company begins importing liquefied natural gas.
• 1989: CPC establishes an environmental protection division.
• 1990: Natural gas receiving terminal is completed.
• 1996: CPC begins privatization process.