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Industry Report
China
Petroleum
Analyst: Grace Liu
86 (755) 82485666-6078
[email protected]
4 June 2004
Petroleum Industry: More Attractive With Demand Surge
The OPEC held the 131st committee in Beirut yesterday. The OPEC believes high oil price is mainly attributable
to the higher than expected demand growth in the U.S. and China, geopolitical situation, oil refinery business of
some major oil product consumption regions, bottleneck problem made of oil product allocations and new
standards, worries to future oil supply and active speculation activities etc. The OPEC has decided to increase
output quota to 25.5 million barrels/day with effect on 1 July 2004, representing a rise of 8.51%. The OPEC will
further increase oil output to 26 million barrels/day since 1 August 2004. In the meantime, the OPEC decided to
hold a meeting on 21 July for reviewing the said increasing output policy.
Scale of mineral resource sector. According to the China Petroleum and Chemical Industry Association, the
current industrial value of petroleum and natural gas sector in China for 2003 was RMB328.6 billion, up 22.1%
yoy. Industrial value for the 1Q04 increased 3.4% yoy to RMB88.6 billion. According to the China Coal Industry
Association, industrial value of coal enterprises for 2003 increased 19.24% yoy to RMB245.325 billion. Current
industrial value for 1Q04 rose 35.11% yoy to RMB69.7 billion.
Mineral resource output for 2003 increased 13.6% yoy to 1.35 billion tonnes. Crude oil output increased 1.5%
yoy to 169 million tonnes. Crude oil output of PetroChina Natural Gas Group and PetroChina Petrochemical
Group were 109 million tonnes and 38.16 million tonnes respectively, representing 64.7% and 22.54% of total
output in China. Crude oil output for 1Q04 rose 2.4% to 42.61 million tonnes. Output of natural gas for 2003
increased 6.8% yoy to 34.1 billion cubic meters. Output of natural gas from PetroChina Natural Gas Group and
PetroChina Petrochemical Group accounted for 73.0% and 15.5% of total output in China. Output of natural gas
in 1Q04 increased 16.0% yoy to 10.1 billion cubic feet. Raw coal output for 2003 grew 18.0% yoy to 1.327
billion tonnes and it rose 14.4% yoy to 335 million tonnes in 1Q04.
Crude oil and natural gas output for 2003 and 1Q04
Item
Unit
2003 Growth (%)
Production output of resources
10k tonnes
134,992
13.6
Crude oil
10k tonnes
16,932
1.5
Petrochina Natural Gas Gp
10k tonnes
10,954
1.94
Petrochina Chemical Gp
10k tonnes
3,816
0.43
CNOOC Gp
10k tonnes
1,533
2.7
Natural Gas
‘000 mn cubic meters
341
6.8
Petrochina Natural Gas Gp
‘000 mn cubic meters
249
10.45
Petrochina Chemical Gp
‘000 mn cubic meters
53
5.0
CNOOC Gp
‘000 mn cubic meters
30
6.7
Raw Coal
10k tonnes
132,669
18.0
Source: National Bureau of Statistics of China, Petroleum and Chemical Association, GTJA (HK)
1Q04
4,261
2,741
954
383
101
75
14
8
33,526
Growth (%)
2.4
2.7
2.7
-0.6
16.0
13.3
10.6
33.5
14.4
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1
Total profit of China crude oil and natural gas for 2003 increased 35.63% yoy to RMB124.3 billion, accounting
for 15.25% of total industrial enterprises profit. Profit for 1Q04 fell 2.88% yoy to RMB35.8 billion, accounting
for 15.24% of total in China. The slight profit fall is due to the drop of international oil prices during 1Q04. But
according to oil prices since the second quarter, realized profit of the industry will jump dramatically. Profit of
coal enterprises for 1Q04 surged 123.64% yoy to RMB4.956 billion, accounting for 2.11% of total industrial
enterprises profit.
Energy consumption. According to the figures of International Energy Agency, average energy consumption
per capita in the world for 2001 was 1.64 tonnes boe and energy consumption per thousand US dollars is 0.29.
