Mainland oil majors to post weaker profits

CNOOC, the mainland's dominant offshore oil and gas producer, is expected to report a small decline in first-half net profit tomorrow, as a drop in output and higher production costs offset the benefits of higher prices and lower tax.

The company, the Hong Kong-listed unit of China National Offshore Oil Corp, may post a 4.2 per cent decline in net profit to 37.67 billion yuan (HK$46 billion) for the first six months, compared with 39.34 billion yuan in the same period last year, according to the average estimate of four brokerage analysts.

According to research reports by Barclays, Citigroup and Sanford Bernstein, CNOOC's oil and gas production is estimated to have fallen 5-6 per cent in the first half, mainly due to a shutdown of the Penglai 19-3 oilfield last September following major oil spills. It is not known when it will resume.

In April, CNOOC was ordered to pay 480 million yuan and its US-based partner ConocoPhillips 1.2 billion yuan to compensate for the ecological damage from the spills and to improve environment protection. CNOOC submitted a revised production and development proposal and environmental impact assessment of the field to the central government in January, but a minor oil spill in June may have delayed a restart.

In January, the company announced a target to produce an oil and gas equivalent of 330 million to 340 million barrels of oil this year, which is flat to 2.5 per cent higher than last year's output. Management at the time underscored its goal to increase output an average of 6 per cent to 10 per cent a year between last year and 2015.

It has so far not changed this target, despite having made a US$15.1 billion takeover offer for Canada-based international oil and gas producer Nexen last month. If completed that deal would boost CNOOC's output next year by about 20 per cent and its proven reserves by 30 per cent.

Besides an output decline, CNOOC faces the challenge of rising production costs, which Citigroup analyst Graham Cunningham said was partly driven by a 3.4 per cent appreciation of the yuan, in which CNOOC's expenses were denominated, against the US dollar, in which its revenues were calculated.

On the bright side, CNOOC has benefited from Beijing's increase in the threshold for the oil production special levy to US$55 a barrel from US$40 a barrel last November. This gave mainland oil firms back an extra US$6 a barrel, said Mirae Asset Securities head of energy research Gordon Kwan. CNOOC also gained from higher crude oil prices. The benchmark Brent oil price averaged US$114 a barrel in the year's first-half, up 2 per cent from a year ago, Kwan said.

Sanford Bernstein analysts expect onshore oil and gas majors PetroChina to report on Thursday a 2.2 per cent fall in first-half net profit to 64.54 billion yuan; and China Petroleum and Chemical (Sinopec) on Sunday to post a 36.9 per cent profit fall to 25.96 billion yuan.

This is largely because Beijing lifted domestic retail fuel prices by less than the international increases in crude oil prices.