Sinopec struggles to post profit in face of price caps
China Petroleum & Chemical (Sinopec), the nation's second-largest oil and gas producer, posted a 3.21 per cent rise in first-half output, as its refining operations struggled to make a profit amid fuel price controls and high oil prices.
The company recorded oil and gas output of 167.13 million barrels of oil equivalent (boe) in the first six months, up from 161.92 million boe in the same period last year.
The growth rate was slower than the 5.04 per cent recorded in last year's first half, but ahead of the 1.07 per cent in the corresponding period in 2005 and 2.48 per cent in 2004.
Oil production grew 2.12 per cent to 143.88 million barrels, while natural gas output surged 10.58 per cent to 139.55 billion cubic feet.
Sinopec's total output growth rate was similar to larger rival PetroChina's 3.66 per cent announced on Monday.
The figures underline the top two oil firms' heavy reliance on natural gas as a growth driver, with oil reserves on the decline as their oilfields mature.
The trend is expected to continue for the next few years since the newly discovered giant Nanpu oilfield in the northeast near Tianjin will not produce significant output until 2010. Sinopec also needs a few years to develop its recent major oil find in Xinjiang Autonomous Region in the northwest.
Meanwhile, Sinopec and PetroChina have announced huge gas discoveries in Sichuan province, which will fuel strong gas output growth.
Sinopec, the world's third-largest crude oil refiner by capacity, said it processed 76.25 million tonnes of oil in the first half, 6.38 per cent more than in the same period last year.
The growth rate accelerated from 5.28 per cent in the first half last year and 4.77 per cent in the same period of 2005, reflecting rising demand despite higher fuel prices as more middle-class consumers become car owners.
Rising processing volume meant that Sinopec lost money as refining margins slipped into negative territory last month on surging crude oil prices.
Meanwhile, refined fuel prices remained unchanged since the previous increase in May last year.
PetroChina and Sinopec have urged Beijing to raise fuel prices to stem losses, but analysts said rising inflation in the past few months may discourage Beijing from lifting prices.
'We expect Sinopec's second-quarter earnings to show a 19 per cent quarter-to-quarter decline as the refining division goes from a strong first-quarter profit to near break-even,' Citigroup analyst Graham Cunningham wrote in a research note.
'We are more concerned about the deteriorating second-half earnings outlook as the refining division heads towards losses starting in the third quarter.'
On the distribution side, Sinopec's more profitable retail operation grew 3.66 per cent in the first half, slowing from 17 per cent to 40 per cent in the same periods between 2004 and last year.
Growth in the less profitable wholesale business was 18.91 per cent in the first half, compared with zero to a 14 per cent decline in the same periods between 2004 and last year.
A Sinopec official said the company had no plans to change its long-standing strategy to enhance profitability by boosting retail volumes.
