Chinese crude production peaked at some 4.3 mmb/d in 2015, capping off a long and steady rise that saw output rise from 3 mmb/d in 1996. But since then, output has fallen sharply. By 2017, the average output of Chinese fields was 3.8 mmb/d and by late 2018, production had fallen to 3.6 mmb/d. The issue is replenishment – the long and established Chinese oil fields in Bohai Bay are now way past their prime, and there have not been enough new fields joining the crowd to keep output at a steady level. Hopes that the American shale revolution could be repeated in inland China proved to be in vain, as geography stood in the way, and the world’s largest energy market is now more and more dependent on imports.
CNOOC plans to change that. After President Xi Jinping called for greater self-reliance and improving national security by boosting domestic reserves in August, the national upstream company CNOOC has now unveiled ambitious plans to boost capital spending with an eye to raise its production. Encompassing both domestic and international assets, CNOOC wants to boost its total capital budget by 14% to its highest level since 2014 to raise net production by 15%.
CNOOC’s focus will remain domestic, but international projects will assume greater importance as it aims to reduce its domestic share of total production from 65% to 63%. Within China, CNOOC will be looking at continuing shallow water exploration in the Bohai Bay and deepwater exploration in the Pearl River Mouth Basin, where it has recently signed strategic exploration deals in Areas A and Areas B. The integrated Huizhou 32-5/33-1 development has also started production, adding 19,200 b/d of output by 2020. It could move even further south, as China and The Philippines agreed to embark on joint exploration activities in disputed areas of the South China Sea. Opportunities exist where China and Vietnam have overlapping claims as well – but diplomatic relationships are more complicated there – and China is also continuing to use its muscle to claim purported oil-rich areas in the middle of the South China Sea around the Spratly Islands.
But while the domestic focus is aimed to meeting the Premier’s requests, it is internationally that the greater opportunities lie for CNOOC. Starting up this year will be the Egina oilfield in Nigeria, part of the OML130 block in which CNOOC has a 45% that includes the Akpo, Egina South and Preowei fields, with the Akpo producing 56,000 b/d last year. Promising assets in Uganda’s Lake Albert Basin, as well as Algeria, Gabon, Senegal and the Republic of Congo have also capped off a decade of growing investment into African upstream. Through its US$15.1 billion acquisition of Nexen in 2013, CNOOC has access to Canadian oil sands – which could make a comeback with the rise in crude prices – and it also has stakes in promising projects in Eagle Ford shale and deepwater Gulf of Mexico. But by far the best investment CNOOC has made is in Guyana, where it is a minority partner in ExxonMobil’s major discoveries in the Stabroek block – acquired when CNOOC decided to retreat from volatile Venezuela. With Guyanese production on track for 2020, CNOOC’s ambitious targets could be exceeded – and that’s good news for President Xi Jinping, who wants his state oil companies to grow from being domestic giants to international behemoths.
CNOOC Capital Expenditure Plans 2019-2020
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Headline crude prices for the week beginning 11 February 2019 – Brent: US$61/b; WTI: US$52/b
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Midstream & Downstream
Global liquid fuels
Electricity, coal, renewables, and emissions
2018 was a year that started with crude prices at US$62/b and ended at US$46/b. In between those two points, prices had gently risen up to peak of US$80/b as the oil world worried about the impact of new American sanctions on Iran in September before crashing down in the last two months on a rising tide of American production. What did that mean for the financial health of the industry over the last quarter and last year?
Nothing negative, it appears. With the last of the financial results from supermajors released, the world’s largest oil firms reported strong profits for Q418 and blockbuster profits for the full year 2018. Despite the blip in prices, the efforts of the supermajors – along with the rest of the industry – to keep costs in check after being burnt by the 2015 crash has paid off.
ExxonMobil, for example, may have missed analyst expectations for 4Q18 revenue at US$71.9 billion, but reported a better-than-expected net profit of US$6 billion. The latter was down 28% y-o-y, but the Q417 figure included a one-off benefit related to then-implemented US tax reform. Full year net profit was even better – up 5.7% to US$20.8 billion as upstream production rose to 4.01 mmboe/d – allowing ExxonMobil to come close to reclaiming its title of the world’s most profitable oil company.
But for now, that title is still held by Shell, which managed to eclipse ExxonMobil with full year net profits of US$21.4 billion. That’s the best annual results for the Anglo-Dutch firm since 2014; product of the deep and painful cost-cutting measures implemented after. Shell’s gamble in purchasing the BG Group for US$53 billion – which sparked a spat of asset sales to pare down debt – has paid off, with contributions from LNG trading named as a strong contributor to financial performance. Shell’s upstream output for 2018 came in at 3.78 mmb/d and the company is also looking to follow in the footsteps of ExxonMobil, Chevron and BP in the Permian, where it admits its footprint is currently ‘a bit small’.
Shell’s fellow British firm BP also reported its highest profits since 2014, doubling its net profits for the full year 2018 on a 65% jump in 4Q18 profits. It completes a long recovery for the firm, which has struggled since the Deepwater Horizon disaster in 2010, allowing it to focus on the future – specifically US shale through the recent US$10.5 billion purchase of BHP’s Permian assets. Chevron, too, is focusing on onshore shale, as surging Permian output drove full year net profit up by 60.8% and 4Q18 net profit up by 19.9%. Chevron is also increasingly focusing on vertical integration again – to capture the full value of surging Texas crude by expanding its refining facilities in Texas, just as ExxonMobil is doing in Beaumont. French major Total’s figures may have been less impressive in percentage terms – but that it is coming from a higher 2017 base, when it outperformed its bigger supermajor cousins.
So, despite the year ending with crude prices in the doldrums, 2018 seems to be proof of Big Oil’s ability to better weather price downturns after years of discipline. Some of the control is loosening – major upstream investments have either been sanctioned or planned since 2018 – but there is still enough restraint left over to keep the oil industry in the black when trends turn sour.
Supermajor Net Profits for 4Q18 and 2018
- 4Q18 – Net profit US$6 billion (-28%);
- 2018 – Net profit US$20.8 (+5.7%)
- 4Q18 – Net profit US$5.69 billion (+32.3%);
- 2018 – Net profit US$21.4 billion (+36%)
- 4Q18 – Net profit US$3.73 billion (+19.9%);
- 2018 – Net profit US$14.8 billion (+60.8%)
- 4Q18 – Net profit US$3.48 billion (+65%);
- 2018 - Net profit US$12.7 billion (+105%)
- 4Q18 – Net profit US$3.88 billion (+16%);
- 2018 - Net profit US$13.6 billion (+28%)