The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Wei Gu

Sinopec’s failed bid for China Gas leaves business unfinished. The Chinese oil producer had to drop its $2.2 billion offer after failing to secure regulatory approval to buy the gas company. As a state-owned bidder, the political sensitivities were too great, and the price probably too low. Yet China’s fragmented gas industry still needs to consolidate.

Launching a hostile bid alongside ENN Energy in December was an opportunistic move. China Gas’ shares were halved in ten months, after co-founder Liu Minghui quit, dogged by embezzlement allegations from which he was subsequently cleared. Investors expected a better price. Even after Sinopec’s offer failed, China Gas’s shares closed 18 percent above the offer price on Oct. 16.

Liu’s return to the company and the emergence of other big shareholders helped fend off the hostile takeover bid. A venture set up by Liu and London-listed Fortune Oil now own 21 percent. Korea’s SK Holdings also increased its stake slightly to 10 percent at a price above Sinopec’s offer. The surprise sale by Oman Oil of its entire 13 percent China Gas stake to Beijing Enterprises Group, another state-owned company, made it clear Sinopec would have to offer more.

The deal also faces political difficulty. The bid has overtones of “guo jin min tui” – Chinese for “the state advances, while the private sector retreats”, which is a sensitive topic in China. For a state company to scoop up a private one on the cheap doesn’t look good.

Demand for natural gas has been robust despite China’s slowing economy. It is a cleaner alternative for oil, while supply remains constrained by bottlenecks. China’s nature gas operators are largely regional players, with national giants like China Resources starting to consolidate the sector. Despite the failed attempt, consolidation in this industry isn’t done yet.