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Gaurav Agnihotri

Gaurav Agnihotri

Gaurav Agnihotri, a Mechanical engineer and an MBA -Marketing from ICFAI (Institute of Chartered Financial Accountants), Mumbai, is a result oriented and a business focused…

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Why Has Chinese Spending On Oil Dried Up?

The world’s biggest spenders on oil and gas assets have suddenly become extremely thrifty – and the world is taking notice.

The last decade saw China’s biggest national oil companies (NOCs) – Petrochina, Sinopec and China National Offshore Oil Corp. (CNOOC) – buy international oil assets like no other. According to data from Petroleum Intelligence Weekly, the three Chinese NOCs made net purchases of foreign oil assets worth $104.1 billion between 2009 and 2013. To put this in perspective, the net purchases made by the three largest US oil companies during the same period were only $9 billion.

However, 2014 was pretty lackluster for the three Chinese NOCs as they made just three deals worth $2.8 billion, a sharp departure from its recent past.

Currently China is the world’s fourth biggest oil producer and the biggest global net oil importer. Could the massive curtailment in spending on oil assets be a part of Chinese President Xi Jinping’s efforts to alter his country’s bloated energy sector? Or, is China merely falling into line with the rest of the energy giants who have either postponed or cancelled their investments due to lower-than-expected oil prices and a persistent supply glut? Related: How Long Can OPEC Maintain Its Current Strategy?

china

(Click to enlarge)
Source: The Beijing Axis

Are the big three Chinese companies taking a more strategic and cautious approach?

The quieter activity is a sea change from years past. The big three Chinese oil firms are treading cautiously as the current business environment is dominated by shaky oil prices and disappointing returns from some recent investments that didn’t pan out the way they expected.

China’s retrenchment is on display in Canada’s oil patch. Petrochina faced criticism for investing in Canadian startups and ignoring the producing assets. CNOOC was ridiculed for cost-cutting and slashing its workforce in Ottawa after acquiring Nexen Inc., and Sinopec received flak after it backed out of its commitment to invest more in Sunshine Oilsands Limited. Related: Investors Turning Away From Green Energy

But perhaps China’s oil companies are taking a more strategic approach, adopting some market-based qualities like their international peers. The Chinese government is doing its part to reduce the monopolies of the NOCs with a planned spin off the $300 billion pipeline assets belonging to Petrochina and Sinopec. The move could attract new foreign investments (backed by private Chinese companies) in China’s relatively closed energy market. That would help boost supplies and somewhat contribute to quenching China’s thirst for oil, which is increasing faster than any other nation (The figure below demonstrates the enormous gap between China’s supply and demand). 

china2

Are there mergers on the horizon?

With Goldman Sachs predicting that Brent could fall to $55 by 2020, most of the global oil majors like Exxon Mobil, Chevron, Total, BP and Conoco Phillips have gone into retrenchment mode. Mergers and/or acquisitions are the best way for oil companies to grow in the current market, where global oil demand is easily met by US shale and OPEC production. The potential merger of Shell and BG group would be the biggest oil and gas merger in over a decade. Even Norwegian giant Statoil is on the lookout for acquisition opportunities. Related: EIA Reports Bizarre Increase In U.S. Oil Production

The Chinese are not far behind; if rumors from Beijing are to be believed, the Chinese government is planning to create an oil supermajor by merging Petrochina and Sinopec to compete with the likes of Exxon, Shell and Chevron and reduce some of their overlapping functions. However, merging the two Chinese NOCs would result in job losses and worsen the already monopolistic environment, something that the Chinese government would not want.

It is evident that the reduction in spending of the big three Chinese NOCs is part of much larger developments taking place in China’s energy sector. Having gobbled up so many assets in recent years, China’s largest NOCs are now taking a breather. Instead of seizing on the current period of low prices by buying up more assets on the cheap, China’s oil companies are instead taking a more disciplined approach by cutting spending and adopting some market-oriented policies. That could allow it to better compete with some of the international oil majors around the world.

By Gaurav Agnihotri of Oilprice.com

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