The last quarter of 2014 saw decidedly mixed results for two of China’s largest state-owned energy firms. PetroChina posted a 21% gain, while Sinopec took a 35% loss.
PetroChina, the country's largest oil and gas producer, reported a 21 percent rise in net profit for the fourth quarter. The state company generated a net profit of 34.3 billion yuan ($5.5 billion) for the quarter, up from 28.4 billion yuan in the same year-ago period. The surge was partly due to the government in July 2013 boosting the price local distributors pay for natural gas for non-residential use by 15 percent, the first government mandated price increase in three years, as part of efforts to boost domestic natural gas production as well as imports, which eased the billions in losses PetroChina incurred from selling imported natural gas at steep discounts. The firm stated that it expected the price increases to narrow its natural gas import losses and boost short-term profitability.
In a round of belt tightening, PetroChina announced that it will cut capital expenditure by another 7 percent in 2014 by adjusting the pace of project construction to better concentrate on investment return. JPMorgan analysts said, “We see good natural gas profitability from further price hikes and Chinese natural gas demand at low double-digit growth, which partly offsets a higher import burden.” In 2013 PetroChina’s capital spending fell 9.6 percent, the first such decline since the company’s 2000 debut on the Hong Kong and New York stock exchanges.
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For the future, PetroChina is setting its sights squarely on a Middle East oil rich nation liberated a decade ago by the U.S. – Iraq.
PetroChina was the first foreign firm to sign an oil service deal in Iraq after U.S.-led forces toppled Saddam Hussein and already partners with BP at Rumaila, Iraq's largest producer, and operates the Halfaya and al-Ahdab fields. In November 2013 PetroChina's purchased a 25 percent share in Exxon Mobil's West Qurna-1 oilfield project, which saw PetroChina overtake Russia's Lukoil to become the biggest single foreign investor in Iraqi oil. China is now seeking to buy 850,000 barrels per day of Iraqi oil, 30 percent of Iraq’s estimated 2014 exports.
But PetroChina's otherwise roseate future is somewhat clouded by a problem endemic among many massive energy firms – corruption.
PetroChina and its parent firm, China National Petroleum Corp. (CNPC) are ensnared in one of the biggest government corruption investigations into the Chinese state sector in years, launched in late 2013 as part of a nationwide anti-corruption campaign led by Chinese President Xi Jinping. Unsettling PetroChina investors, the probe is still expanding and there are no signs it will end anytime soon. As a result of the investigations, PetroChina’s Hong Kong shares have fallen nearly 15 per cent since the probe began.
Five former top executives from PetroChina and CNPC are being investigated for “serious discipline violations,” which in the elliptical language used in the Chinese state media usually serves as shorthand to describe graft. The quintet includes Jiang Jiemin, chairman of both entities, who was a vocal proponent of expansion and of what he called the national and social responsibilities of state-owned enterprises.
Jiang was head of PetroChina and CNPC from late 2006 until early last year and under his leadership, PetroChina’s capital expenditure almost doubled in the five years to 2012.
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Sinopec’s 35 percent drop in fourth quarter net profits, bigger than expected, has more prosaic causes, as its refining division improved profitability was offset by a dip in upstream earnings.
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In a round of cost paring paralleling efforts at PetroChina, Sinopec intends to sell up to 30 percent of its marketing and distribution business and in 2014 cut capital expenditure to $25.96 billion, in order to focus on profitability.
A mixed picture – but China, as the world’s second-largest consumer of oil and fourth largest producer, will doubtless see both more market corrections as well as increased government scrutiny to ensure that governmental energy policy remains on track.
By John Daly of Oilprice.com
