China’s Oil Majors Are Burning Through Oil Reserves

China's state-owned oil companies have been beaten down by low oil prices and stagnant demand at home. PetroChina and Cnooc reported dismal earnings this week, and offered little reason for hope moving forward.

PetroChina said its profit fell by 98 percent in the first half of 2016 compared to the same period a year earlier. The company's crude oil output fell by 4.2 percent as aging fields continue to deplete. Cnooc put up even worse numbers, reporting a 7.7 billion yuan loss, a remarkable downfall from the 14.7 billion yuan profit in the first half of 2015. Cnooc has been dragged down by its $15 billion purchase of Nexen a few years ago, a Canadian oil sands producer that has bedeviled its Chinese parent company for quite some time.

Nexen has suffered oil spills, explosions, and other safety issues. Cnooc took a US$1.6 billion impairment charge on overseas assets, largely because of the troubled oil sands producer. Cnooc made the unfortunate decision of paying top dollar for the company at the height of the market in 2013.

The Chinese oil companies offered up some small achievements, however. Cnooc said that it has achieved cost reductions on the order of 15 percent. It also took the ax to capital expenditures, reducing spending by 33 percent. But it still intends to produce as much as possible, which as The Wall Street Journal reports, presents a longer-term problem for the state-owned company. Cnooc is extracting its oil reserves at a worrying pace. The WSJ says that its reserves in China - some of its most lucrative - can only last for three years at current production rates. Cnooc also has an overall reserve life of only 8.4 years, one of the lowest relative to its international peers.

That suggests that Cnooc will probably have to cut production at some point, perhaps sooner rather than later. Or it will have to dramatically step up spending to develop other oilfields in order to replenish its reserves, which would be an about-face from its current cost-cutting efforts. It will probably be politically difficult to cut production, so the latter option is more likely - Cnooc may be forced to step up spending or make other acquisitions to prevent production declines.

In short, falling revenues and a weak portfolio of assets could force some tough decisions in Beijing.

By Charles Kennedy of Oilprice.com

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