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PetroChina is expected to report that its first-half net profit fell by at least a third, analysts say, as losses in its refining business eroded gains from surging crude oil prices.

Even last year when PetroChina’s market value briefly topped $1 trillion by some calculations trouble was brewing at the traded unit of the country’s leading oil and gas producer.

While other global oil giants are reporting record profits, Chinese government price controls prevent PetroChina and other domestic refiners from passing on higher costs for crude oil to consumers. So their refining operations are bearing heavy losses, despite billions of dollars in subsidies.

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The government will refund value-added taxes on gasoline and diesel imported by the country’s two largest oil companies in the second quarter, the Ministry of Finance has said.

Value-added taxes on 500,000 tons of gasoline and 1 million tons of diesel imported by China National Petroleum Corporation (CNPC) between April 1 and June 30 this year will be refunded, the ministry said on its website yesterday.

It will also return collected taxes to China Petrochemical Corporation (Sinopec) on imports of 500,000 tons of gasoline and 1.5 million tons of diesel in the same period, the statement said.

Analysts said the 17 percent tax refund is aimed at reducing the refining losses of the oil companies and increasing refined oil products supply in the domestic market to prevent a shortage.
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Stamford, Conn.-based Clean Diesel Technologies (Nasdaq: CDTI) announced today that it has licensed its Wire Mesh Filter technology to Zhucheng, China’s Headway Machinery, a commercial diesel engine exhaust company.

Financial terms of the deal were not disclosed, but Clean Diesel said it would receive an upfront licensing fee and royalties on all Wire Mesh Filter units sold in China.

“This deal provides Clean Diesel comprehensive access to the world’s second largest automotive market,” said Bernhard Steiner, president and CEO of Clean Diesel.

“This agreement reinforces the value of our technologies as cost effective, robust emission control solutions for use worldwide.”

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Sinopec, one of China’s two largest oil companies, announced yesterday that it received a subsidy of 12.3 billion yuan ($1.7 billion) for its losses in the refinery business.

It is likely that the jaw-dropping subsidy will spark another round of public complaints. This is the third year that this oil giant has got such a handsome subsidy while reporting overall profits of tens of billions of yuan.

Many people doubt the legitimacy to pay such money to a company that is a beneficiary of the State monopoly in the oil industry.

But the authorities insist that the extra expenditure is necessary to sustain the government’s tight control over retail oil prices, which is essential to reining in rising consumer inflation.

However, the problem is that the astronomical subsidy accounts for only a part, if not a small one, of the real costs that the country is paying for the current oil pricing mechanism. The increasingly negative impact it exerts upon our efforts to improve energy efficiency justifies a thorough examination of the real costs of subsidized oil.
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PetroChina Ltd., the world’s most valuable company by market capitalization, said Wednesday profits rose by just 2.3 percent in 2007 as government controls blocked it from passing on record-high crude costs to consumers, though a Chinese auto-buying boom drove a 21 percent jump in total sales.

Earnings were 145.6 billion yuan (US$20.5 billion; €13.1 billion) on revenues of 835 billion yuan (US$118 billion; €75 billion), said state-owned PetroChina, the country’s biggest oil company.

Profits were squeezed by a 20.1 billion yuan (US$2.9 billion; €1.8 billion) loss at PetroChina’s refining unit due to a government freeze on retail gasoline and diesel prices, the company said.

“During the second half of 2007, international crude oil prices rocketed and as a result, domestic refineries incurred heavy losses in processing,” said a PetroChina statement. It said supplies of gasoline and other refined goods were “very tight.”

Sales by China’s state-owned oil industry have soared as the number of vehicles on its roads multiplied. Demand for plastics and other petroleum products is growing rapidly amid a long-running boom that propelled economic growth to 11.4 percent last year.

But oil refiners say they are losing money due to price controls.

Some have tried to avoid losses by cutting back or stopping production. That has led to fuel shortages, especially in the fast-growing southeast, where filling stations were forced to ration diesel this week, disrupting trucking as drivers waited in long lines.

Companies such as PetroChina with both drilling and refining arms have made windfall profits from oil production, which has helped to compensate for losses elsewhere.

Beijing froze gasoline and diesel prices in September in an effort to rein in a surge in inflation. It raised prices by about 10 percent in November to curb surging demand but has rejected appeals by oil companies for further increases.

PetroChina is China’s biggest oil producer and its No. 2 refiner after rival China Petroleum & Chemical Co., or Sinopec.

PetroChina said 2007 sales of gasoline, diesel and kerosene totaled 600 million barrels, while production was 500 million barrels.

The volume of fuel sold at PetroChina’s network of filling stations rose by nearly 8 percent over 2006, the company said.

PetroChina is the publicly traded unit of government-owned China National Petroleum Corp. Its market capitalization — including Beijing’s majority stake — briefly rose above US$1 trillion in November, more than double Exxon Mobil Corp.’s US$488 billion. PetroChina shares are traded in New York, Hong Kong and Shanghai.

Market cap later fell back below US$1 trillion, but PetroChina still is the world’s most valuable company. Exxon Mobil, however, is far more profitable, with total 2007 earnings of US$40.6 billion.

In 2008, PetroChina said it expects government regulation of the industry to become even “more stringent,” though it gave no details or any indication when it expects the retail price freeze to end.

The company said it will step up exploration for new oil and gas sources in China and abroad. Chinese state oil companies have invested heavily in projects in Africa, Latin America and Central Asia.

“The group will continue to place top priority on resources exploration and development and further consolidate its leading position of the upstream business in China,” it said.

Source: PetroChina