Volatile crude oil prices are the biggest headache for refiners, with any jump in the procurement cost having a direct impact on the margins on refined fuel products.
Given this situation, the latest earnings report from China Petroleum & Chemical Corp. (00386.HK, 600028.CN, SNP.US) may come as a surprise to observers. At a time when the price of Brent crude is approaching US$109 per barrel, the Chinese refining giant, which is commonly known as Sinopec, achieved an unexpected turnaround with an operating profit of 6.66 billion yuan in the first three quarters, as its refinery throughput increased to 174.19 million tons during the period.
In stark contrast, even with a much smaller throughput of 734.5 million barrels, equivalent to slightly over 100 million tons, rival PetroChina’s (00857.HK, 601857.CN, PTR.US) refining segment hasn’t seen the light at the end of the tunnel as it suffered a 20 billion yuan loss during the nine months to September.
The divergence in performance is striking as PetroChina has some other factors working in its favor. The company has more secure sources of crude oil due to its dominance in China’s oil exploration and production activity while Sinopec depends heavily on imports and is more prone to external upheavals.
So, what lies behind the marked disparity in the pair’s refining business that appears totally counterintuitive?
Well, there are many reasons. The first thing is processing capacity.
PetroChina only has a handful of refineries that can handle 10 million tons of crude a year and most of them are located in the northeastern and western inland regions. Sinopec, on the other hand, can sit more comfortably as its two massive backbone plants are right on the doorstep of bourgeoning markets. One refining facility is in Guangdong province while the other is in east China’s Ningbo municipality; both the refineries have a processing capacity of over 20 million tons per annum (tpa).
As for PetroChina, it has realized that larger plants are key to bringing down the refining cost. The company has unveiled some bold expansion plans, but approval procedures and construction will take well over a decade, offering no comfort in the near term. Some recent setbacks can only make the process more thorny – planning on the firm’s 20 million tpa plant in the eastern Zhejiang province has been postponed indefinitely due to environmental concerns, China Business News reports.
Meanwhile, another thing that is weighing down the energy giant’s refining operations is the crude pricing arrangement.
A PetroChina executive told The Economic Observer that crude pumped from the firm’s oilfields is sold to group refineries at a price that is pegged to that of the international market, a deliberate arrangement to ensure the profitability of the upstream business since revenue from the segment is the firm’s most vital pillar of earnings.
Now, in the case of Sinopec, the company is able to make bulk purchases of crude oil –albeit of lower quality — at much lower prices, helping the top refiner achieve a decent profit on the strength of its processing capacity and technical expertise.
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