Refineries Sink Deeper in the Red

Despite the huge subsidies and rise in gasoline and diesel prices, refineries under China's two leading oil companies incurred 5.71 billion yuan of losses in the first half of the year, said an industry association.

From January to June, losses of refineries under China National Petroleum Corp (CNPC) and China Petrochemical Corp (Sinopec) were 47.9 percent more than a year earlier, said China Petroleum and Chemical Industry Association (CPCIA).

China's largest refiner Sinopec last week said its net profit for the first half of the year would decrease by over half. The gap between the high crude prices on the international market and the relatively low prices of refined oil products domestically has put the company's refining business in the red.

Refineries have seen soaring production costs caused by skyrocketing crude prices. They are facing big difficulties, said Feng Shiliang, deputy secretary-general of CPCIA.

Although the country's petroleum and chemical sector continues to see rapid growth, it saw a sharp drop in profits because of the rising crude prices, said CPCIA.

This will continue in the second half of the year as crude prices will stay high, said the association.

In the first half, revenues of the petroleum and chemical sector amounted to 3.07 trillion yuan, up 30.2 percent from a year earlier. The growth rate was 9 percentage points higher than last year.

China's petroleum and chemical producers had a combined profit of 279 billion yuan in the first half, up 2.5 percent from 2007. But the growth rate was down 24.9 percentage points from a year earlier.

In June, the government raised the prices of gasoline and diesel by 1,000 yuan per ton. However, this can't offset domestic refiners' losses, said Zhou Dadi, deputy director of China Energy Research Society.

The move only narrowed the gap between the high crude prices on the international market and the relatively low prices of domestic refined oil products, but it won't put refiners back in the black, said Zhou.

Facing high crude prices, Chinese oil companies have begun to take measures to cut costs. CNPC General Manager Jiang Jiemin said the company would cut office costs and spending on entertainment and travel by at least 10 percent this year.

The company won't approve rental or purchase of luxury cars or the construction of new buildings or hotels, will limit spending on parties and ceremonies and cut back on meetings and overseas trips.

CNOOC Results

Not exposed to the country's loss-making refining sector, China National Offshore Oil Corp's (CNOOC) first-half net profit climbed 35 percent.

CNOOC made a net profit of 18.95 billion yuan on earnings of 106.33 billion yuan, the company said on its website.

Benchmark oil prices in New York have gained 73 percent in the past year and touched a record $147.27 a barrel on July 11. CNOOC's listed unit, CNOOC Ltd, plans to increase capital spending by 44 percent this year to expand oil and gas output by as much as 18 percent and help meet energy demand in the world's fastest-growing major economy.

The big jump in the sales of CNOOC's parent is attributed to the output gain amid soaring crude prices, Wang Aochao, an oil analyst with UOB-Kay Hian Ltd, said Monday. CNOOC's first-half profit and output gains were probably similar to the parent's, Wang said.