China's top refiner, China Petroleum & Chemical Corp, or Sinopec, is to further consolidate upstream operations and finance downstream business by purchasing oil production assets from its parent company and issuing bonds.

Hong Kong-listed Sinopec revealed yesterday it plans to spend 3.5 billion yuan (US$447 million), buying 1,335 oil wells in 118 marginal and low-yielding fields from Sinopec Group Company. The deal is subject to the approval of the State-owned Assets Supervision and Administration Commission.

"The move is designed to trim extra costs from connected transactions between Sinopec and its parent company," said Sang Jinghua, a Sinopec official. "In fact, we have always acted proactively to streamline production and sourcing operations."

Yin Xiaodong, an analyst with CITIC Securities, said Sinopec's decision to purchase oil field facilities from its parent firm makes sense in terms of consolidating and streamlining production and internal sourcing. "It is a normal business operation which will at least bring about neutral market response to the firm's stock performance."

Cao Xiaoxi, chief engineer of Sinopec Economic and Development Research Institute (EDRI) agreed, adding that as the global oil price has soared and profit margins from oil production are hefty, it is a good time for Sinopec to purchase oil production assets.

Sang said the appraisal of the assets was adequate and the price for the offer was acceptable for Sinopec in the long run.

Sinopec operates China's second-biggest oil field at Shengli, in East China's Shandong Province.

This time, the refiner will buy from its parent company the Petroleum Development Centre of Shengli Petroleum Administrative Bureau, the Shengda Group Oil and Gas Co, a 64.7 per cent stake in Shengli Oilfield Dongsheng Jinggong Petroleum Development Stock Ltd, and 52 per cent of Shengli Oilfield Zhongsheng Petroleum Development Co. Sinopec plans to pay for the acquisition with internal resources.

Also yesterday, Sinopec unveiled plans to issue US$1.5 billion of convertible bonds outside of the mainland to repay some foreign-currency loans, and to sell 10 billion yuan (US$1.27 billion) of bonds to fund its ethylene and aromatics projects.

Specific projects that will benefit from the bond issuing include Sinopec's Tianjin Ethylene Project, Zhenhai Ethylene Project and Guangzhou Ethylene Project.

Due to the soaring international oil price, China's oil exploration and production business is boasting high profits, whereas the refining segment has suffered huge losses as current pricing has stayed rigid in terms of adjusting to the local oil price.

Although China has raised the price for processed oil products nine times since July 2003, it is still lower than the international level, dampening the enthusiasm of refiners.

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