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PetroChina Company (PTR)Stock (Energy Industry, Oil & Gas Majors Industry)
 As an affiliate of the largest state-owned oil company, PetroChina essentially has monopoly powers over the Chinese supply of oil - for now. The country's entry into the World Trade Organization means that outside oil companies started to open refined product retail stations (albeit in joint ventures with Chinese companies) in 2007, and will soon be able to explore the country for reserves. PetroChina, unused to competitive pressure, especially from the industry heavyweights, may have problems keeping up, though it's likely that the Chinese government will continue to give it preference in exploration contracts, refined products purchases, and price controls. Furthermore, there's no guarantee that the country will ease the high tariffs it has imposed on oil imported from foreign companies. Chinese growth in the past few years has relied on coal, but the environmental degradation caused by China's archaic coal plants has led the state to decide to increase the use of natural gas as a way of fueling growth - great news for PetroChina, who controls 95% of the country's natural gas transportation infrastructure. Though PetroChina currently competes with only a few Chinese companies like (Sinopec, and CNOOC), soon the majors - Exxon Mobil, Royal Dutch Shell, Chevron, BP, Total , ConocoPhillips - will go head to head with the Chinese monolith for the state's resources and its business.
[edit] Business and FinancialsPetroChina Company Limited is one of China's national vertically integrated oil companies, and is involved in four major petroleum-related activities:
PetroChina was established in November of 1999 as a part of a restructuring of China Petroleum National Corporation (CNPC). As a part of the restructuring CNPC injected into PetroChina most of the assets and liabilities associated with its exploration and production, refining and marketing, chemicals and natural gas businesses. In August, 2008, PTR purchased the remaining 50% of CNPC, making CNPC's international projects (excluding its projects in the controverial region of Sudan) wholly owned by the company.[1]  Today, PetroChina is one of the largest companies in China in terms of sales and should be a primary beneficiary of China's growing consumption of natural resources. It was also briefly the largest company in the world by market cap, moving ahead of goliath Exxon Mobil (XOM) on November 5th, 2007, for a few weeks. It should be noted that the value of the company was difficult to calculate because of the volatile nature of its shares, but the symbolic nature of the displacement was important because it signaled growing international confidence withing the investment community about the prospects not only of the company but of China's future potential growth as well. In 2006, PetroChina had estimated proved reserves of 11,618 MMBbl of oil and 53,469.2 Bcf of natural gas; it produced 2,275.9 thousand barrels per day of oil and 3,758.7 million cubic feet per day of gas. The company had a downstream throughput of 2,150.8 thousand barrels per day, and operated 16,624 retail stations. PetroChina's net profit increased by 2.4%, to CNY 145.63 billion, in 2007; revenue grew 21%, to CNY 835.04 billion. Both increases were driven by rising oil and gas prices and increased sales volumes, though income growth was offset by volatile refining margins[2]. [edit] PetroChina Controls China's Oil and Gas Distribution InfrastructurePetroChina owns and operates China's largest pipeline network, delivering 60% of the country's oil and 95% of its natural gas[3]. With so much of the transportation infrastructure in the company's hands, PetroChina can earn money off competitors who want to ship their own oil - and can afford to discount transportation of its own product. This will be especially important in the future, when China's increasing "openness" allows the oil majors in and leads to increased transportation volumes. Even expanding the country's pipeline capacity will not take much of PetroChina's market share away - the next stages in China's oil infrastructure expansion are to be taken on by PetroChina and China Petroleum & Chemical.[4] [edit] Trends and Forces[edit] As an Affiliate of China's Largest State Oil Company, PetroChina Enjoys Monopolistic PowersChina National Petroleum Company is the largest state-owned vertically integrated oil and gas company in China; the Chinese government owns 88% of PetroChina[5] - and has control over appointing the board of directors. 