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Sinopec to boost output to counter retail losses

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CHINA Petroleum & Chemical (Sinopec), which is Asia’s biggest refiner, will increase crude production and develop natural gas fields to counter losses from selling diesel and petrol at state-mandated prices.

Sinopec plans to boost oil production in west China and increase exploration for unconventional resources including gas from shale formations, the Beijing-based company said yesterday as fourth-quarter profit dropped 23%, missing estimates.

China, which controls oil-product prices to curb inflation, raised tariffs by as much as 7,1% last year, lagging behind the 20% surge in New York crude futures.

Fu Chengyu, who became chairman of Sinopec’s parent in April, led the group to bid for $9,3bn in overseas oil and gas assets to diversify from unprofitable fuel making.

"Strategically, Fu wanted to get more balance between downstream and upstream parts of the company, resembling closely that of Exxon Mobil and Royal Dutch Shell," said Neil Beveridge, a Hong Kong-based analyst at Sanford C Bernstein. "Shale gas clearly presents a big opportunity. The important thing to remember is shale gas will only pay in the longer term."

Production of crude and gas rose 1,6% to 407,9-million barrels of oil equivalent last year, Sinopec said. While crude output fell 1,9% to 321,7-million barrels, gas production jumped 17% to 14,6-billion cubic metres.

China, estimated by the US Energy Information Administration to hold the world’s largest reserves of shale gas, aims to produce 6,5-billion cubic metres of the fuel a year by 2015 and between 60-billion and 100-billion by the end of 2020.

China Petrochemical Corporation, Sinopec’s parent, in January said it had started exploring for shale gas in Anhui province with China National Offshore Oil Corporation, the state-controlled parent of Cnooc. Unit Sinopec and Henan Provincial Coal Seam Gas Development and Utilisation won the rights to explore two areas in the country’s first shale-gas auction in June.

Sinopec has advanced 12% in Hong Kong trading in the past year, compared with the 10% decline in the benchmark Hang Seng index. The stock dropped 0,2% to HK8,62 ($1,10) yesterday. The company plans to increase crude output to 326,5-million barrels this year and boost gas production to 582,6-billion cubic feet this year, it said.

Capital spending on exploration and production will reach 78,2-billion yuan ($12,4bn) this year as Sinopec develops oil blocks, including Shengli, and gas fields, about 45% of total expenditure, according to the earnings statement. Spending on refining will be 36,8-billion yuan, mainly to upgrade plants and boost fuel quality.

"Since its capex is largely unchanged, the only way to boost upstream assets this year will be through asset injection from its parent," Mr Beveridge said.

Sinopec plans to acquire overseas oil and gas assets owned by its parent when appropriate, the refiner said on March 14. In 2010, China Petrochemical paid $7,1bn for a 40% stake in Repsol YPF ’s Brazilian unit, China’s largest energy acquisition that year.

Sinopec itself agreed in November to pay $5,2bn for a stake in a unit of Galp Energia SGPS to explore for oil off Brazil’s coast, China’s biggest overseas purchase last year.

Bloomberg

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