Oil firms see profit go up in smoke

An attendant filling gasoline onto a car at a Sinopec gas station in Huaibei, Anhui province. For Sinopec, falling oil prices mean lower production costs for its downstream refining and petrochemical business. [Photo/China Daily]

CNPC, Sinopec and CNOOC hit by falling product prices during the first six month

China's oil and gas majors saw their profits slump during the first six months of the year, with the levels falling to the lowest in five years, according to financial reports.

The first-half reports for China's "big three" oil companies - China National Petroleum Corp, China Petrochemical Corp, also known as Sinopec, and China National Offshore Oil Corp - showed that CNPC's profit fell by more than 60 percent to 25.4 billion yuan ($3.98 billion), Sinopec by 22 percent to 25.4 billion yuan, and CNOOC by more than 50 percent to 14.7 billion yuan.

The steep drop in net profits for the big three is a direct result of the plummeting prices of global crude oil and weak economic growth, analysts said.

Crude oil prices were fluctuating at around $100 per barrel during the first six months of 2014. Since then it has fallen by nearly half, hitting the profits of oil companies reliant on upstream businesses.

From January to June, operating profits in the oil exploration and production unit of CNPC, also referred to as PetroChina, fell by nearly 70 percent, while profits in the upstream business of CNOOC dropped by more than 50 percent.

But the deteriorating business in oil exploration is not all bad news. For Sinopec, falling oil prices mean lower production costs for its downstream refining and petrochemical business, of which crude oil imports account for 80 percent.

In the first half, the petrochemical company added 14.1 billion yuan to its operating income, an increase of 57 percent year-on-year, while PetroChina saw its refining and chemical business increase by 8.1 billion yuan, driving profit in the downstream sector into positive territory for the first time since 2011.

A sudden change of the market environment poses huge challenges for China's State-owned oil enterprises in terms of domestic projects' development, their participation in overseas projects and even internal management, experts said.

Dong Xiucheng, a professor at Beijing-based China University of Petroleum, said that glory days of high oil prices have long gone and the downtrend will continue for a longer time.

"When the market is good, lots of problems existing in the industry are covered," Dong said. "But when it is tough, it gives players time to rethink their strategies."

He said that though oil companies are struggling when prices are falling, it is an opportune time for them to restructure, reduce costs and create sustainable efficiency.

"There is no doubt that oil companies will reduce their investments for the long term. But a large-scale exploration in upstream will ensure that they can grow in a sustainable manner."

At the same time, China is preparing for a reform to merge State-owned companies which play a big role in the country's economy. Even though details of the reform are yet to be released, reports said Sinopec and CNPC are likely to be restructured into one company.

Experts said the replacement probably will open a new chapter for domestic oil and gas industry with different styles of management for each company, but ensuring stable growth will be the top priority for all the firms.