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China Petroleum and Chemical Corporation (SNP - Analyst Report), aka Sinopec has agreed to increase its stake in the Queensland-based Australia Pacific liquefied natural gas (LNG) project by 10%, taking its share to 25%.

The multibillion Australia Pacific LNG project – formed by Origin Energy Ltd and ConocoPhillips (COP - Analyst Report) in September 2008 – is targeted at developing the vast coal-seam gas resources in the Surat and Bowen basins of Australia over the next 30 years. This endeavor also involves the setting up of a transmission pipeline and a multi-train LNG facility on Curtis Island, near Gladstone.  

This stake purchase by Sinopec will lower ConocoPhillips and Origin's holdings in the Australia Pacific LNG venture to 37.5% each from 42.5%.

Per the terms of the non-binding deal signed by the three aforesaid companies in late February, Sinopec will also buy 4.3 million tons per annum of liquefied natural gas from Australia Pacific LNG’s coal seam gas resources and proposed LNG facility on Curtis Island, starting in 2015 and extending till 2035.

The venture awaits approvals from the Chinese Government and the Foreign Investment Review Board of Australia and is subject to Australia Pacific LNG reaching a final investment decision.

Sinopec management believes that this move will broaden its global operations and pave way for more investment opportunities in Australia. With an increased supply of natural gas, the company is expected to fulfill the growing domestic demand of gas. 

We believe that Sinopec is trying to capitalize on one of its potentially lucrative growth area – the natural gas business – that is expected to witness strong growth in the coming years as China moves from coal to natural gas. We expect the company to build a better position in the energy space in 2012, owing to a higher contribution from upstream activities.

However, Sinopec remains under pressure due to the slowdown of the Chinese industrial sector in response to the global economic volatility. The other major areas of concern include operational disruptions, labor and material cost inflation affecting project outlays, governmental regulations and severe competition from domestic and international peers.

Hence, we see Sinopec performing at par with other industry players and maintain a Neutral recommendation on a long-term basis. Sinopec currently retains a Zacks #3 Rank (short-term Hold rating).

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