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Financial Times: Lex Column: PetroChina’s strategy

Published: March 21 2007 02:00 | Last updated: March 21 2007 02:00

Beijing’s drivers are paying less for their petrol this month, with PetroChina having temporarily cut pump prices during March. Coincidentally, this came just as the National People’s Congress was sitting down to meet in the Chinese capital.

Political influence over PetroChina, the world’s fourth largest oil and gas company by market capitalisation, is a given – the state owns 88 per cent of it. For minority investors, that is a double-edged sword. On one hand, Beijing can unlock access to energy reserves overseas. On the other, it claws back gains that might otherwise line the pockets of shareholders.

PetroChina’s latest set of annual results epitomise this. The average price of Asia’s benchmark Minas crude oil blend rose by $12 per barrel, or 23 per cent in 2006, yet the company’s earnings increased by just 5 per cent. All-in costs in the dominant exploration and production business rose by about $8 per barrel of oil equivalent produced. Of that rise, more than 40 per cent was owing to the imposition of a windfall tax by Beijing last year.

More worrying is the question of whether PetroChina is succumbing to the industry disease of rising costs and capital expenditure. PetroChina expects to spend $24bn on capex this year – more than ExxonMobil.

That suggests PetroChina prioritises longer-term output growth over near-term financial metrics, which should play well with the Chinese government. But it would be unfair to point the finger wholly at political influence. BP and Royal Dutch Shell have also recently increased budgets and emphasised their long-term potential.

One advantage PetroChina has is its outstanding record on reserves replacement: an average of 164 per cent over the past three years, compared with just 78 per cent for its global peers, according to UBS. With the entire sector struggling to contain costs, PetroChina does at least offer a solid basis for growth – a rare commodity in today’s energy industry.

Copyright The Financial Times Limited 2007

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