China Petroleum and Chemical Corporation (Sinopec), Asia's top oil refiner, posted a better-than-expected 9 percent increase in net profit for the first half of the year as oil exploration and finished product price rises offset huge refining losses.

 

In the first half Sinopec earned 21.4 billion yuan (US$2.675 billion) against 19.65 billion yuan (US$2.46 billion) a year earlier.

 

Its turnover jumped 33.8 percent year-on-year to 493.1 billion yuan (US$61.6 billion).

 

Oil exploration and production contributed greatly to its bottom line, as global oil prices clung to a high of US$70 per barrel in the first half.

 

Sinopec produced 3.07 percent more oil to 141 million barrels in the first six months, generating an operating profit of 33.3 billion yuan (US$4.16 billion), up 87 percent year-on-year.

 

This also helped offset a windfall tax of 3.7 billion yuan (US$462.5 million) paid in the first half.

 

Sinopec plans to produce more than 148 million barrels of crude oil in the second half and expects to pay as much as 10 billion yuan (US$1.3 billion) in "special revenue tax" for the whole year.

 

Beijing imposed the "special revenue tax" on oil explorers in March to subsidize refiners and other affected sectors.

 

"Apparently the company is going upstream to cushion its risks in the refinery business," said Lai Wai-shing, an independent analyst in Hong Kong.

 

Two increases in the price of refined oil products by the mainland government relieved the company "a little bit," as the products' retail prices surged 15 percent to 750 yuan (US$93.75) a ton.

 

Analysts expected at least one more price rise for refined products in the second half, which could further help the company.

 

Its marketing and distribution business also did well, with operating profit up 62 percent to 10.76 billion yuan (US$1.345 billion).

 

But "the worst time isn't over" for China's second-largest oil company if its refining losses cannot be rectified in the future, analysts said.

 

The company continued to make losses on every barrel of oil it processed from January to June as the government-imposed ceiling on retail prices of refined oil products such as petrol and diesel were still far below crude oil prices.

 

Sinopec processed 71.68 million tons of oil in the first half generating a pre-tax loss of 16.6 billion yuan (US$2.1 billion) compared to 1.3 billion (US$162.5 million) a year ago.

 

"We need to raise the refined product prices to US$3 (per barrel) higher than the crude before we can manage a profit," said Chairman Chen Tonghai.

 

Sinopec also said it is keen to develop a natural gas project in Puguang, Southwest China's Sichuan Province, in the next few years.

 

"We will invest 60 billion yuan (US$7.5 billion) to 65 billion yuan (US$8.125 billion) in the project from the second half until early 2009," Chen said.

 

With a gas reserve of 320 billion cubic meters, Chen said that gas would be provided mainly to East China.

 

Sinopec also announced yesterday that its parent company Sinopec Group had completed a buyback of shares from three major stakeholders to pave the way for further A-share reform.

 

Sinopec Group has agreed to buy back a combined 4.78 billion shares from State debt-clearing agencies Cinda and Orient, as well as the China Development Bank, for 12.4 billion yuan (US$1.55 billion), Chen said.

 

The deal, boosting the parent firm's stake from 55 percent to more than 70 percent, would simplify Sinopec's shareholding structure and clear bundles for floating State-held shares.

 

Sinopec is the last big State-owned company that joined the massive reform aiming to free up more than US$250 billion of non-tradable State shares and running for nearly a year.

 

Chen declined to reveal other details of the share reform plan, but reports said yesterday Sinopec promised stockholders would get 2.8 bonus shares for every 10 tradable shares held.

 

Market players are closely watching the process, as the deal would mark the completion of the A-share reform.

 

(China Daily August 29, 2006)