Sinopec Seeks More Assets From Parent After $3 Billion Deal

China Petroleum & Chemical Corp., Asia’s biggest refiner, expects more asset deals with its parent after creating a $3 billion joint venture to replace dwindling reserves with oilfields in Kazakhstan, Colombia and Russia.

“We will continue to inject assets into the listed company and ensure these transactions are beneficial to both the parent and the unit,” Vice Chairman Wang Tianpu said in Hong Kong yesterday. “This joint venture helps reduce liability to the listed company.”

Chinese companies are looking abroad for oil and gas assets to feed the energy needs of the world’s second-biggest economy. Securing foreign fields will raise production revenues and help China Petroleum, more commonly known as Sinopec, counter losses arising from government price controls on its domestic refining business, even as those losses have narrowed over the past year.

Sinopec’s stock fell 0.4 percent to HK$8.95 as of 9:46 a.m. in Hong Kong trading. The city’s benchmark Hang Seng Index declined 0.3 percent. The stock rose the most since Jan. 2 to close at HK$8.99 in Hong Kong yesterday after the Beijing-based company announced the 50-50 venture with its state-owned parent China Petrochemical Corp. It also posted full-year earnings that beat analyst estimates.

The company has traditionally favored minority stakes and joint ventures to reduce investment risks, Wang said at a press briefing yesterday. The company won’t rule out outright takeovers in the future, he said.

Overseas Acquisitions

Sinopec and its parent have announced $28 billion of overseas acquisitions in the past decade, data compiled by Bloomberg show. Most recently, Sinopec’s parent agreed to pay Chesapeake Energy Corp. $1.02 billion for 50 percent of 850,000 acres in the Mississippi Lime formation, it said Feb. 25.

The latest joint venture will boost Sinopec’s proven reserves by 9.1 percent to 3.1 billion barrels and its annual crude oil production 11 percent to 365 million barrels, Gordon Kwan, head of energy research at Mirae Asset Securities Ltd., said in an e-mail yesterday.

After two years of losses, Sinopec and PetroChina Co., China’s second-largest refiner, may turn a profit on refining this year.

Sinopec’s operating loss for refining reached 11.9 billion yuan ($1.92 billion) in 2012, compared with a loss of 37.6 billion yuan in 2011, according to a March 24 earnings statement. PetroChina lost 43.5 billion yuan on refining last year, narrowing from a loss of 60.1 billion yuan in 2011, the company said March 21.

Refining Turnaround

“The refining business will be a main contributor to profit after China enacts fuel pricing reforms,” Wang said, without providing details. The company plans to spend as much as 17 billion yuan this year on upgrades to produce higher-quality fuel after record-low air quality in Beijing in January.

It plans to ask the government to raise retail prices for better-quality fuels to help compensate for its upgrade, Wang said. Consumers should shoulder part of the cost by paying higher prices at the pump, he said.

Sinopec’s refining business may have already become profitable in the fourth quarter of 2012, said Simon Powell, head of Asian oil and gas research at CLSA Ltd. in Hong Kong. Sinopec doesn’t report quarterly refining numbers.

“Gradual improvement in refining margins helped turn around the business in the second half of the year,” Sinopec said in a statement yesterday.

Fuel Prices

On Feb. 25, China increased fuel prices for the first time since September, raising gasoline by 300 yuan a metric ton and diesel by 290 yuan a ton. Gasoline and diesel prices are set by the National Development and Reform Commission under a system that tracks the 22-day moving average of a basket of crudes, comprising Brent, Dubai and Indonesia’s Cinta. The commission plans to shorten the fuel price adjustment window, former NDRC Chairman Zhang Ping said March 6, without providing details.

Sinopec says it will raise production capacity for a pilot project, the Fuling shale gas block in southwest China’s Sichuan, in pursuit of “major breakthroughs” in shale.

Several test wells have been drilled at Fuling and the results are “very encouraging,” Wang said yesterday. “By 2015, the project is expected to produce about 1 billion cubic meters of shale gas a year based on what we see now from the test production,” he said.

China aims to produce 6.5 billion cubic meters (230.4 billion cubic feet) of shale gas annually by 2015 and 60 billion to 100 billion cubic meters by the end of the decade, the NDRC said in March 2012.

Costly Drilling

“Drilling wells is very expensive, so we want to make sure the resources are right there before we get started,” Wang said. It usually takes about 70 million to 80 million yuan to drill a shale gas well in China, he said.

Sinopec and its state-owned peers PetroChina and Cnooc Ltd. failed to win blocks in China’s second round of shale gas auctions in December, while coal miners and provincial government investment firms, with no experience of shale drilling, were among the winning bidders.

Wang said the winners overpaid. “Most bidders that have no experience in natural-gas exploration at all would simply propose a number that is totally out of touch,” he said.

China, holder of the world’s biggest shale reserves, has yet to commercially produce the fuel, while output in the U.S. quadrupled in the four years to 2010. The Asian country holds 25.1 trillion cubic meters of exploitable reserves of the fuel, according to the Ministry of Land and Resources.

(Updates share prices in fourth paragraph.)
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