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By Jason Simpkins
PetroChina Ltd. (PTR), China's biggest oil producer, recorded only a modest growth in profit in 2007, as government controls kept the company from passing record-high crude prices on to its customers.
Beijing has kept a tight lid on fuel prices, even as oil trades between $105 and $110 a barrel, to shield its population from soaring inflation. Unfortunately, refiners struggling to keep pace with the soaring price of crude have been unable to recoup that extra cost on the consumer level.
"During the second half of 2007, international crude oil prices rocketed and as a result, domestic refineries incurred heavy losses in processing," PetroChina said in a statement.
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PetroChina grossed $118 billion in 2007, but achieved a profit of only $20.5 billion. That's only a 2.3% increase from 2006, despite a 21% jump in total sales. The company also said first quarter profit would be "relatively poorer" than in 2007.
The government froze gasoline and diesel prices in September to suppress inflation. It raised the price by 10% in November to curb consumer demand, but has taken no further action. As a result, PetroChina suffered a $3 billion loss in its refining process.
PetroChina's refining business breaks even when the cost of crude oil is between $66 and $67 a barrel, Chairman Jiang Jiemin said, yesterday. But the company loses $460 million (3.24 billion yuan) for each $1 the per-barrel oil price rises above that level, Jiang said.
PetroChina was also forced to pay $2.2 billion (15.67 billion yuan) in windfall taxes in 2007, a fivefold increase from the amount it paid in 2006.
"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," Gordon Kwan, chief of China energy research at CLSA Ltd., said in a report.
An inability to grow profits at a time when oil is hitting all-time highs will make it much more difficult for PetroChina to keep up with rising exploration costs and meet growing demand.
Exploration and production expenses soared 30% last year, and oil and gas lifting costs jumped 15%. PetroChina said yesterday that it anticipates a 15% increase in capital spending this year.
"PetroChina is now tackling more difficult reserves as the era of easy oil is clearly over," Kwan said. "Advanced technologies must be applied to exploit the higher-hanging fruits amid a global raw materials and labor cost crunch."
Exxon Mobil Corp. (XOM), the largest U.S. oil company and the most profitable oil company in the world, said earlier this month that it would increase the amount it spends on exploration and development by more than 20% in 2008. Meanwhile the second largest U.S. oil company, Chevron Corp. (CVX), raised cost targets for seven projects by $3.8 billion.
However, neither high oil prices nor surging demand appear to be receding, and that puts PetroChina in a very precarious position. The company said 2007 sales of gasoline, diesel, and kerosene totaled 600 million barrels, but it only produced 500 million barrels. Some refiners are trying to save money by cutting production or closing down entirely, which has led to widespread fuel shortages.
If both crude prices and demand for crude remain high, something else will eventually have to give. Either Beijing will be forced to raise its cap on gas prices or shortages will intensify as refiners cut back production to save money.
"Someone has to pay if the shortage worsens, the government, the refiner or the people," an unidentified analyst with a securities firm in Shanghai told Reuters. "Of course, the people will eventually pay for it, no matter in the form of shortages or higher prices."
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