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The Chinese government is considering merging state-owned oil companies in order to increase efficiency.

China is considering mergers of its state-run oil companies in order to create national champions that could compete with the likes of ExxonMobil (ticker: XOM) and produce greater efficiencies, a topic of growing importance as oil prices remain low.

At the request of China’s leadership, government economic advisers are conducting a feasibility study of options for consolidation, officials with knowledge of the research told the Wall Street Journal. One of the potential mergers involves combining the country’s largest oil companies, China National Petroleum Corp. (CNPC) and its main domestic rival, China Petrochemical Corp. (Sinopec). Other options include merging China National Offshore Oil Corp. (CNOOC) and Sinochem Group.

The move is part of president Xi Jinping’s attempts to gear the economy towards slower rates of growth. Low commodity prices have made it increasingly important that companies operate as efficiently as possible. As the companies have grown, some inefficiencies have materialized. The potential merger seeks to minimize some of those problems.

Each of the companies traditionally handles one portion of the oil industry – CNPC focuses on E&P, Sinopec is China’s major refiner, CNOOC operates offshore – but over the past 15 years the companies have increasingly expanded into each others’ territory. “They’re increasingly fighting among each other,” said one of the officials. “That has led to lots of waste and inefficiency.”

Consolidating in order to compete abroad

The greater efficiencies created by consolidating China’s massive state-owned assets could make the new company more competitive, but only if the Chinese government takes  a new approach towards the company’s structure.

It remains to be seen whether or not the government would allow the new entity to shed some of its workforce or assets in order to maximize competiveness. “That will be the test of whether this is old state-ism … or are they really looking for better performance,” said Philip Andrews-Speed, an expert on energy governance in China at the National University of Singapore.

“We want to create a big Chinese brand to better compete overseas,” said the Chinese official. “We want our own ExxonMobil.”

PetroChina (ticker: PTR), the listed arm of CNPC, has nearly 550,000 employees world-wide, more than seven times the size of XOM. The Chinese company delivered revenue of $361 billion in 2013, compared with more than $420 billion from Exxon. Competing with the U.S. energy giant would likely require any new Chinese company to downsize considerably.

A merger between CNPC and Sinopec would create one of the world’s largest companies. The combined entity would control the majority of China’s onshore oil and gas production and would hold total assets of hundreds of billions of dollars. A CNOOC-Sinochem merger would give the offshore company more refining operations, shielding it against commodity prices to a greater extent.

No timetable has been set for a decision on whether or when to proceed with the mergers, said the officials.

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