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China's oil majors risk wasting a good trade war

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China's oil majors risk letting a good trade war go to waste. Earnings are gushing at the country's energy giants, including the US$210 billion PetroChina.

[HONG KONG] China's oil majors risk letting a good trade war go to waste. Earnings are gushing at the country's energy giants, including the US$210 billion PetroChina. They are beneficiaries of US President Donald Trump's belligerence, which has supported crude prices and opened opportunities in Iran. New rules hampering smaller rivals at home are helping, too. The boost to bottom lines and stock prices will please Beijing, but does not obviate the need for longer-term reform.

It has been a good start to 2018: CNOOC's first-half earnings rose almost 60 per cent year on year, the company's best performance since 2015. China Petroleum & Chemical Corp , known as Sinopec, has reported its best quarterly net profit in years. PetroChina, due to report on Thursday, has already said its bottom line more than doubled. Shares have outperformed too: Sinopec's Hong Kong stock is up more than 35 per cent in the year to date, against a 6 per cent drop in the wider Hang Seng index.

Higher oil prices have been key, as for other global heavyweights, and a clampdown at home on independent refiners has helped too. But the Chinese state-owned conglomerates are getting an extra boost from Washington. Mr Trump's trade war with China has helped to push down the value of the yuan – that makes imports more costly, but because the majors' revenue is largely in dollars and costs in yuan, a drop helps.

Better still, a US decision to withdraw from the Iran nuclear deal could leave Beijing's trio to fill the gap. For instance, Total may transfer its majority stake in a US$5 billion natural gas project there to China National Petroleum Corporation, the parent of PetroChina.

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The key now is to use the boon wisely. To start, that means doing more to reduce expenses that remain high by global standards. PetroChina will need to campaign for more natural gas price liberalisation, if it is to curtail losses on pricey imports.

Sinopec is looking to bring down costs, but has much further to go: operating expenses in the exploration and production segment declined slightly in the first half, but the unit managed to post an operating loss, even with oil touching highs last seen in 2014. Higher prices certainly paper over the cracks. But current levels – and even Mr Trump's brash foreign policy – will not last forever.

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Oil and gas company CNOOC, the listed arm of the state-owned China National Offshore Oil Corporation, said on Aug 23 that first-half net profit climbed 57 per cent year on year to 25.5 billion yuan (S$5.1 billion) - its strongest performance in three years, thanks to higher crude prices and a more than 20 percent increase in oil and gas sales.

China Petroleum & Chemical Corp, known as Sinopec, said on Aug 26 that its first-half net profit rose 54 per cent from a year earlier to 41.6 billion yuan, thanks to its upstream and refining businesses. The country's largest refiner said it expected fuel sales to drop in the second half of the year, because of an oversupply of refined fuels.

PetroChina is expected to report its earnings on Aug 30. It said on July 30 that it expected first-half net profit to more than double, potentially its highest six-month earnings since 2015.

Global oil prices were up almost 20 per cent in the first half of 2018, with Brent crude oil topping US$80 a barrel in May for the first time since 2014.

REUTERS