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Eric Ng

China Petroleum & Chemical (Sinopec) - China's second-largest oil and petrochemical company - hopes to take an 8 to 10 per cent stake in the PetroChina-led west-east natural gas pipeline project, according to chairman Li Yizhong.

Speaking to reporters after the release of Sinopec's interim results yesterday, Mr Li said the company was in talks with rival PetroChina - China's No 1 oil company - about taking an interest in the project.

The project involves the construction of a 4,200-kilometre gas delivery trunk line - longer than the Great Wall.

The project, estimated to cost as much as 40 billion yuan (about HK$37.8 billion), would pump up to 20 billion cubic metres of natural gas a year from Xinjiang in Western China to Shanghai by 2005.

Mr Li said it was impossible to estimate Sinopec's investment, as details of the project had not been finalised.

Analysts said Sinopec's interest in the project was driven partly by its need to connect its gas reserves in the isolated Tarim Basin in western China with markets in eastern China.

The Tarim Basin reserves are held by Sinopec New Star Petroleum, which Sinopec recently acquired from its parent.

Sinopec New Star's reserves are mostly in the Tarim Basin, where PetroChina also has large reserves.

Analysts expect Sinopec New Star to take advantage of PetroChina's new pipeline through the western provinces to help it deliver its reserves to the markets on the east.

PetroChina has signed memorandums of understanding with four foreign consortiums on potential investment in the west-east pipeline project, and is expected to announce the winning consortium in the next two months.

Meanwhile, Mr Li was confident the company would be able to achieve its target net profit of 18.02 billion yuan this year under mainland accounting standards - as indicated in its A-share listing prospectus, 11.5 per cent higher than last year's 16.15 billion yuan.

This was despite only 8.1 billion yuan of net profit being booked in the first half under the same standards.

He expected Sinopec's oil exploration and production division - which contributed 72.5 per cent of total first-half profit - to perform better in the second half mainly because of inclusion of contribution from newly-acquired New Star.

He also expected a turnaround of the embattled marketing and distribution division whose first-half profit dived 68.8 per cent to one billion yuan.

The sector was hurt by a price distortion which saw Singapore's petrol price - at which Sinopec's product prices are benchmarked - falling below that of crude oil from June to August.

'This is something out of our control, but we are determined to cut costs and reduce inventory levels,' Mr Li said.

He said Sinopec has reached a non-contractual mutual understanding with PetroChina, to boost mainland refining margins and balance refined products' demand and supply.

Sinopec and PetroChina have agreed to reduce crude oil refining throughput for an undisclosed amount, cut their combined refined oil inventory from 11 million tonnes to nine million tonnes and boost production of diesel. Sinopec has also agreed to buy more crude oil from PetroChina and reduce imports, for its refining needs.

After boosting the number of petrol stations by 35.1 per cent in the first half from the end of last year, Mr Li said increases in the second half would be 'limited'.

Sinopec and PetroChina have been expanding their retail networks by buying or setting up petrol stations, and have met criticism that many stations have opened without all the necessary approval procedures.



Stake sought in west-east link