March 19 (Bloomberg) -- PetroChina Co., the world's biggest company by market value posted a smaller-than-estimated gain in second-half profit as rising drilling costs and losses at its refineries eroded earnings from record crude oil prices.

Net income climbed 3.7 percent to 63.8 billion yuan ($9.03 billion), from 61.52 billion yuan a year earlier, according to calculations based on 2007 earnings Beijing-based PetroChina announced today. That's lower than the median profit estimate of 72.2 billion yuan in a Bloomberg survey of seven analysts.

Fuel-price curbs on Chinese refiners and state levies on oil sold at more than $40 a barrel weighed on earnings. PetroChina joins Exxon Mobil Corp. in reporting higher exploration costs. First-quarter profit will be ``relatively poorer'' than in 2007, chairman Jiang Jiemin said today.

``PetroChina is now tackling more difficult reserves as the era of easy oil is clearly over,'' Gordon Kwan, CLSA Ltd.'s China energy research head, said in a report after the announcement. ``Advanced technologies must be applied to exploit the higher-hanging fruits amid a global raw materials and labor cost crunch.''

PetroChina's Shanghai-traded shares have dropped 49 percent since peaking at 48.62 yuan on Nov. 5, helping to wipe about $490 billion off its market value. The Hong Kong stock has fallen 29 percent this year. It rose 2.5 percent to HK$9.84 in Hong Kong today and 0.4 percent to 22.58 yuan in Shanghai.

Full Year

Spokesman Mao Zefeng declined to confirm the derived earnings figure. Full-year profit rose 2.4 percent to 145.6 billion yuan, China's biggest oil producer said in a statement to the Hong Kong stock exchange today. Sales rose 21 percent to 835.04 billion yuan.

Exploration and production expenses climbed 30 percent last year while oil and gas lifting costs gained 15 percent to $7.65 a barrel. The company paid 15.67 billion yuan in windfall taxes on oil sales in 2007, more than five times the 2.89 billion yuan it paid in 2006.

PetroChina plans a 15 percent increase in capital spending this year to 207.9 billion yuan, it said today.

Exxon Mobil, which is larger than PetroChina by sales, on March 5 said it raised 2008 capital spending by more than 20 percent to $25 billion to cope with escalating costs for drilling rigs and engineers.

No Subsidy

Chevron Corp., the second-biggest U.S. oil company, on March 11 said it raised cost targets for seven projects by $3.8 billion and indefinitely delayed two others amid record prices for energy services and equipment.

PetroChina's refining and marketing loss was 20.68 billion yuan in 2007. The refining business breaks even when crude oil is at $66 to $67 a barrel, Chairman Jiang said. PetroChina loses 3.24 billion yuan for each $1 the per-barrel oil price rises above those levels, he said.

The company didn't receive a government subsidy to help cover losses from selling fuels below cost, Chief Financial Officer Zhou Mingchun said today.

China controls fuel prices to shield consumers in the world's most-populous nation from inflation. The nation's consumer price index climbed 8.7 percent in February from a year earlier, the fastest pace in 11 years.

``The windfall tax, combined with downstream refining losses are big headwinds for PetroChina's 2008 profit and free cash flow growth, all but erasing the energy giant's earnings leverage to booming crude prices,'' Kwan said.

Output Targets

PetroChina's oil production increased at a slower pace than natural gas. Oil output in 2007 rose 1 percent to 2.3 million barrels a day, while gas surged 18.6 percent to 4.46 billion cubic feet a day.

PetroChina aims to boost oil and gas output by 7 percent to 1.189 billion barrels of equivalent this year, Vice President Li Hualin told reporters in Hong Kong. Oil output will reach 871.6 million barrels while gas production will be 1.907 trillion cubic feet, he said. The company plans to process 854.9 million barrels of crude oil this year, he said.

The state-controlled company will pay a final dividend of 0.156859 yuan a share, compared with 0.154699 yuan a year earlier.

PetroChina made six exploration discoveries last year, Board Secretary Li Huaiqi said today. They includes the Jidong Nanpu field, the nation's biggest oil find in almost half a century.

An independent reserves assessment has shown the deposit holds more reserves than previously announced, Jiang said today. The field produced 400,000 tons of oil last year and PetroChina plans to add 1 million tons of capacity this year, he said.

The field holds the equivalent of 1.18 billion tons of oil, China's Ministry of Land and Resources said in August. That's about 8.6 billion barrels, enough to supply China for three years.

PetroChina will start offshore exploration this year in the Bohai Bay off northern China and in the South China Sea, Jiang said. The company has set aside 8 billion to 10 billion yuan to develop fields in Bohai Bay, he said.

To contact the reporter on this story: Ying Lou in Hong Kong at ylou1@bloomberg.net; Winnie Zhu in Shanghai at wzhu4@bloomberg.net

Last Updated: March 19, 2008 08:13 EDT