(Bloomberg, Oct 31, 2006) China Petroleum & Chemical Corp., Asia's biggest oil refiner, reported its largest profit gain in two years after increasing oil and natural gas production to meet demand in the world's fastest-growing major economy.

Net income in the third quarter rose 51 percent to 13 billion yuan ($1.65 billion), the Beijing-based company said in a statement today. Sales and operating revenue climbed 25 percent at the company, which refines about half as much oil each day as Exxon Mobil Corp.

China Petroleum, or Sinopec, stepped up oil exploration and increased natural gas and chemical output to counter refining losses caused by government-curbs on fuel prices. Profitability at its refineries, which supply 80 percent of China's fuel demand, will improve as crude oil prices decline, Sinopec said today.

``Sinopec is sitting at a sweet spot among Chinese oil companies given its significant downstream exposure which would benefit from improved margins,'' said Lei Wang, who helps oversee more than $7 billion at the Thornburg International Value Fund in Santa Fe, New Mexico.

Sinopec shares rose as much as 3.7 percent to HK$5.33 in Hong Kong after the earnings report and traded at HK$5.32 at 10:50 a.m., heading for their biggest gain in almost two months. The benchmark Hang Seng Index was 0.3 percent lower.

Operating profit at Sinopec's exploration and production division rose to 17.6 billion yuan from 14 billion yuan. The loss from processing oil into fuels and chemicals widened to 12.6 billion yuan from 6.6 billion yuan a year earlier as the company increased refining volume.

Crude Purchasing

Sinopec has ``brought down costs in crude oil purchasing,'' the company said in the statement. ``Domestic demand for petroleum and petrochemical products both maintained rational growth rates'' as China's economy expanded 10.7 percent from January to September, it said.

The marketing and distribution operating profit was 9.8 billion yuan while operating profit at the company's chemicals division was 4.9 billion yuan.

Total sales and other operating revenue rose to 280.8 billion yuan from 224.1 billion yuan, it said.

Sinopec's capital expenditure in the first nine months was 44.6 billion yuan, the company said. The company plans to spend 80.4 billion yuan this year, up from a previously announced 70 billion yuan to raise spending on exploration, refining and chemicals, it said.

Nine-Month Output

In the first nine months, Sinopec's net income rose 22 percent to 34 billion yuan. Sales climbed to 774 billion yuan from 593 billion yuan.

Sinopec's nine-month oil output increased 2.8 percent to 30 million metric tons and the average selling price gained 34 percent to 3,388.03 yuan a ton. Processing volume rose 4.45 percent to 108.7 million tons, or about 2.92 million barrels a day. Irving, Texas-based Exxon Mobil, the world's biggest oil company, refined 5.6 million barrels a day during the period, according to its Web site.

Nine-month natural gas output was 18.1 percent higher at 5.35 billion cubic meters as prices climbed 14 percent to 750.7 yuan a thousand cubic meters.

``Natural gas will be the next driver, both by price lift and volume growth,'' Wang said.

China's government controls fuel prices to limit their impact on inflation. State officials are considering a new oil- product pricing system to link domestic prices with crude costs.

China on May 24 raised gasoline and jet fuel prices by about 10 percent and diesel by 12.3 percent, after raising prices in March and July last year to help refiners cover the higher cost of crude oil. The state allows refiners a range of 8 percent above or below its guideline price levels.

Government Prices

``As long as the government doesn't cut fuel prices, Sinopec will benefit,'' said Jason Xu, an analyst with KGI Consulting Co. in Shanghai before the earnings were announced. ``The easing international oil price is positive for Sinopec's earnings.'' Oil has fallen from a record of $78.40 on July 14.

The company's expansion strategy is similar to those of global refiners such as Exxon Mobil Corp., and Royal Dutch Plc, which are boosting exploration to take advantage of possible gains in crude prices.

Exxon Mobil Corp., the world's biggest oil company, reported a 5.7 percent gain in third-quarter profit to $10.5 billion, the Irving, Texas-based company said Oct. 26. The company's refining profit jumped 29 percent to $2.74 billion.

Royal Dutch Shell Plc, Europe's biggest oil company, reported that third-quarter profit, excluding one-time items and changes in inventory values, rose 21 percent to $7.03 billion.
source:Bloomberg