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Kong analyst Dennis Ip telling Bloomberg on March 13: “The Chinese government still wants to produce more to enhance its self-sufficiency rate.”
He added: “Lower oil prices are defi- nitely going to hurt the cash flow for those Big Three oil majors. Whether they execute 100% of their capital plan this year, or try to defer, really depends on how long [the low- price environment] lasts.”
Wood Mackenzie principal analyst Max Petrov, meanwhile, said the country’s eco- nomic recovery from the coronavirus out- break would support drilling budgets this year.
“Beijing will want to keep energy flows and employment levels running high as eco- nomic activity returns to normality after the impact of COVID-19,” Bloomberg quoted him as saying. “This suggests spending will remain high or accelerate during the second half of the year.”
There are several reasons, however, why Xi’s position on energy security will likely have evolved since July 2018.
Cheap oil
First of all, oil prices are predicted to remain in the $30-40 per barrel range in the coming months, according to analysts surveyed by Reu- ters. The depressed prices are both the result of Russia and Saudi Arabia launching an oil price war at the start of this month as well as the spread of COVID-19.
Saudi Aramco has said it will ramp up oil production in April to 12.3mn barrels per day (bpd), with the aim of maintaining that figure into May.
“In a nutshell, Saudi Aramco can sustain the very low price and can sustain it for a long time,” Aramco CEO Amin Nasser said during a March 16 earnings call. “For the production in May ... I doubt it would be any different from next month.”
CFO Khalid al-Dabbagh, meanwhile, said his company was “very comfortable” with prices at $30 per barrel. Developers in the US have already started slashing upstream budgets in preparation for a more austere price environment.
At the same time, China’s oil demand has been rocked by the spread of COVID-19, lim- iting the country’s role in supporting prices.
The virus is thought to have reduced domestic oil demand by an estimated 20%. Bloomberg quoted unnamed Chinese and international oil executives in early Febru- ary as saying that refineries’ stockpiles of
unsold oil products, such as gasoline and jet-fuel, were growing on a daily basis. It added that some refiners were on the verge of running out of storage, with some facili- ties anticipated to reduce crude processing volumes by as much as 15-20%.
Though China has begun lifting city lock- downs, it will take some time for domestic demand to return to pre-COVID-19 levels, which were already unable to soak up exist- ing fuel stockpiles.
When Xi directed oil producers to expand their budgets, he did so at a time when oil was sitting comfortably above $70 per barrel and there was uncertainty over supply given the country’s trade war with the US. Despite the US’ sanctions on Russia, Iran and Venezuela, however, China has not struggled to ramp up its imports. The coun- try’s imports grew from 9.31mn bpd in 2018 to 10.17mn bpd in 2019 and again to 10.7mn bpd in the first two months of this year.
Availability of supply was not an issue last year and is only set to improve this year as other countries implement quarantines and Saudi Arabia and Russia duke it out over market share. In such an environment, energy security through domestic produc- tion becomes less of a compelling incentive when the breakeven cost of that supply is as much as twice the cost of imports.
Costly production
Senior Sanford C Bernstein analyst Neil Bever- idge said last week that PetroChina and Sinopec’s breakeven costs were an estimated $50-60 per barrel. Offshore specialist CNOOC Ltd, mean- while, has managed to trim its production costs from US$45 per barrel in 2013 to about US$30 during the first half of 2019, company docu- ments show.
Rystad Energy’s vice-president for upstream research, Parul Chopra, told Bloomberg this week that the breakeven price for new Chinese wells was $41 per barrel, compared with $13 in Saudi Arabia and $11 in Iraq.
The government allowed the Big Three to rein in production in 2015 and 2016 in response to the 2014 price crash that left many of the majors’ fields uncommercial.
Energy security has long been a con- cern for China’s government, but Beijing is unlikely to demand its state oil companies should shoulder heavy losses from domes- tic production when imports offer a cheaper and readily available alternative.™
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