Average energy consumption per capita in China was 0.90 tonnes boe, lower than the average 45% of the world
and the energy consumption per thousand US dollars is 1.02, 252% higher than the international average level.
Average energy consumption per capita in the U.S., Japan, South Korea and Germany were 3.16, 4.09, 4.11 and
4.26 respectively and average energy consumption per thousand US dollars of 0.18, 0.09, 0.30 and 0.13
respectively.
Mineral resource consumption of major international crude oil importers in 2001
Total resources consumed
(Mtoe)
International Average
10029
OECD countries
5333
U.S.
2281
China
1139
Japan
521
South Korea
195
Germany
351
Italy
172
France
266
India
531
Holland
77
Spain
127
Source: International Energy Agency
Average resources consumed per capita
(toe)
1.64
4.68
3.16
0.90
4.09
4.11
4.26
2.97
4.36
0.51
4.81
3.16
Resources consumed per thousand US
dollars (toe)
0.29
0.19
0.18
1.02
0.09
0.30
0.13
0.14
0.15
1.08
0.15
0.18
China is a country with lower energy efficiency. Along with the growth of technology and falling energy
consumption per 10 thousand dollars GDP during 1991-2001, the economy has been recovering since 2002, so
the average elasticity of energy consumption during 1991-2002 is 0.51 and the figures are expected higher than
the average during 2004-2006.
Energy Consumption in China
1991 1992 1993 1994 1995 1996 1997
GDP growth (%)
9.2
14.2 13.5 12.6 10.5
9.6
8.8
Energy Consumption Growth (%)
5.1
5.2
6.3
5.8 6.9
5.9
-0.8
Elasticity of energy consumption
0.55
0.37 0.21 0.46 0.66
0.62
Energy Consumption Output per 10k dollars GDP
5.12
4.72 4.42 4.18 4.01
3.88
3.53
(tonnes/10k dollars)
Coal per 10k dollars GDP (tonnes/10k dollars)
5.46
4.94 4.61 4.38 4.21
4.04
3.57
Crude oil per 10k dollars GDP (tonnes/10k
0.61
0.57 0.53 0.48 0.46
0.44
0.45
dollars)
Source: National Bureau of Statistics of China, 2000-2002 Yearbook of China Energy Agency, GTJA (HK)
1998
7.8
-4.1
3.15
1999
7.1
-1.58
2.89
2000
8.0
0.13
0.01
2.68
2001
7.5
3.5
0.47
2.59
2002
8.0
9.9
1.24
2.63
3.08
0.41
2.81
0.42
2.56
0.44
2.42
0.41
2.42
0.40
Crude oil reserves in the world may last 40.6 years. According to the statistics from U.S. Oil and Gas
magazine, international crude oil reserves are 1,212.9 billion barrels and natural gas of 550,000 billion cubic feet.
Crude oil reserves in the Middle East account for 56.53% of total international reserves and the reserves of
OPEC member account for 67.53%. Therefore, oil resources are mainly concentrated in the hands of the OPEC
cartel.
China Petroleum – June 04 2004
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2
Gas and oil reserves as at 1 January 2003
Oil (‘000 barrels)
Asia Pacific regions
38,712,066
West Europe
18,097,790
East Europe and Union
79,360,176
The Middle East
685,642,260
Africa
77,428,393
South America
313,639,663
OPEC
819,007,000
Total in the world
1,212,880,852
Source: U.S. Oil and Gas Magazine, GTJA (HK)
Percentage (%)
3.19
1.49
6.54
56.53
6.38
25.86
67.53
100.00
Gas (1 billion cubic feet)
445,407
188,631
1,967,112
1,979,675
418,162
502,437
2,490,740
5,501,424
Percentage (%)
8.10
3.43
35.76
35.98
7.60
9.13
45.27
100.00
According to the BP international resource statistics in 2003, international crude oil reserve to production ratio
met the oil crisis in late 1970s and 1980s and increased to 44.7 years in 1989 from 32.9 years in 1986. Entering
in the 1990s, oil reserves dropped slightly. International crude oil prices during 2000 to 2002 retreated from the
bottom, oil reserve to production ratio rose 1.25% and 0.50% yoy respectively. International crude oil reserve to
production ratio for 2002 was 40.6 years and 92 years for the Middle East.
International crude oil reserves and output ratio during 1980-2002
