By January 26, 2017 Read More →

As crude prices rise, China’s oil majors set to lift capex for first time in years

China's oil majors

An increase in production by China’s oil majors could be bad news for exporters like Saudi Arabia and Russia.  Radio Free Asia photo.

China’s oil majors invest in low-risk, mature fields

 By Chen Aizhu

BEIJING, Jan 26 (Reuters) – China’s oil majors are expected to pump up spending in 2017 for the first time in years, scrambling to squeeze more barrels of crude out of ageing domestic wells in the hope that higher prices are here to stay.

State-run explorer CNOOC Ltd set the tone this month. After an international output cut agreed late last year lifted benchmark Brent crude futures to a peak of nearly $58 a barrel, not seen for 18 months, CNOOC said it would spend as much as $10 billion, up to 40 per cent more than 2016.

Industry executives and analysts say that increase – the first in CNOOC’s annual spending since 2014 – is likely to be followed by peers in a sharp turnaround after sliding crude prices led to years of job and budget cuts across the world’s top energy market.

“We believe $50-$60 will be the new normal for the next couple of years,” said Wang Haitao, chief executive of privately run Chinese oil service and equipment firm Kerui Group. “Once oil is above $50, it’s not longer a pessimistic figure.”

Industry experts expect energy giants PetroChina Co and Sinopec Corp will likely follow suit in investments centred on arresting declines at lower-risk, mature oilfields rather than ramping up any new oil production. With the global oil market still vastly oversupplied, developing natural gas fields will take priority for the time being, they said.

PetroChina and Sinopec are expected to announce capital spending in late March.

“As oil rebounds, it’s logical we’ll lift spending this year, including plans to step up natural gas development,” said a Sinopec spokesman, without giving details on the increases.

A PetroChina spokesman was not immediately available for comment.

In CNOOC’s case, despite the higher spending plan it has cut its 2017 oil and gas output estimate by 3.3-5.5 per cent from 2016 to 450-460 million barrels, a level it expects to maintain through 2019. Last year, China’s crude output hit its lowest since 2009 and analysts have forecast it to fall by as much as another 12 per cent by 2020.

Still, any Chinese success in getting more out of its older fields could be bad news for top exporters like Saudi Arabia and Russia. Both have boosted oil sales to the world’s No.2 consumer in recent times, with Russia leading the growth by supplying a quarter more last year.

RENEWED CONFIDENCE

Oil firms are more optimistic after prices have stabilised above $50 per barrel following the deal by OPEC and other producers to coordinate output cuts for the first time in 15 years in a bid to curb the glut that had pulverised prices.

In January 2016, U.S. prices sank to decade lows of $26 per barrel, deepening a years-long rout that start in July 2014 as demand waned and oversupply grew.

“CNOOC’s higher spending fits into a global pattern that oil firms are adjusting up their capex this year after two years of slumps,” said Wang Yushuang, Beijing-based analyst with consultancy Wood Mackenzie.

Globally, oil and gas companies are expected to raise exploration and production (E&P) spending in 2017 by 7 per cent, marking the first increase in three years, Barclays said earlier this month.

In China, large and mid-cap oil companies’ capex is expected to grow by 11.5 per cent in 2017, according to StarMine SmartEstimates. That compares to an Asian oil companies’ average capex growth of 5.5 per cent.

At east China-based Kerui, turnover is expected to rise 10-20 per cent this year as its mostly global clients spend more on drilling, company officials said.

In one example of new production plans, state-run Sinochem Corp plans to resume drilling at its Wolfcamp shale oil property in Texas after production stopped last year, according to a person involved in the project who spoke on condition of anonymity because he wasn’t authorised to discuss the matter publicly.

“It’s in line with the revival of shale activities in the U.S.,” said the person. ($1 = 6.8797 Chinese yuan renminbi)

(Reporting by Chen Aizhu; Additional reporting by Patturaja Murugaboopathy in BENGALURU; Editing by Kenneth Maxwell)

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