The 3 national oil giants in China reported earnings results for the first half of the year. Net profits in CNOOC gained +51% y/y in 1H11, outperforming Sinopec's +9% and PetroChina's +1% gains. Incomes in the 2 refiners were dragged down by the refinery sector in which margins were squeezed by high crude oil prices. CNOOC has benefited from high oil prices as its major operation (99%) is oil and gas production and it operates only 1 refinery. The company, however, revised down guidance. Oil and gas production volume will increase to 331-341M boe in 2011, up 1-4% from last year but down from 355-365M boe projected in the beginning of the year. 20M boe of the downward revisions was attributable to the delay of the Bridas project in Argentina while the remaining 4M boe was due to the shutdown of platform B and C of Penglai 19-3 project after oil spill. The potentially lower production growth is expected to affect full year earnings.

The earnings result from PetroChina was disappointing with net profit added +1.0% to RMB 66.0M in 1H11. The refining division recorded a decline of RMB 23.4B (oil processing: 491M bbl), including the asset impairment provision of around RMB 4B, as the government's fuel price hikes failed to catch up with the rise in global crude oil prices, resulting in margin squeezes. Performance of other sectors also missed expectations. Despite strong volume growth of +5.1%, operating profits in the E&P division grew only +41% on annual basis as E&P costs increased substantially. The loss in natural gas imports and higher income tax also helped generate the disappointing result.

Sinopec's result was stronger with net profit rising +9.4% to RMB40.2M in 1Q11. The refining division incurred a loss of Rmb12.2M (oil processing: 800M bbl) during the period. It's likely that the company had locked in crude oil prices for use in the second quarter in the first quarter so that it was less affected by the surge in oil prices in the second quarter.

In the price mechanism introduced by the National Development and Reform Commission (NDRC) in December 2008, China's fuel prices will be adjusted should international oil benchmarks (Brent, Dubai and Cinta) fluctuate by more than 4% over 22 working days. However, the government only raised prices by about +10% in the first half of the year. This resulted in margin squeezes in Chinese refineries.