International oil reserves & output ratio in 2002
Source: BP International Energy Statistics 2003
PetroChina has discovered gross petroleum reserves about 18.3 billion barrels, accounting for 1.5% of total
reserves output in the world. Gross reserves of natural gas amounted to 53,000 billion cubic feet. Total fired coal
reserves amounted to 5,570 billion tonnes and reserve extraction amounted to 1,040 billion tonnes. Fired coal
reserves account for 10.97% of total output in the world. Oil and gas reserves of PetroChina (0857) were 17.7
billion boe, accounting for 64.6% of total oil extraction. Reserve to oil extraction ratio is 19.96 years. The ratio
of other international petroleum companies, such as ExxonMobil, BP, Shell, Chevron Texco and Total are 13.86,
16.74, 10.56, 12.99 and 12.30 years respectively.
Oil and gas reserves of PetroChina, Sinopec and CNOOC
Item
Crude oil (mn barrels)
Natural gas (billion
cubic feet)
Total oil and gas
reserve output (mn
boe)
Total in China (2002)
18,250
53,325
27,445
PetroChina 857
10,919
41,069
17,764
Sinopec 386
3,257
2,887
3,738
CNOOC 0883
1,436
4,154
2,128
ExxonMobil
12,075
54,769
22,000
BP
4,444
23,831
12,955
Shell
6,844
46,573
14,874
Chevron Texaco
8,599
20,191
11,964
Total
7,323
22,267
11,401
Source: US Oil and Gas Magazine, 2003 Annual Reports of Companies, GTJA(HK)
Oil and gas output
(mn boe)
1236
890
303
130
1,587
774
1,408
921
9,267
Reserves to
production ratio
(years)
14.8
19.96
12.34
16.37
13.86
16.74
10.56
12.99
12.30
International crude oil still remains over-supply. According to the revised figures from the International
Energy Agency, demand of international crude oil in 2004 and 2005 are expected to grow 2.0% and 2.3% yoy
respectively and it may rise to 80.6 mn barrels/day in 2004. Supply of international crude oil in 2004 and 2005
are expected to grow 2.5% and 1.7% respectively and it grows to 81.5 mn barrels/ day in 2004. Therefore,
China Petroleum – June 04 2004
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international crude oil during 2004-2005 remains over-supply. According to the projection of the U.S. Energy
Agency, average demand growth of international crude oil during 2003 – 2025 is 1.8%.
Resource demand and supply in mainland mainly rely on GDP growth as well as other factors such as population
size, capital and smaller technology changes on energy consumption. Nominal consumption of crude oil in China
for 2003 increased 10.15% yoy to 252.3 mn tonnes. According to the report of the International Energy Agency
dated 12 May 2004, projected crude oil consumption in mainland for 2004 is expected to grow 13.66% yoy to
6.24 mn barrels/day, overtaking Japan to be the second largest oil consumer just after the largest consumer,
America. According to the projection of China Petrochemical Association, mainland crude oil demand in 2004
and 2005 are expected to grow 5.79% and 6.39% yoy and the average growth rate during 2004 to 2010 is 6.16%.
China has been a net oil importer since 1993. Crude oil output in China just grows 1.2% each year. Output in
2003 is about 3.5 mn barrels/day in 2003. Imported crude oil for 2003 amounted to 91.12 million tonnes,
accounting for 36.12% of total consumption and 42.4% for the first three months in 2004.
Projected crude oil prices in 2004 and 2005. International crude oil prices in 2003 were affected by the U.S.Iraqi war. Average price of Brent oil for the year was US$28.85/barrel, up 13.34% yoy over the average price
US$25.23 in 2002. Average prices in 2000 and 2001 were US$28.42 and US$24.84/barrel. Average price for the
first five months in 2004 was US$33.4/barrel, up 14.8% yoy.
International crude oil prices during January 2002 to May 2004
Source: Bloomberg, GTJA (HK)
International crude oil prices may be affected by several factors, including:

