China Petroleum & Chemical Corp workers at the company's underground gas storage in Puyang, Henan province. The company's profit rose 12.8 percent year-on-year to 70.7 billion yuan in 2010. [Photo / China Daily]

Rising price of crude oil continues to erode refinery profit margins

BEIJING - China Petroleum & Chemical Corp (Sinopec), Asia's biggest oil refiner by capacity, aims to produce 45.59 million metric tons of crude oil in 2011.

That's amid an expansion of exploration in western China and overseas as rising oil prices continues to erode profit margins at the company's refining division.

Sinopec's profit rose 12.8 percent year-on-year to 70.7 billion yuan ($10.77 billion) in 2010, according to its annual report released on Sunday. That's compared with a profit growth of 35.6 percent at PetroChina Company Ltd and the upstream-focused China National Offshore Oil Corporation (CNOOC) Ltd's 84.5 percent jump in profit.

Sinopec said that its future sustainable development will depend partly on further discoveries or acquisitions of oil and natural gas resources.

The company will invest 54 billion yuan in the exploration and development sector in 2011, accounting for 43.8 percent of its total capital expenditure.

The surge in crude prices last year cast a shadow over Sinopec's refining division, which saw operating profit fall 42.2 percent from the previous year to 15.85 billion yuan, while the exploration and productions unit surged 97.3 percent in the same period to 47.15 billion yuan.

The annual Platts global spot price for Brent crude averaged $79.47 a barrel in 2010, up 29.2 percent from a year earlier.

"Sinopec's gross margins in the refining sector were largely squeezed by rising crude oil prices and the country's controls on fuel prices. We're also not optimistic about its earnings this year," said He Wei, an analyst at BOCOM International Holdings Co.

Fuel production and sales generate 62 percent of Sinopec's revenue, said Bloomberg.

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The refiner imports more than 80 percent of its total crude oil processing volume, said He. As such, it's going to be a tough year for the company if the oil prices continue to rise.

Domestic fuel prices, which are tightly monitored by the government, were raised by up to 4.5 percent in February.

By contrast, Brent crude futures in London have soared almost 10 percent since China last lifted fuel prices in December.

The fuel price move is based on a mechanism that was introduced in 2009. It allows the National Development and Reform Commission to adjust fuel prices when crude prices change by more than 4 percent over 22 working days.

However, the price adjustment was much smaller than the surge in crude prices because of the government's curbs on inflation.

"The crude prices that are currently beyond the fundamentals are not our major concern. Instead, the fuel price adjustment, which has largely trailed behind the oil price, will cause difficulties for us," Rong Guangdao, president of Sinopec Shanghai Petrochemical Co, said in an exclusive interview with China Daily in March.

Rong said that refining capacity will grow to 16 million tons this year from about 10 million last year because of technological innovation, but there is no plan for further expansion of capacity through large investment.