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China's oil companies see profits and output rise on price reforms

China's economy might have wobbled during the first half of the year, but the country's big three national oil companies have thrived, seeing their profits and output rise on the back of domestic fuel price reforms, as well as a series of acquisitions abroad

Sinopec, China's largest crude refiner, was the biggest winner of the fuel price reforms. In March this year, China's powerful National Development and Reform Commission (NDRC) changed the way refined oil product prices in China are set, shortening the period between price adjustments from 22 working days to 10. This allowed Sinopec and other refiners to more quickly pass on the cost of higher international crude prices.

Sinopec credited the change for lifting its refining business out of the red and back into profit. The company's refining unit recorded a small 213 million yuan ($35m) profit in the first half of the year, a significant improvement on the 18.5 billion yuan loss seen in the same period the previous year. Refining margins rose 731% from $0.55 a barrel to $4.57/b, the company said.

Overall, Sinopec's net earnings in the first half of the year were up 23.6% to 30.3bn yuan, with positive operating measures across the board. Oil and gas production was up from 1.17m barrels of oil equivalent a day (boe/d), driven by higher natural gas output at its overseas assets. Refinery throughput rose 5.2% from 109.76m tonnes to 115.44m tonnes as Sinopec sought to keep up with growing Chinese fuel demand, though China's slowing economy meant that diesel demand growth had slowed, the company said.

PetroChina, the largest of China's big three state oil companies, also benefited from the oil price product reforms, though it still saw losses in its refining business. The company lost 7.77bn yuan from its refining operations in the first half of 2013, but that is half the 15.5bn yuan loss over the same period last year. Overall profits for the first half of the year rose 5.6% from 62bn yuan in 2012 to 65.5bn yuan.

PetroChina continues to see losses in refining at least partly, analysts say, because they have not managed the business as well as Sinopec. The company has a smaller, older and less sophisticated refining infrastructure than its domestic rival and faces higher logistical costs getting its fuel from refineries to market.

In spite of higher domestic fuel prices, some analysts have called for PetroChina to sell some of its less profitable refineries. The company has said it is shifting its focus to maximising profitability over scale. "PetroChina will shift its focus to the quality of growth and profitability rather than just scale expansion," company president Wang Dongjin said in press conference announcing the results.

More important for PetroChina was the NDRC's reforms to domestic natural gas prices. In July a new domestic natural gas pricing mechanism for non-residential consumers went into effect, which raised average city-gate prices by 15% to 1.95 yuan, or around $8.90 per million British thermal units. That reform came in too late to be fully seen in the company's first half results, but promises to boost the company's bottom line in the future.

PetroChina is the country's largest natural gas producer, accounting for about two-thirds of total output, and importer and thus the biggest beneficiary of the reforms. The company's natural gas business lost 41.9bn yuan last year selling imported pipeline and liquefied natural gas (LNG) bought abroad at international prices and sold at the lower domestic rate. That could rise to 45bn yuan this year on higher import volumes in spite of price reforms, according to the company's management.

Analysts at JP Morgan, though, see higher domestic prices and strong domestic production growth potentially boosting the natural gas business from a 2.1bn yuan loss last year to a small profit this year.

The company expects further price increases to come and plans to step up its domestic gas business to take advntage. Output was 1.33 trillion cubic feet (cf) in the first half of this year, 8.2% higher than last year. And that could accelerate in the second half of the year. JP Morgan analysts say that they expect "double-digit growth" this year. The price reforms have turned the natural gas business from a drag on the company into a potential driver of growth.

China National Offshore Oil Corporation (Cnooc), the smallest of the three companies, has also seen a strong first half of the year, with profits and output buoyed by its $15.1bn acquisition of Canada's Nexen.

The upstream-focused company reported a profit for the first half of the year of 34.38bn yuan, up 7.9% from the same period in 2012. Total production rose by nearly a quarter to 1.1m boe/d thanks to the volumes acquired in the Nexen takeover.

Some analysts have argued that Cnooc overpaid for Nexen, and the company's share price has struggled since the deal. The company, though, has sought to win investors over. "We bought Nexen not because we expected any immediate benefit. We are looking at its long-term potential," chief executive Li Fanrong said. Analysts at Credit Suisse say they expect production to grow by 15% a year for the next two years.

China's oil companies have outpaced western majors so far in 2013. While Chinese oil companies see profits and production rise, the majors have disappointed with rising spending failing to translate into higher production. Challenges in historic strongholds for the majors such as the North Sea and Nigeria have also dented output and profit. That has made them increasingly reliant on complex and capital-intensive megaprojects to deliver growth, but so far those projects have delivered the hope for gains. 

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