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China's state oil companies have been at the forefront of Beijing's increasing prioritisation of energy security over the past decade, making investments that have helped soften the blow from the closure of the Strait of Hormuz.
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Since 2018, Sinopec, PetroChina and CNOOC Ltd have spent hundreds of billions of dollars drilling domestically while also building and filling oil storage tanks to fulfill Beijing’s energy security mandates. After the U.S.-Israeli war on Iran began in February, they have sold fuel domestically at capped prices and curbed exports for months to lucrative markets abroad.
Supporting energy security sometimes comes with commercial cost. Domestic onshore fields tend to be more expensive and complex to drill, and the oil majors haven’t enjoyed the same wartime windfall as international peers.
“China's oil majors have generally fulfilled their energy-security role well,” said Chokwai Lee, director of equity research for Morningstar.
“There have been no major fuel shortages despite disruptions to Middle East supply routes, reflecting a combination of strategic petroleum reserves, diversified import sources, and stable domestic production.”
UPSTREAM PRODUCTION INCREASES
When China’s domestic oil production began to decline in the late 2010s, it so concerned officials that in 2018 they launched a seven-year plan to accelerate drilling. Since then, the three oil majors are estimated to have spent 2.3 trillion yuan ($343 billion) domestically versus $56 billion abroad, according to Reuters calculations based on company filings.
The national dividend has been a jump in oil production to around 4.3 million barrels per day from lows of 3.8 mbd, a difference equal to about a tenth of China’s imports from the Gulf.
Domestic gas production is also soaring, capping demand for liquefied natural gas imports, which have not returned to their previous peak since slumping during the COVID-19 pandemic.
Onshore production has often come at high cost because the fields are challenging and require new, often more expensive, methods. The breakeven for PetroChina and Sinopec’s onshore oilfields is around $55 a barrel on average versus $37 for U.S. shale, according to Rystad Energy.
Some of PetroChina’s onshore oilfields operate at a loss, even when prices fall to maintain domestic production, according to Chen Lin, vice president at Rystad Energy.
“Over the seven-year period, Sinopec and PetroChina have spent money they would not have spent had they been purely commercial,” said Philip Andrews-Speed, senior research fellow at the Oxford Institute for Energy Studies.
OIL MAJORS HELP WEATHER GULF WAR
China's oil majors have also helped the country weather the energy shock triggered by the war by prioritising the domestic market over more lucrative export markets.
Beijing capped domestic fuel prices and banned exports in March, before relaxing controls in more recent months, limiting the windfall from higher oil prices and, in Sinopec’s case, resulting in a 1.8 billion yuan refining loss in the second quarter, according to Reuters calculations based on company filings. In contrast, President Donald Trump said the industry was “making too much money” after Exxon and Chevron reported bumper profits in the second quarter.
CNOOC and PetroChina posted record first-half earnings, while Sinopec, the world's largest refiner, beat expectations. Even so, their shares have risen far less than those of international peers since the war began.
While most of the world's major oil and gas companies have posted double-digit gains since the war began in late February, Sinopec has lost 10% for its Hong Kong-listed stock.
The “social responsibility” required of China's oil majors is not without its benefits, according to Parsley Ong, head of Asia energy & chemicals at J.P. Morgan. They have been able to draw on the country's vast oil reserves while Beijing has also relaxed its fuel export curbs, Ong said.
“They are expected to prioritize domestic supply stability, but sector losses were smaller than many in the industry expected, reflecting some policy flexibility.”
Reuters
