Aug. 27 (Bloomberg) -- PetroChina Co., the world's second- biggest company by market value, posted its steepest semi-annual profit decline in more than six years as refining losses and taxes eroded gains from high crude oil prices.

Net income dropped 35 percent to 53.6 billion yuan ($7.8 billion) in the first half, or 0.29 yuan a share, from 81.83 billion yuan, or 0.46 yuan, a year earlier, the company said in a statement today. That's lower than the median estimate of 54 billion yuan in a Bloomberg News survey of seven analysts.

PetroChina, overtaken by Exxon Mobil Corp. as the world's most valuable company in the first half, was hurt by government fuel- price caps that undermined the company's ability to profit from a 46 percent jump in oil prices. Cnooc Ltd., a Chinese oil producer that doesn't run refineries, said profit surged 89 percent after it boosted crude reserves and production.

``The first half should be the most difficult for PetroChina,'' Wang Aochao, a Shanghai-based analyst with UOB-Kay Hian Ltd., said before today's report. ``We expect the earnings to improve for the rest of this year as we assume crude prices to drop, while refining margins will rise after the government increased fuel prices in June.''

The profit drop was the biggest since a 43 percent fall in the second half of 2001. PetroChina's refining business posted a loss of 59 billion yuan between January and June this year, compared with a year-earlier profit of 3.9 billion yuan, the company said.

Tax Rebates

To help narrow refiners' losses from selling fuels in the domestic market at below cost, the government paid PetroChina and China Petroleum & Chemical Corp., the nation's largest refiners, rebates of 75 percent on the 17 percent value-added tax levied on crude imports in the second quarter.

The two companies will get a rebate of about 40 percent on the tax for crude imported between July and September, the South China Morning Post reported yesterday, citing people it didn't identify.

Windfall tax payments also more than tripled to 47.8 billion yuan in the first six months this year, trimming earnings, PetroChina said today.

Second-quarter profit fell 38 percent to 24.7 billion yuan, according to Bloomberg calculations made by deducting earnings for the first three months from today's figures. Cnooc doesn't report quarterly results.

PetroChina had a market value of $337 billion at today's close. The stock advanced 3.4 percent to HK$10.30, before the earnings announcement.

Stepping Up Exploration

Overall sales rose 40 percent to 549.5 billion yuan in the first six months, in line with a 46 percent gain in benchmark New York oil prices. China's biggest oil producer said it will pay a first-half dividend of 0.131827 yuan a share.

Crude oil production rose 3.5 percent to 434.5 million barrels in the first half, while crude oil processing increased 4.3 percent to 425.2 million barrels. Natural gas output jumped 15.7 percent to 923 billion cubic feet.

High oil prices, which reached a record $147.27 a barrel on July 11, are boosting investments in new fields. PetroChina aims to spend 132.3 billion yuan on exploration and production, its 2007 annual report shows.

``Upstream exploration will be the company's priority for the coming years,'' President Zhou Jiping told reporters in Hong Kong today. ``We have very good assets with promising reserve prospects.''

PetroChina plans to keep its annual crude oil reserve replacement ratio above 1 within the next three to five years and that of gas deposits above 3 during the same period, Zhou said.

Overseas crude and gas production rose 48.6 percent to 43.1 million barrels of oil equivalent in the first half, accounting for 7.3 percent of its overall output, Zhou said.

``The share is not high, and we should accelerate our overseas business,'' Zhou told reporters.

Capital Expenditure

Capital expenditure increased 41 percent to 71.7 billion yuan in the first half. Annual spending will remain above 200 billion yuan in the coming years, and about 70 percent of that will be plowed into exploration and development, Zhou said.

Spending will increase 15 percent to 207.9 billion yuan this year, PetroChina said in March. Expenditure plans will include the acquisition of foreign assets from its parent, Chairman Jiang Jiemin said then.

PetroChina plans to set up a unit to manage its city-gas projects and benefit from the nation's rising demand for the cleaner-burning fuel, Zhou said. China's annual city-gas demand may increase to 30 billion cubic meters by 2010 and jump to 60 billion cubic metes by 2015, he said.

Pipeline to Beijing

The company also plans to build a third pipeline to carry natural gas from its fields in Shaanxi province to Beijing, and aims to boost supplies of the fuel to the capital by 33 percent to 6 billion cubic meters this year, Zhou said.

The Beijing-based company has agreed to buy parent China National Petroleum's 50 percent stake in CNPC Exploration & Development Co., the Wall Street Journal reported yesterday, citing a person familiar with the matter.

PetroChina needs more time to conclude the stake purchase, which requires the approval of the Chinese government and further talks with ``resources countries,'' Zhou said today, without giving details.

To contact the reporter on this story: Wang Ying in Hong Kong at wang30@bloomberg.net; Winnie Zhu in Hong Kong at wzhu4@bloomberg.net

Last Updated: August 27, 2008 10:02 EDT