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Sinopec Consolidates Core Business

Sinopec, Asia's largest oil refiner, will buy petrochemical assets and petrol stations from its parent company for 4.58 billion yuan (US$553.8 million) in an asset swap to consolidate its petrochemical and oil retail businesses.

Meanwhile, Sinopec will sell downhole operation business a kind of engineering service during oil exploration and production to its parent China Petrochemical Corp for 1.75 billion yuan (US$211.6 million), Sinopec said in a statement yesterday.

The balance of the deal requires Sinopec to pay 2.8 billion yuan (US$337 million) in cash to its parent. The transaction, however, is subject to the approval of shareholders.

Sinopec said the transactions will "broaden the core business through significant expansion of the scale of its petrochemical facilities, improvement to the operation and retail network of oil products."

In a separate deal yesterday, Sinopec agreed to buy 10.6 per cent of the enlarged share capital of China Gas Holdings Ltd for HK$128 million (US$16.4 million) to become its second largest shareholder.

The investment allows Sinopec to break into China's embryonic gas markets by taking the advantage of the gas distribution network of China Gas.

Up until September, China Gas has obtained exclusive rights to develop city gas in 38 cities on the mainland.

"The investment in China Gas facilitates Sinopec to share the benefits of the growth of China's gas market, and establish stable gas distribution networks," Sinopec said in another statement.

The two companies also agreed to forge a strategic alliance to co-operate in natural gas exploration, transportation, purchase, supply, investment in gas projects, construction of infrastructure and operation in city gas, information exchange and human resources.

Shares of Sinopec, which were suspended on Monday pending the asset acquisition announcement, yesterday rose 4.24 per cent to HK$3.08 (39.5 US cents) in the Hong Kong stock exchange. The shares have lost about 2.5 per cent in the last three months.

Analysts said both deals are positive as they allow Sinopec to cash in on the fast growing petrochemical and gas business in China.

Particularly, the purchase of the parent company's petrochemical assets enables Sinopec to take advantage of the cyclic peak of the global petrochemical industry.

The operating profits of Sinopec's chemical division have already soared nearly seven-fold year-on-year to 5.1 billion yuan (US$616.6 million) in the third-quarter this year, the company said last week.

Sinopec said the acquisition of petrochemical assets will increase its ethylene production by 380,000 tons, up 12 per cent based on 2003 capacity.

Meanwhile, output capacity of synthetic resins will rise by 580,000 tons, or 12 per cent, and those of synthetic fiber monomers and polymers will increase 24 per cent.

Through the purchase of the gasoline station assets, which includes 1,023 gasoline stations and 54 oil depots, Sinopec says it hopes to strengthen its position as leader of the retail gasoline sector.

(China Daily November 3, 2004)

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