According to the existing geopolitical situation, it is less possible to see huge wars happened. Therefore,
crude oil prices may not have several unusual ups and downs.

The political situation in the Middle East also worries the market. Iraq may take longer time for its reestablishment. Together with other uncertain geopolitical situation among oil producers, the terrorist attacks
from al-Qaeda etc. may continue. Those uncertainties may stimulate oil prices volatile in future.

The existing oil output from Iraq has resumed to 2.3mn barrels/day, close to the pre-war level 2.8mn
barrels/day. Presently, the whole world is waiting and observing the handover of the Iraqi sovereignty. If the
sovereignty is handed over to new administration successfully, oil output from Iraq may resume rapidly. It
may help to depress the rise of oil prices.

The OPEC has decided to increase oil output quota by 2 mn barrels/day to total 25.5 mn barrels/day with
effect on 1 July, representing a rise of 8.51%. Oil output will further increase to 26 million barrels/day since
1 August. Meanwhile, the OPEC decided to hold a meeting on 21 July for reviewing the proposed
enhancement of output. Presently, the OPEC output accounts for 38.4% of total international crude oil output.
The OPEC may enhance the basket oil price from US$22-24/barrel to US$30-34/barrel. Over-production of
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oil in March and April 2004 are 1.37 and 2.3 mn barrels/day. In fact, the OPEC has already raised oil output
quota by 2 mn barrels/day. Remaining output capacity is ranging 2.17 mn barrels to 2.67 mn barrels. So, the
increase of capacity is less. The over-production capacity of those OPEC members may further increase 1.3
mn barrels/day by the end of last year. It signals that the effects from the increase of output from the OPEC
are declining but larger psycho effects.
‘000 barrels/day
Oil quota and output of members of the OPEC
Quota in
Apr 2004
Algeria
Indonesia
Iran
Kuwait
Libya
Nigeria
Qatar
Saudi Arabia
United Arab Emirates
Venezuela
OPEC 10
Quota in
Feb-Mar
2004
Output of
Feb 04
Output of
Mar 04
Output of
Apr 04
750
1,218
3,450
1,886
1,258
1,936
609
7,638
782
1,270
3,597
1,966
1,312
2,018
635
7,963
1,200
975
3,900
2,300
1,450
2,350
750
8,700
1,200
975
3,900
2,300
1,450
2,350
760
8,300
1,200
970
3,900
2,300
1,450
2,350
760
8,300
2,051
2,704
23,500
2,138
2,819
24,500
2,300
2,450
26,375
2,270
2,450
25,955
2,120
2,450
25,800
2,000
28,375
2,200
28,155
2,300
28,100
Iraq
Crude Oil Total
OverOverCapacity
Extra
production production
capacity
of Mar 04 of Apr 04
418
450
1,200
0
-300
-248
970
0
303
450
3,900
0
334
414
2,300
0
138
192
1,450
0
332
414
2,350
0
115
151
850
90
337
662
10,0001,70010,500
2,200
62
69
2,500
380
-369
-254
2,450
0
1,370
2,300
27,9702,17028,470
2,670
2,300
0
1,370
2,300
30,2702,17030,770
2,670
Source: US Energy Agency

According to the U.S. Energy Agency, America announced crude oil reserves as at 3 June grew 12.7% yoy
to 302 million barrels but gasoline reserves fell 1.44% yoy to 204 million barrels. However, these two
indicators are both below the lower-ends. Due to many states in America adopting the new standard gasoline,
gasoline reserves are reducing, so oil prices are boosted. The current high oil prices partly reflect the cost of
environment protection. The current strategic oil reserves in the U.S. amounted to 659 million barrels. The
U.S. government emphasized it would not use the strategic oil reserves to soften the existing high oil prices.
The rise of crude oil prices has benefited the U.S. economy to kick off the gloom of deflation since 2003.
With the coming presidential election, it signals the Bush administration may strengthen its intervention on
oil prices during the 2H04.

According to the report of International Energy Agency on 12 May, crude oil reserves of OECD countries
for the 1Q increased 2.78% yoy to 2.474 billion barrels, slightly lower than the 5-year average 400,000
barrels/day.
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Source: International Energy Agency

Huge finance deficit and trading deficit caused the U.S. dollars weakening. Both presidential election getting
closer and high oil prices arising inflation may lead the interest rise decision more prudent. Therefore, the
U.S. government’s weakening U.S. dollars policy may remain unchanged in 2004. Nevertheless, the
depreciation of U.S. dollars may lead oil prices to climb higher and adverse impacts to Europe and Japan
users lesser. Meanwhile, it becomes an excuse for the OPEC to maintain its basket oil price high.

Global economy is boosting and it supports oil prices to hover high. Economic figures of the U.S., Japan,
China, India and Europe are reflecting the global economy is growing in 2004. China and India populations
are very high and the efficiency of resources consumption is lower. The strong economic growth of these
two countries may stimulate oil prices searching for a new balancing point. China proposes to implement its
strategic oil reserves to stimulate the short-term oil demand.

