PetroChina Profit Drops; Output Curbs Expected

By ARIES POON and DAVID WINNING

HONG KONG -- PetroChina Co. said oil-price volatility and soaring costs drove its net profit down 22% last year, its first fall in annual earnings since 2001.

This year, PetroChina, China's largest listed oil producer by output, says it confronts "a complex and volatile external environment" as China's economy slows and domestic demand for petrochemical products shrinks.

Industrial activity in China is stagnating as export orders to the U.S. and Europe thin out, hitting oil demand because fewer trucks are needed to deliver goods to market and as oil-fired power plants reduce capacity.

The International Energy Agency recently forecast that China's oil-demand growth in 2009 would be the slowest in nearly 20 years, with diesel demand particularly weak.

PetroChina expects to cut crude-oil output 4.3% this year and refinery runs 1.4% in response to weakening domestic demand. But PetroChina predicts it will keep capital spending at last year's level of 232.2 billion yuan ($34 billion).

PetroChina President Zhou Jiping said Beijing's move to raise price ceilings for gasoline and diesel by 3% to 5% in response to higher global oil prices would lift the company's monthly revenue by 1.26 billion yuan.

Full-year net profit was 114.43 billion yuan, down from 146.75 billion yuan in 2007. Revenue rose 28% to 1.071 trillion yuan from 836.35 billion yuan.

A key reason for the profit fall was a 40.63 billion yuan increase in the windfall taxes paid to the government on oil sales. The tax kicks in whenever oil prices rise above $40 a barrel, and PetroChina said its average selling price in 2008 was $87.55 a barrel, up 34% from 2007.

Earnings were also squeezed by operating losses in its refining-and-marketing arm and chemical business. Operating losses on refining widened to 82.97 billion yuan from 20.68 billion yuan, as PetroChina wasn't able to pass on the cost of rising crude-oil prices in full to consumers because of the government's previous system of strictly capping refined-product prices.

Write to Aries Poon at aries.poon@dowjones.com and David Winning at david.winning@dowjones.com

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