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High oil-linked LNG contract prices hit Chinese Sinopec's H1 2018 revenue

Hong Kong — China's state-owned Sinopec was hit with an import loss of Yuan 1.6 billion ($235 million) in the first half of 2018, because of difficulty in passing higher long-term oil-linked LNG contract prices to downstream gas consumers in the country, a senior company official said Monday.

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As crude oil benchmarks recover, so do oil-linked long-term LNG contract prices. Based on an estimated 14% linkage to Dated Brent plus a 50 cents/MMBtu constant, the average price of long-term LNG contracts delivered in H1 2018 would be $10.4/MMBtu, up 35% from $7.7/MMBtu a year earlier, according to Platts data. The linkage to crude oil in long-term contracts was also higher in 2011, when oil prices reached above $100/b and Sinopec's bigger contract with Australia Pacific LNG was signed.

Sinopec imported 3.5 million mt in H1 2018, largely from two contracts it signed on an oil-linked basis with Papua New Guinea LNG for 2 million mt/year in 2009, and with APLNG for 4.3 million mt/year in 2011.

"Term LNG prices were agreed when the oil price was high, while domestic gas prices were cut in line with falling oil prices in 2014," Sinopec CFO Wang Dehua said Monday during Sinopec's interim result briefing.

LNG IMPORT CAPACITY EXPANSION

Sinopec is planning to increase gas supplies though more LNG imports and domestic natural gas production, Sinopec Chair Dai Houliang said.

"We will expand our LNG terminal capacity to over 14 million mt/year in the future," Dai said. Currently, Sinopec has two LNG terminals with a combined capacity of nearly 6 million mt/year.

Sinopec is also planning to increase domestic natural gas production to 33 Bcm by 2020, 20% above its 2018 target of 27.58 Bcm, company vice president Huang Wensheng said.

Earlier this month, China's President Xi Jinping called for more efforts to increase China's upstream exploration and development amid growing supply security uncertainty, due to rising China-US trade tensions, the return of US sanctions on Iran and falling production from Venezuela.

-- Oceana Zhou, oceana.zhou@spglobal.com

-- Abache Abreu, abache.abreu@spglobal.com

-- Edited by Geetha Narayanasamy, geetha.narayanasamy@spglobal.com