Fitch: Rising costs for China, Malaysia oil

Fitch Ratings said it commented that the overall business environment for the oil and gas upstream sectors in China and Malaysia has become less benign in 2007 relative to 2006. This is primarily due to rising exploration and production-related capital expenditure and operating costs, which is mainly attributable to higher premiums for oil field acquisitions, an increase in deepwater exploration and higher drilling and service costs, Fitch said.

The agency also said it expects that earnings and cash flow growth in the upstream sector in China will be adversely affected by the upstream windfall tax imposed in March 2006.

Generally, the region's major oil and gas upstream companies - including Cnooc Ltd. (A with stable outlook), PetroChina Company Ltd. (A with positive outlook) and Petroliam Nasional Bhd. (A with stable outlook) - have continued to take advantage of the persistent oil price increases, underpinned by strong demand particularly from China and India, as well as the geopolitical uncertainty, Fitch said.

The major upstream companies have steadily increased their oil and gas output while maintaining sound reserve bases, the agency added. However, Fitch noted that increasing capex and operating costs may adversely affect the overall financial strength, unless they are accompanied by a correspondingly high oil price and output growth.

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