Big oil pumps profits

Boosted by a new oil pricing system that links domestic fuel prices more closely with international prices this year, China's two major oil companies are expected to see much better business performances in the first half compared with the same period last year, said analysts.

The two oil companies, PetroChina and Sinopec, will see "robust growth" in profits when they publish their interim reports later this month, said Lin Boqiang, director of the China Center for Energy Economics Research at Xiamen University.

The more market-oriented domestic fuel price could help oil companies post better profits in the first six months, he said. "As domestic gasoline and diesel prices are now more linked with international rates, PetroChina and Sinopec can pass on rising costs more to end users," he said.

The big gap between State-capped fuel prices and global crude prices has long been a headache for domestic oil companies. In the first half of last year when global crude price was high, domestic refiners incurred great losses because they were not allowed pass the costs on to consumers.

For instance, Sinopec, which is Asia's largest refiner, said it lost 46 billion yuan in the first half of 2008 when global crude price was high. The company made a profit of 5.7 billion yuan in the first half of 2007.

But in line with this year's oil pricing system reform, Sinopec would see more than 100 percent growth in profits in the first half, and the company's refining business would also see solid growth in profits, said Liu Gu, an analyst with Guotai Jun'an Securities in Shenzhen.

PetroChina, the country's biggest oil and gas producer, but with less refining business than Sinopec domestically, also said in an earlier statement that its refining profit "increased to a record" in the first half after the government revised the fuel pricing system.

PetroChina's refining subsidiaries achieved a "remarkable performance" in the first half even as processing volumes and operating rates were cut by the financial crisis, said the statement.

China adopted a new oil pricing system this year under which domestic oil prices would be adjusted when the moving average of a basket of international crude (Brent, Dubai and Cinta) changes more than 4 percent over a period of 22 working days.

Under this mechanism China raised domestic oil prices three times and cut the price twice this year. The latest adjustment was on July 29, when the government cut gasoline and diesel prices by 220 yuan per ton, or 3 percent, to reflect the drop in international crude prices.

However, some industry insiders said that the mechanism should be further improved because the current system does not reflect the change in global crude prices very well.

"I feel that the fuel price is still very high, and I don't think it reflects the change in global crude prices well," said a Beijing taxi driver surnamed Li yesterday.

(China Daily 08/07/2009 page10)