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Sinopec budgets 700b yuan to expand output

China Petroleum & Chemical (Sinopec), the world's second largest oil refiner, has budgeted around 700 billion yuan (HK$830 billion) in the next five years to expand its petroleum fuel and chemicals output to meet rising demand.

The firm continues to face dual challenges from domestic fuel price controls that have weakened its refining profit, and from difficulties in finding sufficient new oil and gas reserves on the mainland.

This means the nation's second largest oil and gas producer is increasingly under pressure to acquire oil and gas resources overseas to ensure long-term growth.

The company is aiming for crude oil output of between 43.5 million and 45 million tonnes in 2015, down from 46.2 million tonnes last year, president Wang Tianpu said.

Gas output is targeted to reach 20 to 24 billion cubic metres in 2015, representing average annual growth of 9.9 per cent to 13.9 per cent from last year's 12.5 bcm.

Sinopec's 2015 total output target for both oil and gas represents an average annual growth of 1.2 per cent to 2.8 per cent from last year, down from the 4.1 per cent average rate achieved between 2006 and last year.

It said refined fuel sales were targeted to rise to 170 million tonnes in 2015, from 140 million tonnes last year, and chemical sales were projected to rise to 55 million to 60 million tonnes in 2015, from 43.5 million tonnes last year.

On top of the 124 billion yuan budgeted for this year, Wang said 140 billion to 150 billion yuan a year may be required between 2012 and 2015, to meet five-year production goals.

The spending would be adjusted based on prevailing market conditions and Sinopec would aim to meet its targets without raising its debt ratio, he said.

In a research note, American brokerage Sanford Bernstein's senior analyst Neil Beveridge said that newly proven oil and gas reserves added by Sinopec last year amounted to only 80 per cent of its output. This saw its proved reserves fall to 3.96 billion barrels of oil equivalent (boe) at the end of 2010 from 4.04 billion boe a year earlier and 4.12 billion boe at the end of 2008.

He estimated that Sinopec's new reserves cost US$24.5 a barrel, higher than its peers. 'Given the maturity of [its] Shengli oilfield [in Shandong], acquisitions and gas will be the only way to grow production,' he wrote.

He said Sinopec had not shown much financial discipline in acquisitions, referring to the high prices that its parent China Petrochemical Corp paid for assets in South America and Africa.

Wang said that when buying its parent's assets, management would seek to balance the interest of the parent and Sinopec, and try to ensure 'relatively good returns' and controllable political risks for Sinopec.

Chief financial officer Wang Xinhua said state fuel price controls meant that its refining profit margin was further eroded in this year's first quarter from the fourth quarter after oil prices topped US$100 a barrel.

Wang expected this year's average international oil price to exceed US$100 a barrel, and Beveridge said he estimated that the refining operations were running at a loss.

Sinopec's share price slid 2 per cent yesterday to HK$7.69, after it unveiled the five-year plan and posted net profit of 71.8 billion yuan, slightly lower than the 72.4 billion yuan estimated by analysts.

Analysts said fourth-quarter profit was lower than expected due to higher than anticipated impairment losses on assets like inefficient fertiliser plants.

Energy targets

Sinopec is aiming for crude oil output of between 43.5 million and 45 million tonnes in 2015

By then refined fuel sales are projected to rise from 140 million tonnes to: 170m

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