Upstream investments from China should not slow down despite the energy transition

Strong points

CNOOC and PetroChina move forward with upstream plans

Chinese state-owned oil companies remain focused on upstream sector: Platts Analytics

Beijing plans to invest billions of dollars in energy security

PetroChina and China National Offshore Oil Corp. Ltd recorded sharp increases in oil and gas production in the first nine months of 2021, a sign that major Chinese state-owned oil companies are aggressively pursuing plans to increase domestic production of fossil fuels despite the country’s energy transition. country. speed.

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Analysts said most large state-owned companies would aim to invest billions of dollars in the coming years to ensure that their upstream sector continues to show output growth, in line with Beijing’s vision for the energy security.

“Chinese state-owned oil companies will continue to focus on investments in the upstream sector given the country’s growing dependence on imported oil,” said Kang Wu, head of Asia Analytics and demand. global at S&P Global Platts.

“With the energy transition underway and the energy sector expected to experience big changes in the decades to come, it appears Beijing is keen to ensure that sufficient investment continues to flow to boost domestic oil production for its own. own energy security. Whether or not this strategy works to prevent China’s oil production, which will eventually decline in the long run, remains to be seen, “he added.

CNOOC’s domestic crude production jumped 11.5 percent year-on-year to 233.9 million barrels between January and September. The 24.1 million barrels increase in production during the nine-month period accounted for 90% of the Chinese production increase of 26.79 million barrels during the period, the results showed. of the third quarter recently released by the company.

It increased national gas production by 11.8 percent year-on-year to 348 billion cubic feet in the January-September period as part of efforts to increase the country’s supply of clean energy. That growth was slightly higher than the 10.8% year-over-year increase in gas production during the same period, according to data from the National Bureau of Statistics.

Growth is expected to be sustainable, as its Lingshui 17-2 deep-water gas field in the South China Sea reached full operation in September after commissioning on June 25. The gas field is expected to add 3 billion m3 to the company’s annual production.

Focus on energy security

The Chinese government has urged upstream companies to increase production and increase reserves to secure fossil fuel supplies, while starting the country’s energy transition.

“As public entities, the main Chinese operators are not only focused on profit. They also play an important and integrated role in the social economy. So, even in a less favorable oil price environment, we expect Chinese NOCs to perform according to government expectations. and continue to make efforts to consolidate domestic supply, ”said Peng Li, research analyst at Rystad Energy in a recent memo.

CNOOC has targeted its non-fossil resources to represent more than half of the company’s energy resource mix by 2050, and increase gas production to 35% of its upstream production by 2025, compared to 21% currently .

The company plans to invest 5-10% of its annual capital expenditure in the development of new energy activities, carried out by offshore wind energy projects, during the 14th five-year plan (2021-25), compared to about 3 to 5% at the end. -2020. The company spent 56.96 billion yuan ($ 8.9 billion) in the first three quarters, up 5.4% year on year. Its total budget for 2021 is 90-100 billion yuan.

Aim to hit the target

PetroChina is also aiming to meet its 2021 oil production target of 924 million barrels, or 2.53 million barrels per day, said Brian Xing, deputy director of investor relations at the company.

PetroChina produced 662.3 million barrels, or 2.43 million bpd, from January to September, down 5.6% year-on-year due to a 28.7% drop in production at abroad, according to the company’s results.

The reduction in overseas oil and gas production is mainly due to production restrictions set by OPEC +, said Wei Fang, deputy secretary of the board of directors of Petrochina.

As its overseas production plummeted, PetroChina increased its domestic crude production from a low 0.3 percent year-on-year to 2.05 million barrels per day between January and September. Its domestic production accounts for 85% of the company’s total crude production and 50.7% of China’s total crude production.

Rystad said China is looking to increase oil and gas production in the coming years to meet growing domestic demand and reduce the record share of oil imports.

National oil companies are expected to spend more than $ 120 billion on drilling and well services over the 2021-2025 period, seeking to meet growing demand for oil and gas. At the same time, the country aims to meet more of its demand for oil from domestic sources, after the share of imported crude oil has risen steadily since 2014 to peak at nearly 75%. last year, he added.

“To be exact, CNPC, CNOOC and Sinopec are together expected to spend around $ 123 billion on drilling and well services over the next five years, compared to a total of $ 96 billion between 2016 and 2020,” Rystad said.

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