Xinhua Finance Releases Report on 'Credit Risks of China's Oil and Gas Industry'

Drop in Global Crude Oil Prices is a Turning Point for Market-driven Pricing

of Domestic Refined Oil

SHANGHAI, China, Sept. 23 /Xinhua-PRNewswire/ -- The credit rating department of Xinhua Finance Limited ("XFL", TSE Mothers: 9399 and OTC: XHFNY), China's premier financial information provider, released its report on "Future Credit Trends in China's Oil and Natural Gas Industry", which identifies, in addition to macro-economic policy to support stable growth and control inflation, government policy on issues such as refined oil pricing mechanisms and energy security as the primary factor influencing the oil and gas industry's credit worthiness.  Xinhua Finance feels that a) realization of a market oriented pricing mechanism via the linking of domestic and international refined oil prices remains a long term goal of the Chinese government; b) reform of the domestic market's refined oil pricing mechanism is unavoidable; and c) to the extent that inflationary pressures can be brought under control, the government should allow pricing of domestic refined oil to reflect the market.

From a government policy perspective, the Chinese oil and gas industry has greatly benefited from the rapid growth of the domestic economy as well as government policies that have promoted monopolization of the industry, and in recent years the industry has been in a continuous state of rapid development. However, the continuous rapid rise in international crude prices in conjunction with domestic gas price controls has led to an unrelenting increase in financial pressure on the Chinese oil and gas industry, and a weakening of its profitability.  Xinhua Finance feels that as a monopolized industry, the industry certainly realizes strong support from government policy, but at the same time it bears reciprocal responsibilities. An environment of refined oil price controls and windfall profit taxes strongly impacts the credit worthiness of the industry.  However, since they are strategically important state-owned enterprises, sovereign support continues to contribute positively to gas and oil companies' credit ratings.

The report pointed out that high consumption rates of oil and gas have led to an unremitting increase in China's dependence on foreign oil and also aggravated the energy security problem.  The scale of the oil and gas industry's capital expenditures will continue to increase as it pursues further exploration for natural resources to diversify its supply channels, subjecting the industry to significant pressure.  In the realm of refined oil price controls, the government's policy of controlling inflation as a top priority has led to postponement of reform in domestic refined oil pricing mechanisms despite the sharp rises in international oil prices.  Although the National Development and Reform Commission has increased refined oil prices by 16%-18%, this has not been enough to substantively improve the profitability of refined oil companies.

Regarding the policy of low energy prices, Dr. Chung-Hsing Chen, vice president and head of ratings and research for Xinhua Finance, commented that "From the point of view of controlling the current CPI index, the government's use of short-term inflation control measures such as restraining refined oil prices can be deemed to be successful.  However, over the medium to long term, controlled low energy prices and financial subsidies encourage high consumption and at the same time compromise efficiency.  In addition to expediting development of alternative energy sources, China will inevitably need to decrease energy consumption via energy conservation.  The goals of energy conservation, reduced carbon dioxide emissions, and increased energy efficiency can be realized through employment of pricing mechanisms to reduce irrational energy consumption.

Eric Zhong, Xinhua Finance's director of corporate credit ratings, also pointed out that while over the short-term refined oil price controls have affected the industry's profitability and limited its credit worthiness, from the medium to long-term perspective, rationalization of the Chinese oil and gas industry's fixed price mechanism for refined oil will improve its credit worthiness.  At the same time, government policy support will continue to have a positive influence on the industry's credit worthiness.

Regarding the short-term volatility in international crude oil prices, Xinhua Finance stated that the financial crisis in the U.S will continue for some period of time, and will have a long-term impact on global financial markets and global economic growth, thus suppressing energy demand.  Although during times of financial crisis there will be some short-term investment in the crude oil market as a safe haven, the international crude oil price still may slide down to a more rational price, relaxing inflationary pressures.  As one of the world's biggest consumers of oil, China's domestic economic growth and oil consumption will undoubtedly be affected by the global financial slowdown.  However, Dr. Chung Hsing Chen feels that China clearly has a greater ability to maintain economic growth than most other countries due to the government's financial strength and the potential growth in domestic demand.  This in turn indicates that China's energy consumption will continue to be significant.  The present period of sliding crude oil prices is a good opportunity for the Chinese government to gradually implement market-oriented mechanisms for the pricing of refined oil.

The report finishes up by analyzing and briefly evaluating the business and credit characteristics of the big three Chinese state oil companies- PetroChina, Sinopec and CNOOC.  The report points out that the present environment of refined oil price controls and relatively high international crude oil prices presents the three big state oil companies differing credit trends.  In general, PetroChina relies on its market monopoly status and upstream resource superiority to maintain market competitiveness, and its creditworthiness is relatively stable.  Sinopec's credit condition is the most heavily impacted by government policy and is most sensitive to policy changes. Forthcoming upward adjustments in refined oil prices will be beneficial in improving the profitability of its refinery business and cash flow levels. However, this will not be particularly useful in significantly improving Sinopec's overall profitability.  Sinopec's downstream properties will fully benefit, and Sinopec's overall credit condition will realize the most remarkable improvement, from large downward moves in international crude oil prices and gradual implementation of domestic market-oriented pricing mechanisms for refined oil.  CNOOC's business is relatively undiversified; the company's profitability and cash flow levels will be the most heavily impacted by large fluctuations in oil prices.

This report is the first in a series of reports on the energy industry from Xinhua Finance.  Xinhua Finance will periodically issue further energy industry credit risk reports. Xinhua Finance will continue to monitor closely major policy changes, market developments, etc., assess associated industry credit risk implications, and release our findings to the market in a timely fashion.

To read the full report (in Chinese only), please contact us at: .

About Xinhua Finance Limited

Xinhua Finance Limited ("XFL") is China's premier financial information provider and is listed on the Mothers Board of the Tokyo Stock Exchange (symbol: 9399) (OTC ADRs: XHFNY).  Bridging China's financial markets and the world, Xinhua Finance's proprietary content platform, comprising Indices, Ratings, Financial News, and Investor Relations, serves financial institutions, corporations and re-distributors worldwide.  Through its subsidiary Xinhua Finance Media Limited (NASDAQ:XFML), XFL leverages its content across multiple distribution channels in China including television, radio, newspaper, magazine and outdoor media. Founded in November 1999, XFL is headquartered in Shanghai, with offices and news bureaus spanning 11 countries worldwide.

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