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. Not only that, no Western companies are yet allowed to explore in China, and imported oil faces heavy tariffs, so PetroChina faces little competition from the supermajors. [edit] China's Shift Toward Capitalism Means PetroChina's Competition Will Get TougherChina's recent movement toward capitalism threatens PetroChina's market dominance. China's recently entered the World Trade Organization, and in 2007, the country opened itself to foreign refining and marketing companies, who are now allowed to establish retail stations in joint venture with Chinese retailers. For example, Royal Dutch Shell and PetroChina's refining counterpart Sinopec are now operating petrol stations together.[6] In the future, as oil exploration and production companies are allowed to enter and operate in the country, PetroChina will find that in a competitive market, oil does not flow so easily. [edit] Chinese Foreign Policy Allows PetroChina to Invest in Regions that Western Companies Don'tThe Chinese maintain a strict foreign policy of non-interference. While Western countries like those in the European Union and North America are loath to send investment dollars into countries with human rights abuses, such as Myanmar and Sudan, China has no problem in doing so. This can create problems with social/ethical investors; in 2005 and 2006, a number of major investing institutions, including Yale and Harvard universities, divested from CNPC's affiliates (including PetroChina) because of the role the company's money played in furthering the genocide in Darfur. Access to "forbidden" reserves, however, can be extremely beneficial, especially when oil prices are high and oil companies are scrambling to increase production. [edit] Volatile Oil Prices Help PetroChina's Upstream Business and Hurt its Downstream BusinessOil and gas prices have fluctuated heavily over the past few years, though the most recent trend is a rise in prices, with a barrel of oil trading in international market on March 17, 2008 at $111. Because both are nonrenewable forms of energy (they will eventually run out), slowing discoveries of new sources combined with increasing demand has led rising prices - and to speculation that production is approaching peak oil quantities. Whether this is true or not, oil and gas are commodities: one company's oil can only be differentiated from another company's oil based on price, so when oil prices are high, all vendors of crude benefit from larger margins. The Chinese government puts a price floor on crude petroleum and a price ceiling on refined petroleum - good for explorers, bad for refiners. PetroChina's meager 2.4% income growth in 2007 (despite its 21% revenue growth) occurred because these price regulations did not allow the company to pass on high refining costs to consumers. PetroChina recently applied for a higher refined price ceiling, as well as lower refined import tariffs, so that the company could sell refined products at higher volumes for greater profits[7]. In June, 2008, the Chinese government was forced to raise the ceiling on refined products (17% for gasoline, 18% for diesel, and 25% for jet fuel) because PetroChina has been losing money; since October 2007, the company's value (market cap) has declined by approximately 75%.[8] [edit] PetroChina's Business is Reliant on the Chinese MarketWhile 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. Currently, China produces a little more than 3.4 million barrels per day[9] - less than half of the 7.9 million barrels per day projected for its 2007 demand[10]. The country's government is loathe to become dependent on foreign oil, and has imposed high taxes on imported crude and refined products in order to stimulate the growth of its own oil companies (like PetroChina). As the Chinese economy grows, the country's demand will continue to out-pace its supply, driving prices up further - another good thing for PetroChina. In the current international economy, however, the credit crunch and possibility of a recession in Western markets could lead to a slowing of China's export-based manufacturing economy, causing oil demand to fall and PetroChina's business to go with it - especially if competition increases from international oil companies in the future. [edit] China Plans to Adopt Natural GasCurrently, two-thirds of China's electricity generation comes from coal-fired power plants[11] - sources that generate tremendous amounts of greenhouse gases and particulate air pollution. To remedy some of these problems, China is planning on increasing natural gas usage from 3% to 5.3% by 2010[12]. With ownership of 95% of the natural gas transport pipelines in China[13], PetroChina is in a position to take advantage. In August 2008, PTR also entered the carbon trading business, joining the United Nations Clean Development Mechanism's carbon trading market.[14] [edit] CompetitionBecause 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. 2007 production data is as yet unavailable for PetroChina, but below are some metrics for its future competitors.
 PetroChina Company2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available
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