International rules, commercial needs to dictate Russian energy ties: Sinopec

China's state-run oil and gas giant Sinopec will comply with local and international regulations to manage its investments and conduct energy trades with Russia, a company executive said March 28.

Despite the mounting and sweeping financial sanctions against Moscow, Sinopec's investments and business operations in Russia remain relatively stable for now, though the company would rigorously assess business economics and financial risks for any Russian energy trades and projects ahead.

"The operation of the company's business and projects in Russia are generally smooth, and there is no risk to impairment of the assets for the time being [according to relative accounting regulation and rules]," company president Yu Baocai said during a conference call to announce Sinopec's 2021 annual results.

Sinopec acquired a 10% stake in Russia's PAO SIBUR Holding in 2015.

It holds a 40% stake in the joint Amur Gas Chemical Complex (GCC) project with the Russian petrochemical producer Sibur.

The projected has been under construction since August 2020, with the construction cost estimated to be below $10 billion.

Sinopec set an operation management desk in Russia to monitor the construction and associated progress. A source with knowledge about the desk told S&P Global Commodity Insights that the project has been progressing slower than usual.

The decision to buy discounted Russian crude and LNG cargoes will be governed by prices, specifications, freight, tariffs, as well as international policy obligations, the official said, adding that Sinopec will continue to diversify its import sources.

As the world's top refiner by capacity, Sinopec relies on crude imports to meet around 86% of its throughput demand.

Seaborne Russian crudes are among its sources. Sinopec is the leading buyer of Russia's Urals crude and it has purchased at least one cargo for loading in May, S&P Global reported earlier. Sinopec is not only a state-owned company but also listed in Shanghai, Hong Kong and New York.

Refining faces challenge

Sinopec Chairman Ma Yongsheng said the company's refining sector faces a rising challenge with crude prices fluctuating mostly at high levels.

"We will adopt the procurement-on-demand approach to purchase crudes at favorable rates, and apply dynamic solutions to adjust product slate and utilization according to market changes," Ma said.

Sinopec plans to process 258 million mt (5.19 million b/d) of crude in 2022, and run at about 85% of its primary capacity to produce 147 million mt of gasoline, gasoil and jet fuel, according to its annual report.

The planned volumes mark a rise of 1.1% from its throughput of 255.28 million mt in 2021 and an increase of 0.5% from its oil products output of 146.21 million mt over the same period.

Despite the record-high throughput target, the output plan for oil products remains below volumes of 159.99 million mt seen in 2019.

It targets to raise domestic oil product sales by 1.6% year on year to 174 million mt, lower than 184.45 million mt seen in 2019.

These indicated that the producer intends to cut its oil products yield this year as China's domestic demand is likely to peak around 2025 and Beijing is set to cut product exports.

Sinopec's refining operations earned Yuan 65.93 billion ($10.35 billion) before interest and taxes in 2021, a record-high and an increase of 855.5% from Yuan 6.9 billion in 2020, according to the annual report.

About Yuan 2.6 billion of its profit came from appreciation of crude inventory and Yuan 400 million from oil product inventory as oil prices surged in 2021, Huang Wensheng, Sinopec vice president and board secretary, said during the call.

Huang added that Sinopec usually keeps crude inventory to meet about 20 days of throughput volume, and oil product inventory to meet 15 days' sales.

Sinopec's solo-listed refinery Shanghai Petrochemical plans to cut crude inventory by two-to-four days' throughput volume to limit the cost impact of international crude price fluctuations, S&P Global reported earlier.

Boost to upstream output

High crude prices offer a good opportunity for Sinopec to boost its upstream output and reserves, Ma said.

Sinopec targets to raise its oil and gas output by 2.3% year on year to 490.65 million boe in 2022. The company's production stood at 479.74 million boe in 2021, missing its target of 482 million boe.

Its crude production target is set to recover 0.5% to 281.2 million barrels from 279.76 million barrels in 2021.

Sinopec produced 249.6 million barrels (684,000 b/d) of crude domestically in 2021, accounting for 17.7% of China's total crude oil output, according to the company's annual report and the National Bureau of Statistics.

Beijing targets to raise crude output by 0.5% year on year to 200 million mt, or 4.02 million b/d, in 2022.

Sinopec plans to spend Yuan 81.5 billion on exploration and production to meet this goal, which would be a 19.7%, or Yuan 13.40 billion, increase from the capital expenditure on the sector in 2021.

The increment falls just behind the chemical sector, which is set to rise by Yuan 14.5 billion to Yuan 66.1 billion in 2022 as part of the company's efforts to grow the segment to replace refining as its leading profit maker.

Sinopec plans to spend Yuan 198 billion in 2022, a rise of 17.9% from the capex of Yuan 167.9 billion in 2021.

Sinopec's 2022 targets, 2021 operation results

*Oil, gas outputs from both domestic and overseas

Source: Company report

Sinopec's domestic production (million mt)

^ Sinopec's output divided by China's total production

Source: Company report, the National Bureau of Statistics

Sinopec's capital expenditure (billion Yuan)

Source: Company report