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Analysis: Under new management, scandal-hit PetroChina changes course

A security camera is seen in front of the logo of Petrochina at its gas station in Beijing August 29, 2013. REUTERS/Kim Kyung-Hoon
A security camera is seen in front of the logo of Petrochina at its gas station in Beijing August 29, 2013. REUTERS/Kim Kyung-Hoon

By Charlie Zhu

HONG KONG (Reuters) - PetroChina Co Ltd's <0857.HK> <601857.SS> days of super-charged spending may be over as the Chinese national oil giant seeks to steer clear of the legacy of former chairman Jiang Jiemin, now under an official corruption probe.

PetroChina will likely record an annual drop in capital spending for 2013, according to company officials and industry specialists. That would be its first such decline since its Hong Kong and New York stock market listings in 2000.

The world's third most valuable oil company by market capitalization remains on the prowl for global takeover targets but has vowed to become more choosy and focus on what it calls large-scale and quality projects, company officials said.

"The new management is completely different from Jiang Jiemin, under whom PetroChina has been spending like crazy and got into a lot of deals at home and abroad with questionable economics," a PetroChina official who has attended some recent strategy briefings by the firm's new management, led by chairman Zhou Jiping, told Reuters. He declined to be identified because he was not authorized to speak to the media.

PetroChina spokesman Mao Zefeng declined to comment on the quality of the firm's overseas projects, but said previous acquisitions were mainly driven by the need to secure reserves and expand the company's international footprint.

Beijing said on Sunday that it was investigating Jiang for "serious discipline violations" - shorthand the government generally uses to describe graft - in what appears to be a deepening crackdown on corruption and a push for reform. It came after an official announcement last week that three top executives at PetroChina and one at its parent China National Petroleum Corp (CNPC) - China's second largest company by revenue - were facing inquiry.

Under Jiang, a vocal proponent of expansion and what he called political and social responsibility for state-owned enterprises, PetroChina's capital expenditure surged to 352.5 billion yuan ($57.60 billion) last year from 181.6 billion yuan in 2007. Jiang was head of PetroChina and CNPC from late 2006 until early this year.

The spending rise may partly reflect cost inflation in the global oil sector and extra resources required to stem production falls at its ageing oil fields, especially China's largest oilfield Daqing, but critics contend that the company invested too heavily in its refining and petrochemicals businesses at the expense of oil and gas exploration and production.

PetroChina's new management was quick to bury Jiang's legacy, telling the media and investors that the group would become a more profit-driven entity and "enter (a) new development phase", new president Wang Dongjin said in late August, shortly before news of the investigations officially broke.

"To put development quality and profit at the core is the urgent need of PetroChina" and it will shift its focus away from "just scale expansion", Wang said. He did not specify what measures he will take to boost profitability.

CHANGING COURSE

While some watchers are skeptical PetroChina will make any substantive change given its role as China's dominant oil producer, others say the new management is putting the company on the right track.

"We are likely to see a flat, maybe lower capex number this year, which is a step in the right direction," said Neil Beveridge, senior analyst at Bernstein Research in Hong Kong.

PetroChina's capex fell 3.1 percent to 108.2 billion yuan in the first half, with spending for refinery and chemical projects falling 52 percent while upstream spending rose 11 percent.

Under Jiang, PetroChina and CNPC entered into a series of major overseas deals, including a $4.21 billion acquisition of a stake in an offshore gas field in Mozambique in March. Jiang said previously that overseas business would account for half of CNPC's output by 2015, up from around 40 percent currently.

It remains unclear whether PetroChina is still chasing that goal, but two sources close to the company said senior officials now think the firm may have been overly aggressive in some of the deals, including purchases of high-cost unconventional energy assets like oilsands and shale gas in Canada and coalbed methane projects in Australia. One of the sources said the company had been "reckless" in its pursuit of growth.

The oil giant is still in the hunt for large buys, including a multi-billion dollar stake in Exxon Mobil's $50 billion West Qurna-1 oilfield in Iraq, but its risk appetite has dwindled, the sources said.

PetroChina was the first foreign firm to sign an oil service deal in Iraq after U.S.-led forces toppled Saddam Hussein and the country already accounts for a big chunk of the company's overseas output.

TURNING A SUPER TANKER

But even if PetroChina is bent on boosting shareholder returns, it will be a long-running process given the sheer size of the company.

Analysts expect PetroChina to cut spending on refining and petrochemicals as well as pipeline segments over the next few years - capital-intensive businesses with poor profitability - while allocating more resources to exploration and production.

PetroChina raised about 90 billion yuan over the past year from the sale of some pipeline assets by setting up joint ventures with domestic institutions. It may do more of these deals in the pipeline, refining and petrochemical sectors to help rein in spending and boost profitability, analysts said.

"It is like a huge super tanker and it takes time to change course," said James Hubbard, head of Asia Oil and Gas research at Macquarie in Hong Kong.

($1 = 6.1196 Chinese yuan)

(Additional reporting by Grace Li in HONG KONG; Editing by Emily Kaiser)

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