CHINA'S GAS FUTURE
NGW wrote, China's national oil companies are promising to boost natural gas production despite deep cuts in overall investment and losses so far this year.
The shift in focus from oil to gas by the big state-owned producers appears to be driven by the government's policy of reducing the use of high-polluting coal rather than the prospect of greater returns.
Last month, China National Petroleum Corp. (CNPC) pledged to boost investment in gas exploration, production and pipelines over the next decade. The company expects a near- doubling of annual gas output to 180 billion cubic meters (6.3 trillion cubic feet) by 2020.
Last year, CNPC produced 94.5 billion cubic meters (bcm) of gas, accounting for 72 percent of China's production and nearly half of the country's consumption, according to company data.
China's leading oil company now spends 70 percent of its total budget on gas production and about 10 percent on gas pipeline construction, said Hou Qijun, head of the CNPC planning department.
Hou predicted that the gas proportion of CNPC's budget will continue to rise, adding that the cleaner-burning fuel is "our top priority with high potential for profit growth."
To hear CNPC tell it, gas has a virtually unlimited future in China.
The company's research institute has projected that China's consumption will climb 167 percent to 510 bcm by 2030 and over 270 percent to 710 bcm by 2050, compared with 191 bcm in 2015.
A first-half report by second-ranked China Petroleum & Chemical Corp., known as Sinopec, also stressed gas growth over production of oil.
Sinopec's gas output rose 10 percent to 11 bcm during the period while crude production fell 11.4 percent, Bloomberg News said.
Sinopec plans to double annual gas production to 40 bcm by 2020, Bloomberg reported, citing a statement by company chairman Wang Yupu in March.
Bullish national figures
China's most recent national figures seem to support a more bullish outlook for gas over oil.
In the year through June, China's gas consumption rose 9.8 percent to 99.5 bcm, the National Development and Reform Commission (NDRC) reported. Production edged up 2.9 percent to 67.5 bcm, while imports jumped 21.2 percent to 35.6 bcm, the top planning agency said.
China's oil output fell 4.8 percent during the period to an average of 4.04 million barrels per day as both of the big companies scaled back due to weak world prices for crude.
CNPC's PetroChina subsidiary plans to cut oil production by 4.8 percent this year while Sinopec will lower output by 7.5 percent, the official Xinhua news agency said.
The stronger performance for gas suggests a partial recovery from last year's slower growth of 3.7 percent, a fraction of the average annual rise of over 15 percent in 2009-2013.
Despite a glut of Asian supplies and heavy investment, China's imports of liquefied natural gas (LNG) fell 1.1 percent last year, marking the first annual decline since imports began in 2006.
It is unclear whether this year's gas gains reflect an economic turnaround or a greater commitment to the government's drive to curb reliance on coal.
Edward Chow, senior fellow for energy and national security at the Center for Strategic and International Studies in Washington, said it is hard to tell whether the reported budgetary shift toward gas means a big increase in actual spending because the companies may be cutting total investment due to the oil slump.
Weak spot in economy
Fixed-asset investment (FAI) in the petroleum sector has been one of the weak spots in China's economy so far this year.
In the first six months, FAI in petroleum and natural gas extraction fell 18 percent to 95.8 billion yuan (U.S. $14.4 billion), the National Bureau of Statistics (NBS) reported.
The NBS did not break down oil and gas investment separately.
The first-half profit picture has also been bleak.
Revenue for petroleum and gas extraction slid 26.5 percent during the period to nearly 289 billion yuan (U.S. $43.4 billion). The NBS reported losses of 38.9 billion yuan (U.S. $5.8 billion), compared with profits of 62.9 billion yuan (U.S. $9.4 billion) a year earlier.
Chow said China's state monopolies generally release less information than western oil majors, which regularly provide financial breakdowns by sector and activity as a guide to investors over time.
Instead, the state companies often "cherry pick" numbers, making it hard to determine the profitability of oil and gas investments.
"At least in the official reporting, they tend to highlight some positive shift in direction in some way without telling you all the stories behind it," Chow said.
In the case of the current shift from oil to gas, the prospects may be complicated because gas prices will inevitably be linked to oil, at least on international markets.
In China, profits may depend on government price controls and how quickly they are lifted, or whether the government subsidizes gas sales to promote the fuel.
