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Chinese crude production could prove too costly
The country’s oil producers are more susceptible to low prices given high local field costs, which could force production to be rationalised in the coming months
COMMENTARY
WHAT:
China trimmed oil production following the 2014 oil price crash.
WHY:
Prices fell below $28 per barrel in January 2016, making Chinese fields uneconomical.
WHAT NEXT:
The Chinese oil market is oversupplied and reducing domestic production where prices are low makes the most sense.
THE immediate future of China’s oil production is in question given the hammering that crude prices have taken since the start of the year.
Between the global coronavirus (COVID- 19) pandemic and this month’s collapse of the OPEC+ production agreement, the price of international benchmark Brent crude has fallen to its lowest level in four years. Brent prices broke through the physiologically important $30 per barrel barrier on March 16, before hitting $26 on March 18. It was the benchmark’s lowest level since 2002.
The consensus among analysts seems to be that while oil is trading at a four-year low, China’s state-run oil producers will likely keep the spigots open. The argument is that the central government’s energy security values will trump the commercial concerns of the country’s upstream oper- ators. It is a compelling case, given that Chinese President Xi Jinping ordered the state majors in 2018 to ramp up oil and gas output to slow an ever-growing depend- ency on energy imports.
However, the argument fails to address certain economic realities within the domestic and international oil sectors that could force the country’s two biggest oil companies – PetroChina and Sinopec – to trim their oil-focused drilling budgets.
Steady as she goes
China’s oil production fell from a peak of 4.31mn bpd in 2015 to 3.79mn bpd in 2019, owing to a slide in oil prices that began in August 2014 and saw Brent briefly fall below $28 per barrel in January 2016.
Production has recovered, however, after Xi issued the directive to ramp up domestic exploration and production in July 2018 owing to growing trade tensions with the US, which exposed China’s heavy reliance on energy imports. National oil production averaged 3.84mn bpd in 2019 and climbed again in the first two months of this year to 3.98mn bpd.
China watchers now believe that the state majors will keep ramping up oil output in line with Xi’s self-sufficiency mantra.
The head of global energy research at the Beijing-based government think-tank Chinese Academy of Social Sciences, Wang Yongzhong, told the South China Morning Post on March 10 that the country’s drillers were expected to stay the course.
Wang said: “Neither a rally [in oil prices] nor a plunge is good for China. The Chi- nese government is concerned more about energy security, i.e., how to find multiple sources of stable supply.”
It is a sentiment shared by several analysis houses, with Daiwa Capital Markets Hong
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w w w . N E W S B A S E . c o m Week 11 19•March•2020