Motives Behind China's Oil Industry Crackdown Remain a Mystery

An analysis by Michael Lelyveld
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china-zhou-yongkang-mar-2012-600.jpg Zhou Yongkang at the National People's Congress opening session in Beijing, March 5, 2012.

After two years and dozens of corruption cases, China's motives for targeting its state-owned oil monopoly remain largely a mystery.

Since four top officials were ousted at China National Petroleum Corp. (CNPC) for "serious violations of discipline" in 2013, at least 45 middle and high-ranking executives have been investigated for corruption, state media reported last month.

The cases account for a fraction of the 71,748 officials that the Communist Party's Central Commission for Discipline Inspection (CCDI) says it punished for breaking anti- corruption rules in 2014.

The shock waves have swept through the ranks of both high and low party officials, in keeping with President Xi Jinping's pledge to pursue both "tigers" and "flies."

But the CNPC probes are believed to represent the highest concentration among the 26 state-owned enterprises (SOEs) under investigation by the CCDI in 2015 and the 14 SOEs inspected in the prior two years.

Most recently, the agency announced an investigation of CNPC General Manager Liao Yongyuan last month for "suspected serious violations of law and party discipline."

One week later, the Supreme People's Procuratorate (SPP) said former Vice General Manager Wang Yongchun had been prosecuted on charges of bribery, holding "unidentified property" and abuse of power, the official Xinhua news agency said.

Many executives prosecuted

With the latest corruption cases, five out of the nine members of CNPC's executive board have been placed under investigation, according to Xinhua.

Other top ex-officials of CNPC have also been prosecuted and expelled from the party, including Jiang Jiemin, who served as director of the State-Owned Assets Supervision and Administration Commission (SASAC), as well as CNPC chairman.

Jiang's trial on corruption charges began today before a local court in central Hubei province.

He stands accused of "taking bribes, possessing a large number of assets from unidentified sources and abusing power while performing duty for a state-owned enterprise," according to Xinhua.

Zhou Yongkang, the powerful former domestic security chief and a previous general manager of CNPC, has also been charged with "bribery, abuse of power and intentional leaking of state secrets," the SPP announced on April 3.

The sequence could be a sign that prosecutors have been targeting one top CNPC official after another, removing them almost as quickly as their disgraced predecessors can be replaced.

In the case of Liao, for example, he was named general manager in May 2013, just three months before Jiang was detained and the first four senior CNPC executives were suspended on suspicion of corruption.

Liao, a company veteran who had overseen construction of China's West-East gas pipeline project, held onto his new post for less than 20 months.

Caixin magazine cited sources as saying that Liao was accused of getting jobs for relatives at exploration subsidiaries and allowing bidding irregularities in pipeline contracts.

Analysts puzzled

While the progression of big names has played out in public, it has left analysts to puzzle over the government's motives and goals for CNPC.

A report by the official English-language China Daily offered a series of theories last month, concluding that the anti-corruption campaign "has combined with plunging crude prices to darken the outlook for China's petroleum industry."

Among the possible explanations cited is the notion that the government is clearing the decks for restructuring or reform, particularly in the more profitable and monopolized "upstream" exploration and production segments, where graft opportunities abound.

That interpretation suggests that targeted officials were removed for resisting the government's plans, a theory that might be supported by the probes aimed at a majority of CNPC's board.

But in a seeming contradiction, China Daily also cited unnamed "foreign observers" as saying that the sackings "might disrupt development strategies."

Caixin has favored the "clique" theory, arguing that prosecutors are pulling at a thread that links the imprisoned former Chongqing party secretary Bo Xilai with Zhou Yongkang and Jiang Jiemin in what the Financial Times has called the "petroleum faction."

Another interpretation is that China's oil sector has simply been so riddled with corruption that investigators are finding it wherever they look, leaving analysts to perceive patterns in retrospect.

Edward Chow, senior fellow for energy and national security at the Center for Strategic and International Studies in Washington, said that analysts are unable to explain the government's goal for CNPC because the crackdown has taken on a life of its own.

"It seems to me that the anti-corruption campaign is just out of control now," Chow said.

"Whatever the initial impulse was, they're now at the point where they want to correct the system altogether," said Chow. "But I don't hear of any reforms that would alter the underpinnings of why corruption was as pervasive as it was."

So far, the government has offered mostly tentative and conflicting ideas for reforming the petroleum monopoly, suggesting it may be opened to more competitive forces on the one hand and expanded under state auspices on the other.

Last May, CNPC's listed PetroChina subsidiary announced plans to spin off the West-East pipeline business into a new company that would be open to private investment under the government's "mixed ownership" policy.

Critics have been doubtful about the mixed ownership initiative, which falls short of privatization and leaves the state in control.

"I don't see how that changes corruption," Chow said.

In another move last August, the Ministry of Commerce cleared Xinjiang Guanghui Energy Petroleum Co. Ltd. to become the first private enterprise licensed to import crude oil for sale to refineries, Xinhua reported.

The move was seen as a small step toward promoting competition, nibbling away at the state's monopoly control.

But in February, government planners appeared to be moving in the opposite direction after The Wall Street Journal reported that advisers were studying a merger of CNPC with state-owned refining giant Sinopec to create a "new national champion" that would compete with international oil majors.

The idea met with a frosty reception.

In a blog posting for the American Enterprise Institute, Asia economist and resident scholar Derek Scissors cited the plan as evidence that President Xi "is not a market reformer."

"A market reformer acts to increase competition in a crucial sector, not reduce it," Scissors said.

Chow said a merger would also be counter-productive for fighting corruption.

"That would go in exactly the wrong direction," he said.

Days later, a Sinopec official denied knowledge of any such plan and refused further comment, Xinhua reported.

Merger gambit

The news agency quoted an "industry insider," saying the government was working on a structural reform plan for the energy sector to be released "as early as the first half of this year."

Chow believes the merger story was a trial balloon, but it may also demonstrate the lack of set goals for CNPC, the energy sector and the anti-corruption drive.

The merger gambit suggests that reforms at CNPC may be more of an afterthought of the corruption crackdown rather than part of a coordinated plan.

An alternate explanation is that the entire campaign has been used to justify a purge of officials who opposed Xi's rise to party leadership.

"They did not believe that Xi Jinping was qualified to be general secretary," said Willy Wo-Lap Lam, a senior fellow of the Washington-based Jamestown Foundation, as quoted by The Washington Post.

Philip Andrews-Speed, a China energy expert and a principal fellow at National University of Singapore's Energy Studies Institute, said that Xi had twin objectives when he came to power -- dealing with the Bo Xilai/Zhou Yongkang clique and dealing with corruption.

Those factors have combined with the ample opportunities for corruption at CNPC, thanks to its huge levels of investment and procurement, making the company a focus of investigations, said Andrews-Speed.

The connections to reform are less clear, he said in an email message.

"Some very modest reforms are being implemented, but most commentators do not see these actions as precursors of a major structural reform. I doubt that the government will break up CNPC and Sinopec into smaller companies as it wants to have large internationally competitive national oil companies," Andrews-Speed said.

In the meantime, the wave of prosecutions is stifling innovation as industry officials keep their heads down instead of pushing new reform or restructuring ideas, said Chow.

"The system is freezing because the anti-corruption campaign has gone on too long and no one knows where it's heading," he said.


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