PetroChina is the largest oil and gas producer in China and the second largest company in China in terms of revenue. PetroChina is an integrated oil and gas company whose operations include oil and gas exploration and production, refining, and the marketing and transportation of oil, refined products, natural gas, and other petrochemicals. The company’s largest segments are its refining and marketing segment and its exploration and production segment.
Because almost all of the company’s earnings come from oil and natural gas operations, Petrochina’s future revenues depend heavily on the price and consumption of natural gas and oil in China. PetroChina sells its oil and natural gas products at prices determined by the Chinese government. Although government set prices are not as susceptible to changes due to market conditions as oil sold in North America, government policies like fuel price caps and windfall taxes were partially responsible for the 22% decline in annual profits in 2008.
PetroChina operates its businesses through exploration and production of crude oil and natural gas, refining, transportation, storage and distribution of crude oil and petroleum products, manufacture and distribution of basic petroleum chemical products, derivative chemical products and other chemical products, distribution of natural gas, crude oil and refined oil products, as well as sale of natural gas. Its segments of operations are listed below.
Refining and Chemicals (2010 Operating Profit of RMB7.8 billion): PetroChina's refineries processed 122 million tons of crude oil in 2010, which represents a 9.1% growth compared to 2009 levels. The amount of gasoline, diesel, and kerosene rose to 79.45 million tons, which is a 8.5% increase compared to 2009 levels. Earnings from its chemical operations, which pertain to the production of petrochemicals, chemicals, and petrochemical derivatives, rose on a year-over-year basis. In 2010, PetroChina's chemical operations produced 18.06 million tons, an increase of 5.0% from 2009 levels. While the completion of refining projects contributed to the overall rise in production levels, higher crude prices led to higher processing costs and lower margins. Over 2010, operating profit from the Refining and Chemicals segment dropped 54.7% compared to 2009 levels.
A large portion of the crude oil processed at PetroChina’s refineries comes from the crude oil PetroChina extracts from the ground. To cut transportation and storage costs, a majority of the refineries are located close PetroChina’s storage facilities and transportation pipelines or railways. PetroChina sells its refined petroleum products through its 16,725 retail businesses and 802 regional wholesale distribution outlets. Over the course of 2010, PetroChina completed several projects related to its Refining and Chemicals operations. Key projects completed in 2010 include: the refinery project of Guangxi Petrochemical and the reconstruction of Liaoyang Petrochemical and Jilian Petrochemical. By the end of 2010, the Company achieved an enhanced refining structure including six 10-million-ton refining projects, four ethylene projects, and two aromatics projects.
Exploration and Production (2010 Operating Profit of RMB153.7 billion) : Through its exploration and production operations, PetroChina searches for and extracts crude oil and natural gas. PetroChina’s E&P operations are primarily located in the northeastern, northern, southwestern, and northwestern regions of China.
In terms of its exploration operations for 2010, PetroChina made several discoveries in its exploration areas. PetroChina ascertained 16 blocks of large-scale reserve in the Erdos Basin, in the Qaidam Basin, in the Bohai Bay Basin, in the Tarim Basin, and in the Sichuan Basin. PetroChina realized an oil and gas reserve replacement ratio of 1.32 in 2010.
PetroChina produced 858 million barrels of crude oil over the course of 2010. This production level represents a year-on-year increase of 1.7%, from 2009, which marks the largest year-on-year increment in production in recent years. Output of marketable natural gas rose 5.2% year-over-year to 2,221 billion cubic feet in 2010. The average selling price of its crude oil increase 35% compared to 2009 prices. These factors drove the rise in operating profit from this segment. Compared to 2009 operating profit of RMB105.02, 2010 operating profit was RMB153.7 billion.
Marketing (2010 Operating Profit of RMB16.0 billion): PetroChina markets a range of refined products, including gasoline, diesel, jet fuel and lubricants, through a network of sales personnel and independent distributors and wholesale and retail distribution system across China. PetroChina owns approximately 16,607 service stations. In 2010, the Marketing segment reported operating profit of RMB16.0 billion, which is a 20.3% increase from 2009 operating profit realized by the segment. Drive in part by strong domestic sales of oil products, sales of refined products increased 19.3% year-over-year. PetroChina sold 101.92 million tons of oil products to domestic customers. This represents an increase of 15.8% compared to sales in 2009.
Natural Gas and Pipeline (2010 Operating Profit of RMB20.4 billion): Petrochina's pipelines measure a total length exceeding 50,000 kilometers, of which more than half is devoted to natural gas. The Natural Gas & Pipeline segment reported 2010 operating profit of RMB20.4 billion, representing a year-over-year increase of 7.2%.Growth in operating profit compared to 2009 resulted from the completed in construction projects.
China National Petroleum Company is among the largest state-owned vertically integrated oil and gas company in China China's government tends to award contracts for operations within the country - exploration and production, for example, or retail station operation - and as an affiliate of the largest state-owned oil company (and an international, publicly traded corporation that attracts foreign investors), PetroChina gets the lion's share of China's oil business. With little Western competition involved in China's exploration and production operations, PetroChina faces little competition from the supermajors
However, China's control over the country's oil industry has the potential of hurting companies like PetroChina. In China, the National Development and Reform Commission of China (NDRC) controls wholesale price ceilings for crude oil and petroleum products. While NDRC's fixed prices often remove oil-price volatility, the prices have the potential of negatively impacting producers if the set prices do not reflect the market accurately.
While PetroChina has begun to expand its exploration and production operations abroad, the company is only allowed to sell its crude and refined products in China.
As the largest oil producer in China, PetroChina is likely to benefit from China's economic recovery in 2009 and 2010. In the past, China's growing population and economy have led to oil and gas demand outpacing supply. While this has the potential of leading to rising commodity prices, China also has the potential of becoming dependent on foreign oil. In addition, PetroChina's mandate to sell to oil and gas products to China has the potential of hindering potential international expansion plans.
As Chinese energy companies strike deal after deal to secure foreign supplies of coal and gasoline, PetroChina has the potential of accelerating the production of gas found on the surface of coal in order to meet domestic demand for cleaner-burning fuels. Coal-bed methane, gas in shale, and tight gas contained between rocks are resources of unconventional gas that have the potential of becoming a major energy source for domestic consumption because of their possible abundance and low-emissions. Alongside BP (BP), PetroChina will assess a gigantic coal-bed methane deposit in Xinjiang. This find, as well as PetroChina's aggressive exploration efforts have the potential of boosting unconventional gas production significantly in the future. Annual output has the potential of exceeding 10 billion cubic meters by 2020.
Because PetroChina is a subsidiary of China's largest state-owned oil company, it currently has few major competitors - among them, CNOOC and Sinopec. Once China opens up to international development, however, PetroChina will face retail and exploratory competition from the oil majors. While this may seem like a huge advantage, given that PetroChina cannot sell outside of its country, retail stations opened in China by foreign companies must be opened in joint venture with Chinese companies - and Sinopec and PetroChina are the most likely to be involved. Furthermore, it remains to be seen whether or not the country will remove the petrol tariffs that prevent the international oil community from competing effectively with PetroChina. The oil majors and nationals - Exxon Mobil, Chevron, Shell. BP, ConocoPhillips, Eni S.p.A., LUKOIL, etc. - are vertically integrated oil companies that explore, extract, and refine petroleum products. Supplying their own oil allows them to keep margins down, while their immense size allows them to keep capital expenditures high to expand refining capacity and increase exploration and production globally.
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