The rise of crude oil prices enhances the market speculation. Meanwhile, it may make oil prices hovering
highs.
In sum, it is more probably to see oil prices remain high in 2004. Along with the improvement of technology and
more other energy replacement such as natural gas, hydrogen and coal etc., in the meantime, the rise of oil prices
may stimulate oil supply to rise as well as tighten the demand. Energy-saving campaign may also help to depress
the demand. However, it is hard to see oil reserves in short-term have a dramatic increase. Based on the above
factors, we raise projected average price of Brent oil to US$31/barrel.
National restrictions. Crude oil prices in mainland are mainly determined by the standard price as well as the
discounted or premium rates. The benchmark price of domestic crude oil in China is in line with the previous
monthly FOB price plus tariff (the current tariff is zero) of similar crude oil on the international market. The cost
of mainland crude oil-to-factory normally should be slightly lower than the cost of imported oil-to-factory.
Presently, the introduction of fuel oil futures etc. signals the country will use oil importation to offset the effects
from international oil prices and China proposes to establish its strategic oil reserves.
Access to the WTO may affect the petroleum industry in 2004. China promises 15% growth of non-state
owned crude oil trading after China’s access to the WTO. The oil imported quota of non-state owned trading
companies in 2004 has grown 15% over 2003 to 10.95 million tonnes. Due to the extension of the imbalance of
oil demand and supply, it will not affect crude oil and natural gas basically.
Macro-control policy basically will not impact the energy industry. National Development and Reform
Commission unveiled the macro-control policy on iron and steel industry, cement and electrolyzed aluminium
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since the beginning of 2004. After then, the Political Bureau of China also implemented certain measures to
control the growth of currency credit and further strengthen the management of land use. The measures include
strictly control new investment and enforce to prevent irrational investment and low-quality asset expansion. On
the other hand, the State Council ordered to have one-off clearing on all projects whether they are underconstruction or proposed to construct. The NDRC, the Central Bank and CBRC jointly announced a notice about
tightening the asset policy and credit policy to reduce its credit risk and published an industry list in which the
industries having any low-quality asset expansions are prevented. It is no doubt that those administrative control
measures are strict and intensive. To the petroleum and chemical sector, those oil and gas fields, which are not
approved by authorities and are disqualified to the requirement of China, may be adversely affected. In
conclusion, macro-control policy may affect the resource industry none.
Economic measures will impact the energy industry less. The government may consider to using interest rise
policy upon results of the said macro-control policy effective or not. According to the present economic situation,
interest rise is no doubt. Due to the lower debt ratio of energy companies, the net debt ratio of PetroChina (857)
is 15.3% and both CNOOC (0883) and Yanzhou Coal Mining (1171) recorded net cash respectively. High oil
price brings the upstream companies strong cashflow since 2003. By the end of 2003, cashflow balance of
PetroChina, CNOOC and Yanzhou Coal Mining were RMB11.2 billion, 14.4 billion and 2 billion respectively. It
is less probably to see huge debts the companies burdened. Therefore, interest rise may affect the mineral
resource sector lesser.
Industry Risk. Major risks to the energy sector:

The strong volatile and unexpected international oil prices may lead the companies profit fluctuating.

Generally, the extraction cost of major oil and gas fields in China becomes higher as they are entering into
the medium or final stages. Meanwhile, newly discovered oil and gas reserves are not sufficient enough to
fulfill the growth of demand;

Companies may meet diplomatic obstacles and interventions from other foreign competitors when they are
going to acquire oil fields from other countries;

National policy to mineral resources may change.
Market expectation. Presently, the market believes the economic macro-control may have a soft landing.
China’s economy will continue to grow in 2004. H shares continue trading active. With the introduction of Hshare index futures and options contracts, increasing market interests in trading H shares and higher volatility of
H shares. Both PetroChina and Sinopec account for 33.24% share percentage of the HKCEI. Any stock price
changes of both companies will be materially to the Index. High oil prices may bring mineral resource
companies huge profit. Fired coal is also a basic material and a leading industry during the economy recovering.
Mineral resources industry is expected to benefite from the growth of China and international economies in
2H04. The expectation of high crude oil prices may enhance the valuation of mineral resource companies.
Mineral resource sector aroused high concerns from the market during high international oil prices. Along with
the international economy is recovering and the economies of high population countries such as China and India
are boosting, international mineral resources and demand will be reallocated. Energy sector will become a key
factor to international economic and political development in coming few years. The effects to stock markets are
also important.
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7
Rating Definition
The Benchmark: Hong Kong Hang Seng Index
Rating
Buy
Accumulate
Neutral
Reduce
Sell
Time Horizon: 6 to 18 months
Relative Performance
>15%
5% to 15%
-5% to 5%
-5% to –15%
<-15%
Editor: Christine Yim
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consult the professionals and then make a prudential investment decision.
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