PetroChina’s Struggles Policy Driven
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China’s leading state owned oil and gas producer, PetroChina (NYSE: PTR), posted their first half results for 2012. There was a 6% decrease in profits from $10.3 billion in H1 2011 to the current $9.7 billion. This missed analysts’ estimates by 3%. PetroChina’s crude oil output increased by 1.5% year over year to 452.4 million barrels, while natural gas output increased by 9% to 1,292.4 billion cubic feet in the first half to 2012. The total oil and gas output increased by 3.8% to 667.9 million barrels equivalent and the average selling price (ASP) also increased by 6.3% to $107.98 per barrel, which was translated as a 9.7% increase in profit from exploration and production operations of $17.9 billion.
However, due to the Chinese government’s fuel price controlling measures, profits fell despite increasing output and ASP. Fuel prices were reduced thrice between May and July, a period in which the Chinese commuters enjoyed the lowest prices in the country since the end of 2010. While attempting to engineer a slow bursting of the property bubble, China’s decision to hold down energy prices was a move to soften the blow of losses to be incurred. But, like all price control schemes, the market overwhelms central planning and eventually they have to be abandoned. The Swiss are going to find this out in spades with their year-long peg of the Franc to the Euro at $1.20.
Petrol and diesel prices were finally increased early in August, the first time since March. The state’s measures were aimed at curbing inflation but this came at a massive cost to the refineries, as evidenced by the $3.65 billion loss PetroChina suffered from refining. With the slowdown in China in full-swing, energy demand will likely grow at a slower pace than previously forecasted. Car sales have slowed below 2012 estimates and both inventories and discounts are high, as much as 25% for GM’s (NYSE: GM) best-selling Excelle.
The company disappointed investors with its natural gas and pipeline business reporting a profit of just $258 million, an 85% decline from H1-2011. The reports of the massive Chinese shale gas reserves have been all over the media and PetroChina has been at the center of the spotlight, but shale gas mobilization has not significantly taken off. Furthermore, the government isn’t helping. Natural gas pricing reforms, which were supposed to be implemented months ago, are still locked up in committee. The industry is waiting on the National Development and Reform Commission to revise the natural gas subsidy rules.
The fuel prices in China are set by the National Development and Reform Commission on a 22 day moving average of a basket of different crudes. Sinopec (NYSE: NP) had indicated that a new mechanism could be implemented in the near future setting the price based on a 10 day moving average, creating a more responsive market to changes in price. Brent Crude prices have been very volatile this year due to the admixture of U.S. electoral politics, foreign policy and the instability of the euro zone.
PetroChina currently has most of its oil production in its home territory, more than 90% to be specific, but it has begun an aggressive diversification strategy. By the end of this decade, it has planned to spend $60 billion in purchasing foreign assets, particularly in Australia, Canada, Central Asia and East Africa, $15.7 billion of which will be spent this year.
The firm has an ambitious ten year plan to push its foreign output to 50% of its total production. Besides acquisition of foreign firms, PetroChina’s top management is looking to form joint ventures and partnership agreements with their peers in oil rich nations to bring oil and gas investment to China. Central Asia’s vast oil and gas reserves in places like Pakistan, Turkmenistan and Kazakhstan will be likely targets, putting them directly at odds with U.S. plans in the region.
The company also aims to expand its foothold in the U.S. market. Although it is the biggest producer of crude oil in the world, with its last year’s daily output of crude exceeding that of Exxon Mobil’s (NYSE: XOM) by 100,000 barrels, its oil business there is just a small drop in America’s vast energy ocean. The business has charged Li Shaolin, president of PetroChina International (America), with widening U.S. business operations. To do this, he is planning to increase the current trading volume, the number of traders from the present 15 to 40 in the next seven months, increase the size of the Houston office by 12,500 square feet and secure the business’s first US investment by the end of 2013.
The Chinese government is expected to ease its control on the oil prices in the second half of 2012, and the likelihood of this is rising with rising Brent prices. The persistent European debt crisis and the slow global economic recovery mean that the fortunes of the global oil firms aren’t going to radically change in the near future. But central bank policy will be to keep afloat their various bubbles and competitively de-value their currencies in a tit-for-tat trade war. So far, the U.S. has been holding its cards the closest to its vest, but that is starving what is left of U.S. growth. This will be buoyant for the price of oil, with marginal supply and demand still biased negatively, especially if the markets of Southeast Asia, like Malaysia, Indonesia, and the Philippines, along with India, remain stronger than is currently expected.
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