Energy & Resources

The Rmb64 billion question

PetroChina and Sinopec report huge refining losses; the NDRC disagrees

Big oil sparks big controversy

Accounting data in the Chinese oil industry makes for an unlikely hot topic. But a massive discrepancy between two sets of statistics on the refining business has generated a significant debate.

On the one side, there are the figures released by the economic planning agency, the NDRC. According to its calculations, China’s domestic refining business made a net loss of Rmb1.17 billion ($183.8 million) in the first nine months of the year.

The numbers released from China’s two oil majors paint a very different picture. Here the losses are much greater. PetroChina and Sinopec reported Rmb41.5 billion and Rmb23.1 billion respectively – for a grand total of Rmb64.5 billion in red ink.

As PetroChina and Sinopec account for 80% of national refining activity, it seems unlikely that the Rmb63.33 billion difference could be made up from profits accrued by other companies (from 60 or so refineries, around half of which are in Shandong).

So industry analysts are turning their attention to explaining the huge discrepancy. But for the oil majors, the explanation is simple enough. “It was due to high international crude oil prices and strengthened efforts in the regulation of domestic oil prices,” PetroChina has insisted, according to Xinhua.

The focus on international prices could also involve a little creative accounting. When calculating their oil costs, PetroChina and Sinopec use the international price of crude, which is somewhat misleading because a significant chunk of their supply comes from cheaper domestic sources.

Around half of China’s oil consumption comes from imports, so domestically-refined fuel is by no means insignificant. Nor are the leading oil companies especially transparent in discussing their other costs, say analysts, leading to further confusion about their expenses.

“Using international oil prices when accounting for costs makes the earnings appear negative, while another part of the production costs are never released,” Cui Xinsheng, chairman of the China Petroleum Industry Investment Fund Management told 21CN.

“This practice of self-deception can hardly be justified.”

But why would the oil companies want their refining operations to look worse than they are?

The most obvious explanation is that they want to refer to the losses as part of their appeal to the NDRC to raise petrol prices (or to provide compensation for low prices through subsidies).

The majors have been pushing for this for a while, even though their overall operations are highly profitable, thanks to an extensive presence in more lucrative areas of the oil business, both upstream and downstream.

Net profit for PetroChina and Sinopec in the first nine months was Rmb160 billion.

For the smaller companies in the refining business, the figures released by the dominant operators are inexplicable.

“I do not understand why PetroChina and Sinopec are losing money by refining,” one executive told Xinhua. And the smaller refiners have their own problems, particularly the availability of oil.

In total, these companies have a refining capacity of close to Rmb130 million tonnes, but they are only able to refine 40 million tonnes of final product a year, according to statistics from the Petroleum Industry Chamber of Commerce. Many must also make do with fuel oil, a residue left over from the refining of crude oil, which can still be refined but at a higher cost.

Sections of the press have come out in support of the independents too: “Given that oil refining is a money-losing business, why do the oil majors shut crude supplies to independent refiners and why are they unwilling to let the private sector bear the brunt?” probes the China Youth Daily.


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