Chinese Government Dampers Energy Sector

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Petrochina (PTR) has long been China’s outstanding energy play. Even Warren Buffett, the king of investing, is known for placing a sizeable sum in China’s number one oil producer. But as oil sets record prices, the strict market controls on Chinese gasoline has kept Petrochina’s growth at a near standstill. Petrochina held the record for largest publicly traded company with $1 trillion market cap near its peak.

Going overseas

Petrochina had all of the oil it needed in China, but as the wells run dry, it is starting to look overseas. The company has been in the news lately for human rights violations, in which some say that Petrochina might be indirectly funding both sides of ongoing violence in Darfur, while directly investing in oil wells. Unfortunately, the Chinese wells are running dry, and Petrochina has to look in the most remote and most dangerous places for oil wells.

Petrochina in some ways benefits greatly from its ties to the Chinese government. It gets easy access to domestic wells and reserves. At the same time, it is also under orders to keep the cost of gasoline low for Chinese consumers. While the rest of the world is paying $100 a barrel, Petrochina has to produce barrels in the $60 range. This statistic alone has forced Petrochina out of China and into other areas to find cheap oil, which is no simple task in today’s economy.

Foreign sales faring better

Outside of China, Petrochina’s sales fare much better. The company is allowed to sell oil at independent market prices outside of China, and the company has undoubtedly benefited from high oil prices. The Chinese government did hit the company for an $8 billion windfall tax last year to keep its profits low and maximize tax revenue. Most of the added revenue comes from overseas where Petrochina can still sell oil at full price.

The company might be reaching capacity in oil wells, but also in market cap. There are few wells that can be tapped for as little at $60 a barrel; those wells were bought up when oil prices first reached the $60 target. Now Petrochina is forced to invest in politically unstable areas, where its oil wells and reserves could become property of the government or radicals in one swoop.

Added risk in China

While Petrochina might be the only oil stock suffering from government mandated subsidies, there are other negative factors. One particular downside to an investment in China is the overextended government, which has crippled Petrochina’s profits domestically and forced the company overseas. Buffett timed the market perfectly, selling his 1.3% stake in the company right into the run up to $250 last October and November.

The economics of the home country should always be considered when looking overseas. It is possible that Petrochina could fall to high taxation at home and overseas as it begins to drill in new areas. Political unrest in Venezuela has cost many oil companies billions in seized wells and the same could happen in Africa. The greater gains that come with this overseas investment can easily be overridden by additional risk.

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