With recent pressures on oil producers throughout the industry, the shift to gas may provide little relief.
In April, CNPC PetroChina reported its first quarterly loss since listing in 2000, posting negative earnings of 13.79 billion yuan (U.S. $2.06 billion) compared with a year- earlier profit of 6.15 billion yuan (U.S. $922 million), according to Reuters.
First-quarter profits from natural gas and pipelines dropped nearly 36 percent to 4.7 billion yuan (U.S. $704 million), Bloomberg said.
Parent company CNPC recorded better first-half results as profit of 27.6 billion yuan (U.S. $4.1 billion) rose 11 percent, mainly due to production increases and cost cutting overseas, Shanghai Daily and Reuters said.
CNPC is reportedly planning to cut annual total investment by 40 percent over the next five years.
The cutbacks on oil investment may be following another government agenda as the state producers are pressed to behave more like commercial companies.
But the drop in domestic oil production also has security implications as China grows more dependent than ever on imports of crude, which rose 14.2 percent from a year earlier in the first half to nearly 7.5 million barrels per day, according to customs data.
Crude imports in July slowed slightly to an average of 7.35 million barrels per day in preliminary figures as independent refiners dialed back recent growth, Bloomberg reported Monday.
Even so, China's oil imports have surged 12 percent ahead of the year-earlier pace so far this year, Dow Jones said.
China's official press sounded warnings about import dependence well over a decade ago when rapid economic growth spurred an increase in the share of foreign oil from 29 percent of consumption in 2002 to 33.5 percent in 2003.
With the decline in production this year, the foreign share is likely to top 65 percent, making China more determined than ever to secure its import routes from the Middle East and Africa through the disputed waters of the South China Sea.
"That's certainly a justification that the PLA (People's Liberation Army) navy would use," Chow said.
China has been on the defensive over its South China Sea claims since July 12 when an international arbitration tribunal in The Hague found that they had "no legal basis."
Beijing has refused to recognize the ruling in the case brought by the Philippines.
On July 28, China's Defense Ministry signaled an assertive stance by announcing that the PLA would hold joint air and sea drills with Russian forces in the region sometime in September.
On Saturday, a PLA Air Force spokesperson said Chinese bombers and fighter jets had conducted patrols of the airspace over the disputed Spratly Islands and Scarborough Shoal, which Beijing refers to as the Nansha and Huangyan Islands.
"The Air Force is organizing normalized South China Sea combat patrols, practicing tactics ... increasing response capabilities to all kinds of security threats and safeguarding national sovereignty, security and maritime interests," Senior Colonel Shen Jinke said, as quoted by Reuters.
The energy situation suggests that China's various agendas may come into conflict if current trends continue.
If world oil prices keep weakening, state companies may feel pressure to reduce investment in oil production further, hoping to meet the government's goals for commercial operations and environmentally acceptable fuels.
But energy security concerns seem bound to emerge if dependence on imported oil continues to grow, raising doubts about whether state companies are protecting the national interest with a major shift in investment to gas.
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GAZPROM - The parties discussed relevant issues related to bilateral cooperation, including the Baltic LNG project. Emphasis was placed on the priority measures aimed at developing a joint design concept (pre-FEED).
BHGE - U.S. Rig Count is up 11 rigs from last week to 1,063, with oil rigs up 8 to 869, gas rigs up 4 to 193, and miscellaneous rigs down 1 to 1. Canada Rig Count is up 13 rigs from last week to 195, with oil rigs up 8 to 127 and gas rigs up 5 to 68.
REUTERS - Brent crude futures had risen $1.02 cents, or 1.3 percent, to $81.28 a barrel by 0637 GMT. The contract dropped 3.4 percent on Thursday following sharp falls in equity markets and indications that supply concerns have been overblown. U.S. West Texas Intermediate (WTI) crude futures were up 80 cents, or 1.1 percent, at $71.77 a barrel, after a 3 percent fall in the previous session. WTI is on track for a 3.5 percent drop this week.
EIA - Brent crude oil spot prices averaged $79 per barrel (b) in September, up $6/b from August. EIA expects Brent spot prices will average $74/b in 2018 and $75/b in 2019. EIA expects West Texas Intermediate (WTI) crude oil prices will average about $6/b lower than Brent prices in 2018 and in 2019.