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PetroChina's Profit Pickle

You know, it's funny. With the intent of keeping a lid on inflation, government policy in China has been to mandate a limit on retail gasoline and diesel prices. These price controls have allowed fuel demand to flourish. That's just one of the forces behind -- you guessed it -- persistent inflation.

OK, that's actually not so funny.

PetroChina (NYSE: PTR  ) , for one, certainly isn't laughing. Sure, the firm's upstream operations appreciate oil's ascent, but the integrated giant's refining arm doesn't get to pass on higher crude costs to consumers. Yesterday's earnings release demonstrates what a pickle the petroleum pumper is in.

Exploration and production activities naturally generated a sound profit in 2007, but these profits don't sit so well with the Party. You may recall that Sasol (NYSE: SSL  ) dodged a windfall-profits tax bullet last year, but no such luck for PetroChina. The E&P segment paid more than RMB44 billion ($6 billion) in "special earnings levies," more than a 50% jump over the prior year's payment. That figure amounts to more than 20% of post-levy operating profit for the segment, which posted a modest decline versus 2006.

The refining and marketing business lost a bundle, just like last year. PetroChina's chairman estimates that the segment breaks even somewhere below $70 per barrel, so the company is burning buckets of money as it runs its refineries.

Here's a further frustration. China Petroleum & Chemical (NYSE: SNP  ) , otherwise known as Sinopec, is another big-time refiner in the country. This company is bleeding yuan as well, but it is awarded subsidies to alleviate the pain -- a recent award totaled $1.7 billion. But because PetroChina has upstream operations, it is not compensated for its downstream despair. Considering the windfall-profits tax, this really doesn't seem fair.

This company appears to be in a pretty tough spot. While PetroChina is a well-run company with intriguing ambitions, Petrobras (NYSE: PBR  ) remains my go-to international oil play.

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