PetroChina's Financials Caught in Catch-22

PetroChina's Financials Caught in Catch-22

Global crude oil prices are surging, but state-owned oil giant PetroChina is missing the party. State taxes and price controls are to blame.

By staff reporter Yang Yue and Zhao Jianfei

Soaring oil prices on the international market in the past year should have translated into sharply improved returns for investors with stock in Chinese oil giant PetroChina (SHSE: 601857, HKSE: 0857). However, burdened by state price controls on domestic refined oil and a special income levy, PetroChina is struggling to keep its balance sheet from crumpling.

According to the PetroChina's latest annual report, oil and gas output rose 4.8 percent between 2006 and '07 to an aggregate equivalent of 1.11 billion barrels of oil. The company reported a 21 percent increase in revenues, to 835 billion yuan, but net profits rose a mere 2.4 percent to 145.6 billion yuan.

PetroChina's stock value on the Shanghai market has plunged since rising rapidly after its initial public offering last November. On April 18, the stock slumped to 16.30 yuan -- a price below its IPO opener.

Investors have shown caution over profit figures, which have been held down by the state oil income tax levy. PetroChina paid the state 44.5 billion yuan toward its 2007 levy, based on an average crude oil price of US＄ 70 per barrel. The tax has been in place since March 2006, back when oil companies were profiting from rising crude prices.

Now that global oil prices have shot up and are expected to remain high, PetroChina has submitted a request to state authorities for a levy adjustment. Yet, based on the company's conference with analysts April 28, it's unclear when or even if an adjustment will be made.

Also taking a significant bite out of profits is the state's control over refined oil prices, a mechanism designed to keep consumer prices in check. Although the government's powerful National Development and Reform Commission (NDRC) has adjusted gas and diesel prices several times in recent years, the moves have failed to keep pace with higher crude prices on the international market.

The latest price adjustment for refined oil occurred November 1, when NDRC raised gas and diesel prices 10 percent. But the increase was far less than the 34 percent jump, to US＄ 94 from US＄ 70, in crude prices Oct. 31 on the New York Mercantile Exchange.

PetroChina's predicament is not to be confused with the challenges faced by Sinopec, another oil major whose business has also suffered due to domestic price controls. Sinopec is a downstream refiner without access to its own crude supplies.

But although PetroChina extracts its own crude, the company is taxed on production and marketing according to international oil prices.

Meanwhile, PetroChina is being left out of a state plan to help oil companies by providing tax rebates on imported crude and refined oil. PetroChina will not benefit because its production and refining businesses are combined.

The company also faces a dilemma because a downturn in the entire refining sector has made it impossible to determine whether ongoing profit pressures are a result of management mistakes or purely policy-related, said Shou Xuan, a former assistant secretary to the PetroChina board of directors, who spoke with Caijing.

An independent supervisor at PetroChina, Li Yongwu, has proposed that the State Council allow refined oil prices to increase based on different types of fossil fuels. For example, Li suggested lifting controls on kerosene and aircraft fuel prices, and then using these tax revenues to subsidize prices of diesel fuel, which is largely used in rural areas.

Li also suggested raising the levy base to US＄ 60 from US＄ 40, while reimbursing some levies paid by refiners according to the amount of oil pumped from their own fields.

Despite rising liquidity pressure, PetroChina is not ready to throw in the towel. For example, analyst Hua Kailing noted the company has not cut short its investment in exploration, which would put more tension on liquidity.

Nevertheless, many market observers agree with one investment banker who said that, unless the state overhauls its price and tax policies, "there is no way out" for PetroChina.

As a state-owned company, publicly tradable shares on China's A-share market represent only 2.19 percent of the total stake in PetroChina. The lead stakeholder is the government's State-owned Assets Supervision and Administration Commission (SASAC), which also directly owns, on behalf of the state, 189 major state-owned enterprises following the nation's 2005 stock market reform.

1 yuan = 14 U.S. cents