China Petroleum & Chemical Corp. (386), Asia’s biggest refiner, will ramp up crude production and develop natural gas fields to counter losses from selling diesel and gasoline at state-mandated prices. Sinopec, as China Petroleum is known, plans to boost oil production in West China and increase exploration for unconventional resources including gas from shale formations, the Beijing-based company said yesterday as fourth-quarter profit dropped 23 percent, missing estimates. China, which controls oil-product prices to curb inflation, raised tariffs by as much as 7.1 percent last year, lagging behind the 20 percent surge in New York crude futures. Fu Chengyu, who became chairman of Sinopec’s parent in April, led the group to bid for $9.3 billion in overseas oil and gas assets to diversify from unprofitable fuel making. “Strategically, Fu wanted to get more balance between downstream and upstream parts of the company, resembling much closely that of Exxon Mobil Corp. and Royal Dutch Shell Plc,� said Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein & Co. “Shale gas clearly presents a big opportunity. The important thing to remember is shale gas will only pay in the longer term.� Production of crude and gas rose 1.6 percent to 407.9 million barrels of oil equivalent last year, Sinopec said. While crude output fell 1.9 percent to 321.7 million barrels, gas production jumped 17 percent to 517.1 billion cubic feet (14.6 billion cubic meters). China, estimated by the U.S. Energy Information Administration to hold the world’s largest reserves of shale gas, aims to produce 6.5 billion cubic meters of the fuel annually by 2015 and between 60 billion and 100 billion by the end of 2020. Shale Gas China Petrochemical Corp., Sinopec’s parent, said in January it has started exploring for shale gas in Anhui province with China National Offshore Oil Corp., the state-controlled parent of Cnooc Ltd. (883) Unit Sinopec and Henan Provincial Coal Seam Gas Development and Utilization Co. won the rights to explore two areas in the country’s first shale-gas auction in June. Sinopec has advanced 12 percent in Hong Kong trading in the past year, compared with the 10 percent decline in the benchmark Hang Seng Index. The stock dropped 0.2 percent to HK$8.62 as of 9:35 a.m. local time. The company plans to increase crude output to 326.5 million barrels in 2012 and boost gas production to 582.6 billion cubic feet this year, according to the statement. Capital Spending Capital spending on exploration and production will reach 78.2 billion yuan ($12.4 billion) this year as Sinopec develops oil blocks, including Shengli, and gas fields such as Yuanba and Ordos, about 45 percent of total expenditure, according to the earnings statement. Spending on refining will be 36.8 billion yuan, mainly to upgrade plants and boost fuel quality. “Since its capex is largely unchanged, the only way to boost upstream assets this year will be through asset injection from its parent,� Beveridge said. Sinopec plans to acquire overseas oil and gas assets owned by its parent when appropriate, the refiner said on March 14. In 2010, parent China Petrochemical paid $7.1 billion for a 40 percent stake in Repsol YPF SA’s Brazilian unit, China’s largest energy acquisition that year. Sinopec itself agreed in November to pay $5.2 billion for a stake in a unit of Galp Energia SGPS SA (GALP) to explore for oil off Brazil’s coast, China’s biggest overseas purchase in 2011. Refining Margins Fourth-quarter profit at Sinopec slumped to 11.8 billion yuan, according to calculations made by subtracting nine-month earnings from the 2011 net income. That missed the 12.4 billion- yuan mean estimate of seven analysts in a survey compiled by Bloomberg. Sinopec didn’t provide fourth-quarter data in its earnings statement. Huang Wensheng, the company’s Beijing-based spokesman, declined to comment on the derived figure. Full-year net income rose 2 percent to 73.2 billion yuan, the company said. That compares with a 74.4 billion-yuan mean estimate in a Bloomberg survey of 18 analysts. Sinopec said its refining division posted a full-year operating loss of 37.6 billion yuan, compared with a profit of 14.9 billion yuan in 2010. Crude futures averaged $95.10 a barrel in New York last year, compared with $79.56 in 2010. The company aims to cut crude procurement costs and reduce storage and transportation expenses this year, according to the statement. The government has increased fuel tariffs twice so far this year, after consumer prices rose 3.2 percent in February from a year earlier, the least since June 2010. China delayed price adjustments last year to cushion the impact on inflation, which exceeded its 4 percent annual target every month. Sinopec boosted oil processing volumes by 3 percent last year to 217.4 million metric tons. The company expects to refine 225 million tons of crude this year, according to the statement. To contact the reporter on this story: Aibing Guo in Hong Kong at aguo10@bloomberg.net To contact the editor responsible for this story: Andrew Hobbs at ahobbs4@bloomberg.net

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