PetroChina vows to catch up with Sinopec, starting with shale gas

By AIBING GUO and RAKTEEM KATAKEY
Bloomberg

PetroChina plans to move out of the big shadow cast by its smaller rival.

PetroChina, the country’s largest oil and natural gas producer, aims to catch up with main competitor China Petroleum & Chemical Corp., or Sinopec, in the production of shale gas, according to PetroChina president Wang Dongjin.

“We are about a year and a half behind Sinopec in shale gas exploration because we concentrated our resources on the Longwangmiao natural gas project in Sichuan,” Wang said at a press conference in Hong Kong after the company posted a 4% increase in first-half profit. “We officially begin our shale gas exploration this year, and hopefully we will catch up in exploration production.”

He didn’t give a timeline for achieving that and also said his company had been slower than Sinopec in initiating some of the measures the government has demanded to make the industry more responsive to markets and competition.

Sinopec has stolen headlines this year with plans to raise about $16 billion from selling a third of its fuel-retailing unit, drawing interest from 37 potential buyers. PetroChina, meanwhile, has only recently begun to recover from the government’s campaign against corruption.

PetroChina Purge

PetroChina has rallied 4.2% since July 30, after China initiated an anti-graft investigation into the former head of its parent company, Zhou Yongkang. The targeting of Zhou, a onetime member of the elite Politburo Standing Committee, led investors to bet that the worst of the purge of officials at PetroChina may be over.

PetroChina, which had a first-half profit of 68 billion yuan ($11 billion) or more than double the 31 billion yuan of Sinopec, can make up ground in shale gas, said Duke Suttikulpanich, a Singapore-based oil and gas analyst at Standard Chartered Bank.

“I wouldn’t be surprised if PetroChina overtakes Sinopec in terms of production over the next couple of years,” he said.

Drilling in shale formations for oil and gas has revolutionized supply in the US, making it the world’s largest natural gas producer in 2009, beating Russia. It’s also boosted US crude oil output to the highest in more than a quarter- century and brought the country closer to energy independence.

New Wells

PetroChina plans to drill 154 new shale wells in Sichuan in 2014 and 2015, and produce as much as 2.6 billion cubic meters of the gas in 2015. Sinopec is targeting production of 5 billion cubic meters in 2015.

PetroChina’s Wang said the company’s drilling cost for every shale gas well is around 55 million yuan and could be lowered to around 50 million yuan in the near future. Sinopec chairman Fu Chengyu said earlier this week in Hong Kong that the company’s cost is around 80 million yuan per well, with a view to lowering that to around 60 million yuan.

Plans by PetroChina and its parent China National Petroleum Corp. to open up to private investment and market forces have been taking shape through the summer.

CNPC officials said earlier this month that the company was looking to sell stakes in oil and gas fields to local investors in the northwest province of Xinjiang.

Kunlun Plan

In July, officials said CNPC was considering a plan for Hong Kong-listed unit Kunlun Energy Co. to buy unlisted PetroChina Kunlun Gas Co., in order to combine the company’s gas supply operations and create a national champion better able to compete with private rivals.

PetroChina’s Wang said at the briefing that the company would test the government’s mandate for mixed ownership structures in Xinjiang, and that the Kunlun plan is still under consideration.

“The changes that are happening in PetroChina are and will be a lot more significant than Sinopec,” said Laban Yu, the Hong Hong-based head of Asia oil and gas equity research at Jefferies Group. He has an underperform rating on Sinopec and a buy on PetroChina.

The company’s 4% profit increase met forecasts and was due to higher prices for natural gas. The rise would have been higher but for a 20 billion yuan one-off gain from the sale of a pipeline stake last year.

Capex Drops

Revenue climbed 4.8% to 1.15 trillion yuan. The government raised retail gas prices by 15% in July 2013 and said they would increase further to reflect the cost of producing and importing the fuel.

Its capital expenditure dropped 16% to 91.1 billion yuan, as the company cut spending on natural gas and pipeline infrastructure, in line with its focus on higher-margin projects in oil and gas exploration and production.

“The major thing PetroChina is doing is cutting costs,” said Yu. “They’re going to report much better cost control than the other guys. And maybe even cost reductions.”

Sinopec posted a better-than-expected 7.5% increase in first-half profit earlier this month as Asia’s biggest refiner widened the margin it earned from processing crude oil into fuels.

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