The Chinese Oil Sector: Beijing's Latest Anti-Corruption Target

6 MINS READSep 10, 2013 | 10:27 GMT
(Grigoriy Sisoev/Host Photo Agency via Getty Images)
Chinese President Xi Jinping attends a G-20 heads of state meeting in St. Petersburg on Sept. 6.

Beijing's crackdown on China's premier oil giant, the China National Petroleum Corp., may bring an end to the powerful grouping that has nearly monopolized the Chinese petroleum sector. As part of the Communist Party's anti-corruption drive, the investigation into the company will help new party leaders reassert authority in an industry beset by massive inefficiencies and vested bureaucratic interests — even as they allay public concern over government malfeasance.

President Xi Jinping's probe into the oil industry has implicated many high-level officials. Former China National Petroleum Corp. Chairman Jiang Jiemin has come under investigation, as have four top executives in the company's upstream operations. According to a Sept. 9 report from Yicai, another five executives currently are under investigation, including Sun Longde, the vice president of the company's listed arm PetroChina. (China National Petroleum Corp. has denied the report.) Meanwhile, several mid-ranking officials reportedly have also come under inquiry in the past few days.

Of all the officials under investigation so far, most have ties to China's two largest oilfields, Daqing and Shengli, and to Kunlun Energy, the financial arm of the China National Petroleum Corp. that reportedly serves as the company's power base in the south. Kunlun and Shengli are some of the most important posts in the career paths of senior and mid-level China National Petroleum Corp. officials — and given the company's pre-eminence, they also facilitate the careers of most petroleum industry executives.

The Chinese Oil Sector: Beijing's Latest Anti-Corruption Target

China Oil Fields

This powerful network has conferred on industry officials considerable power not only in the oil sector but also in central government decision making. It has also enabled them to establish regional power bases. For example, Zhou Yongkang, a former member of the Politburo Standing Committee, accrued power in northeast China and in Sichuan province through his control over the country's security apparatus and the oil industry. The ongoing investigations have renewed speculation that he too will be brought down eventually.

Beyond Corruption

The probe into the China National Petroleum Corp., which began secretly in 2011, is unprecedented, but it is only the latest move in Beijing's strategy to reduce corruption and cronyism in monopolistic state-run sectors. The government hopes that punishing the petroleum elite will improve its image with the Chinese public. Hence the attention being paid to the petroleum sector: High fuel prices, unrestrained spending and disproportional benefits for oil executives have been among the public's most pronounced criticisms.

But rooting out the corrupt is not Beijing's only goal. The anti-corruption drive has proved to be a useful tool the new administration can wield to achieve its political and economic priorities, particularly as the leadership consolidates power. This tactic can be traced back to the Yan'an Rectification Movement in the 1940s, when Mao Zedong's introduction of self-criticism and organizational reshuffling established him as the ultimate leader of the Communist Party. Later, the party executed a nationwide anti-corruption crackdown as it drove out alleged capitalists and Kuomintang members in the 1950s.

More modern (and less dramatic) anti-corruption drives have seen the state reshuffle the members of various political factions. For example, former President Hu Jintao diluted the power of the "Shanghai clique" after the Chen Liangyu scandal, and reform initiatives were undertaken after the crackdown on former Railway Minister Liu Zhijun.

Undermining the 'Petroleum Clique'

The latest crackdown against the China National Petroleum Corp. could be the beginning of yet another reorientation. This time, the party desperately needs to regain control of the petroleum sector. Because oil has become so strategically important to China, oil officials have become a powerful entity within the Party. What became known as the "petroleum clique" was never a truly monolithic, unified group, but the political connections it created enabled officials from the oil industry to occupy influential government positions, through which they could shape public policy and resist Beijing's attempts for control.

Initially, the petroleum clique gained power after the successful development of Heilongjiang's Daqing oil field in the 1960s. Its development served as a model whereby China transformed into a self-sustaining petroleum producer. Oil production thus became one of the most important drivers leading the country's early process of industrialization.

The petroleum clique is thought to have been started by Yu Qiuli, China's first minister in its modern petroleum industry and a loyal, conservative supporter of Mao's planned economy. Relying on the prestige and revenue of Daqing, Yu and several of his associates were given positions in which they could make important economic decisions for the state. Serving in such prominent positions ensured that they would protect their interests.

The faction's power waned somewhat in the mid-1980s, partly because its policies ran counter to former leader Deng Xiaoping's reform initiative. After Deng's reforms, the state restructured the petroleum industry to diffuse power and separate business among three state-owned companies. However, the rapid surge in China's oil demand in the 1990s made the national oil companies even more important to Beijing.

Its renewed importance corresponded with China's political transition. Revolutionary elders were leaving politics, and they were being replaced by technocrats who dominated the political system. Many petroleum technocrats entered politics accordingly, with several of them taking high posts, including Zhou Yongkang and future Vice President Zeng Qinghong.

Currently the petroleum clique is seen as one of the most influential factions in China's political system. It has produced successive generations of leaders who used their accomplishments in the oil sector to advance their political careers. Over the past three power transitions, individuals from the petroleum industry were able to secure at least one spot on the Politburo Standing Committee and occupied several provincial or ministerial posts. As China continues to expand its oil business at home and builds business relationships internationally, the petroleum clique likewise expands its influence regionally, nationally and internationally.

This political-business alliance gave many officials experience in local politics and technological expertise, and in turn it engendered a more monolithic system, which granted petroleum companies more autonomy than any other sector. This autonomy made national oil companies even more profitable and powerful, but their corporate interests often superseded Beijing's strategic interests. For example, as many as two-thirds of their overseas projects have been unprofitable, and the state's cash from business deals often went directly to the oil executives. Meanwhile, to compensate for their overseas losses, the companies pressured Beijing for subsidies and hikes in the price of oil at the expense of domestic inflation or fuel shortages.

Currently Beijing is trying to rebalance its economy, and powerful entities such as national oil companies and other state-owned enterprises will be indispensable in this process. But their power has become a liability for the state.

A Symbolic Victory

Although the central leadership has attempted to reassert authority over these companies and undermine their power through organizational reshuffles and personnel appointments, the powerful bureaucracies within the oil industry naturally have resisted Beijing's attempts. Because the system is nearly monopolized, the interests of oil industry have made it difficult for Beijing to allocate resources and wealth the way it desires.

In this context, the weakening of the petroleum clique is a symbolic victory in Beijing's long-running struggle to stamp out factional interests and to reassert control over its own monolithic state-run system. The ultimate goal for Beijing is to make national oil companies more pliant to its authority — it does not want to make the sector more market-oriented any time soon. However, with Beijing's growing energy dependence and persistent bureaucratic interests, the mere dissolution of the petroleum clique may only open up a much more difficult process of restructuring the fundamentals of China's political and economic institutions. 

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