PetroChina is an Energy Optimist

Even with world prices softening, the mainland's No. 1 oil player holds a winning hand of strong management and great government connections

by Dexter Roberts

A Chinese oil and gas company tops this year's Asia BusinessWeek 50. Buoyed by a runup in oil prices and soaring growth in China's red-hot economy, PetroChina, China's No. 1 exploration and production player, had a banner year in 2005. And there are no signs of any slackening yet. In the first six months of this year, net profits were up 29%, to a record of more than $10 billion, on sales 25% higher at $41 billion.

Outside of its home country, PetroChina's image is of a company rushing around the world trying to snap up oil reserves wherever it can. But China's biggest energy company, which controls 75% of the mainland's reserves, has major domestic exploration programs that enable it to keep jacking up production of both oil and gas.

Management, led by Chairman Chen Geng, aims to increase production by 5% a year over the long haul. Lately the company has been running well ahead of that target. All told, PetroChina's production in the first six months totaled 533 million barrels of oil equivalent, up by 6.8%, vs. the same period in 2005.

BUOYED BY OIL FINDS.

"In a bid to meet energy demand from the domestic economic growth, we spared no efforts in production," said PetroChina President Jiang Jiemin announcing first-half results on Aug. 23. "They are executing their plan and executing it well," says David Hurd, managing director and head of Asian Oil & Gas Research, Deutsche Bank.

The biggest surge came in gas output, up 30.8% in the first six months of this year, thanks to new discoveries in China's Songliao and Sichuan Basins. New oil finds in the mainland's Erdos and Tarim Basins, as well as Bohai Bay, pumped up oil production by 1.8%.

Of course, PetroChina does also place a premium on expansion abroad. Working with its parent CNPC, it has explored for oil and gas in Kazakhstan, Peru, Venezuela, and Indonesia. But levels of foreign production remain modest. They were just over 27 million barrels of oil equivalent in the first half of the year, though that was an increase of just over 10%.

TOUGH PRICE CAPS.

PetroChina's unparalleled government connections are a big help in its operations. Former Chairman Ma Fucai is now the No. 3 official in the National Development Reform Commission, the country's top regulatory body. As China's premier petro-player with 439,000 employees, not to mention its status as the nation's largest taxpayer, PetroChina can be assured of both cheaply priced assets from its parent company and access to cheap government loans to support future expansion, say analysts.

Even so, it hasn't all been clear sailing. Beijing caps the pump price of gasoline sold by PetroChina's 18,000 service stations at about $2.40 a gallon, leading to losses in the company's refinery and marketing businesses. And with concerns about social stability growing, the government is unlikely to allow fuel prices to rise sharply, afraid that might upset hundreds of millions of poor farmers, tens of thousands of cab drivers, and many companies that rely on cheap energy.

With world oil prices already softening, PetroChina seems sure to face future profit pressures. "You are not going to have record profits year after year if you are in a commodity business," warns Deutsche Bank's Hurd. Even so, China's economy is expected to keep growing fast, and with strong management and great government connections, PetroChina is positioned to keep up its premier performance.

Roberts is BusinessWeek's Asia News Editor and China bureau chief.