China Petrochemical Corporation, the parent company of China Petroleum & Chemical Corporation (aka Sinopec or SNP), is enthusiastic about building production capacity at its Yuanba gas field, located in southwestern Sichuan. It targets about 16.4 million cubic meters per day, or, 6 billion cubic meters (Bcm) of annual natural gas production capacity in the field by the end of 2015.
The Yuanba gas field is a potential domestic source that holds approximately half of the reserves at the Puguang gas filed, which follows closely behind PetroChina Company Limited‘s (PTR) Sulige field in Inner Mongolia in northern China.
Additionally, the company seeks to add 3 Bcm of gas capacity at the two blocks, namely, Dawa and Maoba, in Puguang gas field next year. Both these gas fields are run by Sinopec.
Although the proven reserves of the Yuanba field are yet to be mentioned, since 2009 the company has already drilled numerous prolific exploration wells. The company also used up 62.7 billion yuan (approximately $9.44 billion) in the Puguang field as well as connected the pipelines for transporting gas to eastern China with a capacity of 12 Bcm on an annualized basis.
Given the environmental friendly nature of natural gas, the Chinese government encourages its consumption, thereby paving the way for growth opportunities. Industry players will leave no stone unturned to capitalize on China’s transition from coal to natural gas in the coming years. At present, two-thirds of China’s electricity is generated by coal-fired power plants, which emit greenhouse gases that pollute the environment.
Management remains active on the development of superior natural gas businesses that include conventional, non-conventional and LNG. We see enormous growth potential for clean and renewable energy in the next several years.
However, Sinopec has been lagging its domestic peers primarily due to exposure to the heavily regulated downstream sector and its relatively weak upstream asset base, despite the company’s effort in building a better position in the exploration and production space.
We maintain our long-term Neutral recommendation for the stock and Sinopec holds a Zacks #1 Rank, which is equivalent to a short-term ‘Strong Buy’ rating.
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