China Petroleum & Chemical Corp., Asia's largest refiner, and rival PetroChina are poised to seek assets overseas to diversify as domestic earnings are depressed by state-controlled prices for processed fuels.

Refining losses resulted in China Petroleum, known as Sinopec, reporting a 41 percent decline in first-half net income to 24.5 billion yuan ($3.9 billion) Sunday. PetroChina, the nation's biggest oil and gas producer, last week said first-half profit declined 6 percent to 62 billion yuan.

Chinese refiners, which sell gasoline and diesel below cost because the government caps retail prices to contain inflation, aren't waiting for the controls to be relaxed. PetroChina said it plans to generate more than half its oil and gas output from overseas projects by 2020 to offset refining losses, while China Petrochemical Corp., Sinopec's state-owned parent, said it would more than double its foreign production by 2015.

"Every dollar spent on domestic refining projects would be a waste of a dollar, since it generates absolutely no return," said Simon Powell, the Hong Kong-based head of Asian oil and gas research at CLSA Ltd. "Overseas acquisition is a short cut to balance refining losses, but it's a gradual process and takes a long time because of political scrutiny and availability of assets globally."

China's state oil companies have spent more than $100bn on assets over the past decade to supply the world's largest energy importer.

Sinopec lost 9.3 percent in Hong Kong trading this year through today, while PetroChina fell 1.8 percent. They're the second- and third-biggest members of the MSCI Far East Energy Index, which also fell 1.8 percent in the period. The Bloomberg World Oil & Gas index, whose largest member is Exxon Mobil Corp., dropped 1.3 percent.

Cnooc, China's biggest offshore oil and natural gas maker with no refining operations, has proposed the nation's biggest overseas acquisition, offering $15.1 billion for Canada's Nexen Inc. Canadian and U.S. regulators are reviewing the takeover.

"If the Cnooc deal is approved, we can expect more Chinese energy investment in those countries almost right away," said CLSA's Powell.

Sinopec lost 18.5bn yuan after processing 811 million barrels of oil in the first half compared with PetroChina's loss of 23.3 billion yuan from refining 489.7 million barrels.

"The loss came purely from the government's policy of capping retail fuel prices," said Laban Yu, head of Asia oil & gas equity research at Jefferies Hong Kong. "There is not much Sinopec can do. We believe current low inflation will allow higher refiner margins in the second half and quite possibly a change in the fuel-pricing mechanism."

Gasoline and diesel prices are set by the National Development and Reform Commission, China's economic planner, under a system that tracks the 22-day moving average of a basket of crudes, including Brent, Dubai and Indonesia's Cinta. The cycle may be shortened to 10 days, China Petrochemical said March 28.

NDRC has indicated it may relax price controls on natural gas and fuels in the second half, PetroChina President Zhou Jiping said at a post-earnings briefing on Thursday.

The fuel pricing reform may not materialize in the second half, especially after the government has made and missed similar commitments in the past, said Shi Yan, a Shanghai-based energy analyst at Uob-Kay Hian Ltd. "I believe both Sinopec and PetroChina understand the situation well and both of them are determined to expand in upstream quickly with or without the pricing reform being finally implemented," she said.

PetroChina wants half its oil and gas output to come from overseas by the end of the decade, Chairman Jiang Jiemin said in March. Production abroad rose 0.9 percent to the equivalent of 62.5 million barrels, accounting for 9.4 percent of the company's output in the first half.

Chinese companies can sell oil and gas from overseas assets at market prices.

President Zhou said in Hong Kong on Thursday the explorer is looking closely at assets in Central Asia, east Africa, Australia and Canada. Zhou said he's "completely confident" of achieving the 2020 goal.

China Petrochemical, Sinopec's parent, seeks to produce 50 million metric tons of crude a year overseas by 2015. Last year, foreign production was 22.9 million tons. Sinopec said it boosted first-half crude output 4.3 percent to 163.09 million barrels and overseas production jumped 82 percent to 11.13 million barrels.

Sinopec has been looking at many energy projects globally and from a strategic point of view Sinopec needs to buy up assets to balance its refining losses.