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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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China’s Oil Majors See Production In Biggest Fields Shrink

One of the biggest oilfields in China, Daqing, has slipped into a loss of around $700 million over the first two months of this year, according to the energy behemoth that operates the field.

This level of loss is substantial even for a company as large as CNPC, and it’s a clear indicator that the world’s second-largest oil consumer has not been spared the fallout from the international price slump.

China holds proved oil reserves of 24.6 billion barrels, according to EIA data, which makes it the most oil-rich country in the Asia-Pacific, after Russia. It has been actively developing these reserves, and although it’s nowhere near becoming self-sufficient, it has been producing over four million barrels daily over the last 12 months. Related: Horizontal Land Rig Count Summary 18th March 2016

The government has been protecting the local oil companies by installing a price floor, but it seems this floor has not helped much. It may even have had an adverse effect, as unlike consumers elsewhere, Chinese consumers have been unable to take advantage of lower fuel prices, with demand remaining depressed, hurting oil companies’ profits.

The local majors are clearly struggling. CNPC has already reduced daily production at Daqing and now plans to cut it further. Overall production will also be cut, although not drastically, along with capital expenditure. Related: What Happens When Oil Hits $50?

One of China’s other state-owned oil companies, Sinopec, is in a similar position. Earlier this year, Chinese media reported the company was preparing to close four oilfields in the eastern China Shengli deposit to survive the downturn. Shengli generated losses of some $1.4 billion over 2015. When this is compared with the $770 million in losses from Daqing, incurred in just two months, the scale of the problem Chinese oil companies face becomes very clear.

CNOOC is also cutting production: This year, the offshore-focused firm is planning to pump between 2 percent and 5 percent less crude than in 2015. Related: Oil Markets Increasingly Bullish As Long Positions Surge

All in all, the Chinese E&P industry is undergoing a process similar to what happened in steelmaking. Production costs per barrel of oil in China are around $40. Abroad, these are lower and even where they are not, exporters such as Russia and Saudi Arabia are ready and willing to lose money for a while in order to maintain their market share. Chinese companies cannot afford that, just like most local miners are incapable of competing with cheap iron ore from Vale, Rio Tinto and BHP Billiton.

To top it all, the three giants have been the target of an anticorruption probe and are now facing a major overhaul that is aimed at breaking up their dominance. It will be some time before CNPC, Sinopec, and CNOOC catch a break, which will only come with higher oil prices.

By Irina Slav for Oilprice.com

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