After soaring global crude oil prices led to a US$3.7 billion loss in the refining industry last year, in late March the government made its first step for eight months toward allowing prices to more closely track the international oil market.
Although it doesn't match the increase in global oil prices seen over the past year, the National Development and Reform Commission announced that refinery petrol and diesel prices would rise by US$37 and US$31 a tonne, respectively.
The move will go some way to alleviating ongoing supply problems, with growing margins providing refiners the incentive to boost domestic production, but it also carries risk of an inflationary blowout. Given Premier Wen Jiabao's acknowledgement at the National People's Congress that rises in consumer prices should stay under 3%, it is therefore not surprising that subsidies are still a key part of the picture.
Consumers will be spared the full impact of the increase with petrol and diesel price increases at the pump limited to US$31 and US$19 a tonne, and additional subsidies promised for "disadvantaged groups and public-good industries".
China's domestic exploration and drilling companies will be eying the refinery price increases hungrily, having already posted record profits in 2005 on the back of soaring oil prices. China National Offshore Oil Corp's net profits increased 57% to a record US$3.15 billion as it's average oil selling price rise by 34% to US$47.31 per barrel, while PetroChina announced a record annual profit of US$16.6 billion. Sinopec's sales grew from US$73.7 billion to US$99.7 billion over the same period, with net profit reaching US$4.9 billion.
However, a new windfall tax will keep this hunger in check. Oil companies engaged in exploring and selling oil in Chinese territory and within its sea borders will have to pay a tariff on every barrel of crude oil they sell above the US$40 mark. A 20% tax is to be imposed on prices ranging between US$40 and US$50, with the levy rising five percentage points for every US$5 price increase up to US$60 a barrel.
Tour yields uranium deal
Premier Wen Jiabao signed off on a uranium deal during his Pacific tour in April that will see China have access to key components for generating nuclear power. The agreement was a bilateral nuclear-safeguards treaty guaranteeing that Beijing would not use uranium imports for nuclear weapons. Australia accounted for 20% of the world's uranium output in 2005 although significant exports to China are unlikely to start until 2008. Beijing wants to build at least 30 nuclear reactors to increase nuclear capacity five-fold by 2020 as part of a move away from reliance on coal-fired power stations. Nuclear power currently contributes just 3% of the country's total energy output. There is no shortage of foreign firms offering to build the nuclear facilities with Toshiba's Westinghouse Electric and Areva SA of France both among the competitors for contracts.
Large marine gas discovery
Sinopec Corp announced the discovery of the largest and most abundant marine phase gas field ever found in China. According to a State Ministry of Land and Resources evaluation, the Puguang gas field in the northeastern part of Sichuan province contains 251.075 billion cubic meters of recoverable reserve and 188.304 billion cubic meters of technical recoverable reserve. Commercial gas production of more than 4 billion cubic meters per annum is expected by 2008, with this figure set to rise to 8 billion cubic meters a year by 2010.
CNOOC drills disputed field
State-owned China National Offshore Oil Corp has been secretly tapping the Chunxiao natural gas field in the East China Sea since January 28. The field is in China's exclusive economic zone, but Japan has disputed China's right to exploit the gas, claiming the operation could also tap gas buried under Japan-claimed waters. On January 27, CNOOC said it would delay production until late 2006 to give time for talks with Japan over the disputed field, but secretly commenced production the following day. China has refused Japanese requests to jointly develop the field.
Small mines to close
Coal mines with production capacity of less than 30,000 metric tons a year, will be closed by the end of 2007 to improve safety. Thousands die every year in the sector, with poorly managed privately run pits responsible for most of the deaths. The State Administration of Work Safety hopes sector consolidation will better utilize fuel resources, improve mining technology, and boost worker and training management.
Oil M&A hits US$6bn
Mergers and acquisitions by Chinese oil and natural gas companies grew sixfold to US$6 billion in 2005, according to a report by Harrison Lovegrove, the UK-based corporate advisers, and US research firm John S. Herold. This was a fraction of global mergers and acquisitions activity in the industry, which tripled in value to US$160 billion, its highest level since 1998. More than 240 deals were struck worldwide in 2005, up 40% from 2004, as oil industry executives and government leaders went on a frantic global buying spree under rising pressure to secure the oil and gas needed to fuel economic expansion.
Energy forum in Pakistan
Pakistan organized a three-day energy forum in April for around two dozen Chinese companies as part of an effort to attract Chinese investment in its oil and gas sector. The country is expected to face a severe shortage of gas after 2010 and Islamabad needs significant investment to increase domestic production. An official with the Ministry of Petroleum and Natural Resources denied the forum was a response to the recently concluded US-India nuclear deal, claiming it was simply a reflection of the long friendship between the two states. Pakistan's resource potential is estimated at 200 trillion cubic feet of gas and 40 billion barrels of oil.