China's two oil giants should be encouraged to ward onto one another's turf, so as to prevent a possible oil cartel on the domestic market, a top State expert said.

PetroChina Company Ltd (PetroChina) and China Petroleum and Chemical Corp (Sinopec), the country's largest oil companies, should not be bound to the territory allocated by the government, said Zhou Dadi, director of the Energy Research Institute of State Development Planning Commission.

In a sweeping restructuring of the energy sector in 1998, the government divided the industry between two State-owned oil giants - China National Petroleum Corp (CNPC) and Sinopec Group.

After the reshuffle, CNPC has controlled oil assets in the north and west part of China, including Daqing oil field (the nation's largest) in Heilongjiang Province and the largest gas field in Tarim Basin, Xinjiang Uygur Autonomous Region. Sinopec Group mainly taps oil and gas reserves in southern and eastern areas, including Shengli oil field (the second largest) in Shandong Province.

PetroChina inherited most of the best assets of CNPC last year. Sinopec was formed by Sinopec Group early this year in the same manner.

However, the clear divisions may lead to problems, Zhou said.

"Monopoly arises when only one company can get access to the business in certain areas," he explained.

Under the current situation, it is easy for the two giants to forge a cartel to manipulate the domestic market, the director said.

PetroChina and Sinopec have reportedly reached an agreement not to acquire oil stations in each other's markets in a bid to establish entry barriers before the retail oil market completely opens to foreign investors in three years.

Sinopec is aiming to manufacture 70 per cent of refined oil products in southern and eastern regions over the next three years, while PetroChina is set to hold around 60 per cent of the market in the north and west part of the nation before the opening.

Territory monopoly may hinder the two companies from improving their management to sharpen competitiveness, which might get the two companies in trouble as foreign oil giants flood in after China's expected entry to the World Trade Organization (WTO), Zhou said.

At present, imported refined oil has been under a 69 per cent tariff. After WTO entry, it would reduce to 6 per cent. Non-tariff barriers like quotas on oil products would also be phased out.

To break the territory monopoly, Zhou suggests the two oil giants should invest in each other's companies, purchase each other's shares and even swap assets.

But Du Guosheng, chairman of Yanshan Petrochemical Company, the subsidiary of Sinopec listed on the Hong Kong stock market, said it is not necessary for Sinopec to swap assets with PetroChina.

"I can't see any reason for Sinopec, as an oil company covering both oil and petrochemical business, to give up its dominance in China's most prosperous regions," Du said.

Zhou added that more oil companies, even foreign firms, should be authorized to enter the oil sector, creating a competitive market.

"The State should encourage the domestic oil companies to co-operate with overseas oil giants to break down the territory monopoly," Zhou said.

Currently, only PetroChina, Sinopec and China National Offshore Oil Corp, the nation's exclusive offshore oil producer, are approved to explore and tap oil reserves across the country.