PetroChina's PTR first-half release included revenue growth of 40% on higher energy prices, but also significant margin contraction because of losses in the refining and chemical division. Average daily production for the half was up 5.1%, to 3,555 thousand barrels of oil equivalent per day, with growth evenly split between oil and natural gas. Operating profit from the upstream segment was CNY 103.7 billion, up 41%. While the firm mentioned pursing exploration projects in regions such as Daqing, there was also meaningful discussion of enhanced oil recovery techniques such as carbon dioxide and heavy oil fire flooding. While these techniques could lengthen the productive lives of older regions such as Daqing, they come with much higher operating costs and require a high degree of technical capability. North American oil and gas producers, which have much greater capability with EOR, have thus far been reluctant to share technical knowledge with the East. As such, we stand by our thesis that natural gas will be PetroChina's primary source of long-term production growth, and the company's limited domestic oil production efforts will largely be directed toward keeping volumes flat.

PetroChina's refining division performed predictably poorly, from a financial perspective, as a result of the mismatch between rising feedstock prices and government-controlled refined product prices. With the Chinese government attempting to slow GDP growth and keep consumer prices in check, we expect refined product prices will remain a key lever used by the country to fight inflation. This means that oil price movement either up or down (i.e., volatility) will create a difficult operating environment for the firm, with upstream and downstream profitability offsetting each other. Steady energy prices that allow the government's refined product pricing mechanism to raise gasoline prices in parity with crude oil prices will be the key to margin expansion for PetroChina in the near term. With the current level of macroeconomic uncertainty in global markets, combined with China's efforts to slow economic growth feeding fears of lower oil demand, we expect more oil price volatility, not less.