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Oil in China: Producers, Up; Refiners, Down (CEO, PTR)

China_3Two of China’s largest oil companies announced earnings for the first half of 2008 today. CNOOC Ltd. (NYSE:CEO), the country’s second largest producer, reported a sales increase of nearly 64% over the first half of 2007, and net profit growth of 89.3% over the same period. PetroChina (NYSE:PTR) reported an earnings drop of 38% compared with the first half of 2007.

CNOOC’s realized price reached $102.49/b for 72.9 million barrels of production in the first half of 2008. That price was nearly 75% higher than the year ago price. Natural gas prices were also up 14% from a year ago.

PetroChina, the country’s largest producer and refiner, reported production for the first half of 435 million barrels, up 3.5% from a year ago, and profits in the company’s E&P division grew 35%. But, like major integrated oil companies everywhere, refining and marketing strangled profits. PetroChina processed 425 million barrels of crude, up 4.3% from a year ago, and produced 11.2% more gasoline and 14.3% more kerosene. The operating loss from all that refining was approximately $8.6 billion. The press release attributes the loss to be the "result of the macro-economic controls of oil product price." PetroChina lost about $54 on every barrel of gasoline it produced and about $78 on every barrel of diesel fuel.

Government-mandated pump prices were raised in June, but the price rise still does not cover the actual cost of gasoline. And there really isn’t very much that PetroChina can do about it. Here’s what the company says it plans to do in the second half of the year:

"[T]he Group will place greater emphasis in building up a modernised sales and distribution system to further improve the refined products sales and distribution network. Efforts will be made to explore profitable markets. The Group will speed up the construction of the storage facilities for retail use and commercial use, thereby creating a regional hub for storage for retail use and a sales and distribution network at provincial, regional and municipal levels. Increasing efforts will be made to achieve overall balance in resources allocation, optimisation and utilisation of resources in order to ensure supply of refined products in the domestic market and realise maximum returns on the refined products."

If you think that will solve PetroChina’s problems, I have some ocean front property in Arizona you might also be interested in.

Paul Ausick

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