For countries who have complete control over their oil industry through their state-run oil behemoths, it’s easy to order them to increase oil output—costs be damned. But sinking money into oil and aging oil fields or in new and cost-intensive plays comes with risks, and in China’s case, investors aren’t so sure that its onslaught of capex planned over the next five years is a winning bet.
Still, China’s largest state-run oil majors, China Petroleum & Chemical (SINOPEC), China National Petroleum Corporation (CNPC), and China National Offshore Oil Corporation (CNOOC) have plans to shell out billions for what some see as rather unprofitable oil fields for the sake of shoring up the state’s energy security in direct response to President Xi’s call last year for them to increase oil production.
The billions in capex planned for the next five years from China’s three companies that together operate over 90 percent of China’s oil-producing fields are not insignificant and represent a huge increase from spending in recent years. Sinopec, for one, announced only days ago that it will spend US$20.3 billion in 2019 alone—US$8.9 billion of which will be dedicated to just upstream operations. This upstream capex represents more than a 40 percent increase in spending over 2018, and will be used in part to increase production at its aging Shengli oilfield, whose reserves fell to just 16 million barrels by end 2018 vs 49 million barrels the year prior, according to Reuters.
Sinopec’s dilemma is clear. Its net profit plunged in 2018 as its costs for purchasing crude oil rose over 40 percent as oil prices ticked upward. It is being squeezed by the rising cost of oil, and it has plans to refine even more crude in 2019, making it even more desperate to lower the amount of crude oil it must purchase by pumping more oil at home.
CNOOC, too, has major plans to up its capex, to the highest level since 2014. In January, it announced that it would lift capex to between US$10 billion and almost US$12 billion this year, and announced even bigger plans to double the number of exploration projects and proven oil and gas reserves by 2025. Related: Sources: Saudis Admit They Want $70 Oil
CNPC—China’s largest oil and gas supplier, last year promised to spend US$22 billion by 2020 to boost oil production as its production in old and dying fields peters out. CNPC is hoping this spend will increase production by 75 percent. To this end, CNPC plans on enlisting the help of foreign firms as well in order to capitalize on others’ technology that it lacks, according to a South China Morning Post article from earlier this month.
The mad scramble by China’s big three to make large investments comes in response to President Xi’s directive last July to increase production as its thirst for oil continues to be robust. Its own oil production, too, is on the decline, leaving it in a predicament of potentially catastrophic proportions that are only exacerbated by the trade row that is endlessly dragging on with the United States.
But producing oil and producing oil at a profit are two entirely different things. The reality is that China’s oilfields are aging, and getting oil out of the ground will be costly. According to data crunched by Bloomberg earlier this week, China’s oil reserves have been on a steady and “terminal” decline, with producing falling about 12 percent over the last three years.
While China’s hopeful increase in production may indeed offset production declines in its older oil fields, it is unlikely to be sufficient enough to also decrease its appetite for crude oil imports, which serviced a whopping 70 percent of its crude oil needs in 2018.
By Julianne Geiger for Oilprice.com
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