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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International expansions for Saudi Aramco – the largest oil company in the world – are not uncommon. But up to this point, those expansions have followed a certain logic: to create entrenched demand for Saudi crude in the world’s largest consuming markets. But Saudi champion’s latest expansion move defies, or perhaps, changes that logic, as Aramco returns to Europe. And not just any part of Europe, but Eastern Europe – an area of the world dominated by Russia – as Saudi Aramco acquires downstream assets from Poland’s PKN Orlen and signs quite a significant crude supply deal. How is this important? Let us examine.
First, the deal itself and its history. As part of the current Polish government’s plan to strengthen its national ‘crown jewels’ in line with its more nationalistic stance, state energy firm PKN Orlen announced plans to purchase its fellow Polish rival (and also state-owned) Grupa Lotos. The outright purchase fell afoul of EU anti-competition rules, which meant that PKN Orlen had to divest some Lotos assets in order to win approval of the deal. Some of the Lotos assets – including 417 fuel stations – are being sold to Hungary’s MOL, which will also sign a long-term fuel supply agreement with PKN Orlen for the newly-acquired sites, while PKN Orlen will gain fuel retail assets in Hungary and Slovakia as part of the deal. But, more interestingly, PKN Orlen has chosen to sell a 30% stake in the Lotos Gdansk refinery in Poland (with a crude processing capacity of 210,000 bd) to Saudi Aramco, alongside a stake in a fuel logistic subsidiary and jet fuel joint venture supply arrangement between Lotos and BP. In return, PKN Orlen will also sign a long-term contract to purchase between 200,000-337,000 b/d of crude from Aramco, which is an addition to the current contract for 100,000 b/d of Saudi crude that already exists. At a maximum, that figure will cover more than half of Poland’s crude oil requirements, but PKN Orlen has also said that it plans to direct some of that new supply to several of its other refineries elsewhere in Lithuania and the Czech Republic.
For Saudi Aramco, this is very interesting. While Aramco has always been a presence in Europe as a major crude supplier, its expansion plans over the past decade have been focused elsewhere. In the US, where it acquired full ownership of the Motiva joint venture from Shell in 2017. In doing so, it acquired control of Port Arthur, the largest refinery in North America, and has been on a petrochemicals-focused expansion since. In Asia, where Aramco has been busy creating significant nodes for its crude – in China, in India and in Malaysia (to serve the Southeast Asia and facilitate trade). And at home, where the focus has on expanding refining and petrochemical capacity, and strengthen its natural gas position. So this expansion in Europe – a mature market with a low ceiling for growth, even in Eastern Europe, is interesting. Why Poland, and not East or southern Africa? The answer seems fairly obvious: Russia.
The current era of relatively peaceful cooperation between Saudi Arabia and Russia in the oil sphere is recent. Very recent. It was not too long ago that Saudi Arabia and Russia were locked in a crude price war, which had devastating consequences, and ultimately led to the détente through OPEC+ that presaged an unprecedented supply control deal. That was through necessity, as the world faced the far ranging impact of the Covid-19 pandemic. But remove that lens of cooperation, and Saudi Arabia and Russia are actual rivals. With the current supply easing strategy through OPEC+ gradually coming to an end, this could remove the need for the that club (by say 2H 2022). And with Russia not being part of OPEC itself – where Saudi Arabia is the kingpin – cooperation is no longer necessary once the world returns to normality.
So the Polish deal is canny. In a statement, Aramco stated that ‘the investments will widen (our) presence in the European downstream sector and further expand (our) crude imports into Poland, which aligns with PKN Orlen’s strategy of diversifying its energy supplies’. Which hints at the other geopolitical aspect in play. Europe’s major reliance on Russia for its crude and natural gas has been a minefield – see the recent price chaos in the European natural gas markets – and countries that were formally under the Soviet sphere of influence have been trying to wean themselves off reliance from a politically unpredictable neighbour. Poland’s current disillusion with EU membership (at least from the ruling party) are well-documented, but its entanglement with Russia is existential. The Cold War is not more than 30 years gone.
For Saudi Aramco, the move aligns with its desire to optimise export sales from its Red Sea-facing terminals Yanbu, Jeddah, Shuqaiq and Rabigh, which have closer access to Europe through the Suez Canal. It is for the same reason that Aramco’s trading subsidiary ATC recently signed a deal with German refiner/trader Klesch Group for a 3-year supply of 110,000 b/d crude. It would seem that Saudi Arabia is anticipating an eventual end to the OPEC+ era of cooperative and a return to rivalry. And in a rivalry, that means having to make power moves. The PKN Orlen deal is a power move, since it brings Aramco squarely in Russia’s backyard, directly displacing Russian market share. Not just in Poland, but in other markets as well. And with a geopolitical situation that is fragile – see the recent tensions about Russian military build-up at the Ukrainian borders – that plays into Aramco’s hands. European sales make up only a fraction of the daily flotilla of Saudi crude to enters international markets, but even though European consumption is in structural decline, there are still volumes required.
How will Russia react? Politically, it is on the backfoot, but its entrenched positions in Europe allows it to hold plenty of sway. European reservations about the Putin administration and climate change goals do not detract from commercial reality that Europe needs energy now. The debate of the Nord Stream 2 pipeline is proof of that. Russian crude freed up from being directed to Eastern Europe means a surplus to sell elsewhere. Which means that Russia will be looking at deals with other countries and refiners, possibly in markets with Aramco is dominant. That level of tension won’t be seen for a while – these deals takes months and years to complete – but we can certainly expect that agitation to be reflected in upcoming OPEC+ discussions. The club recently endorsed another expected 400,000 b/d of supply easing for January. Reading the tea leaves – of which the PKN Orlen is one – makes it sound like there will not be much more cooperation beyond April, once the supply deal is anticipated to end.
End of Article
- Crude price trading range: Brent – US$86-88/b, WTI – US$84-86/b
- Crude oil benchmarks globally continue their gain streak for a fifth week, as the market bounces back from the lows seen in early December as the threat of the Omicron virus variant fades and signs point to tightening balances on strong consumption
- This could set the stage for US$100/b oil by midyear – as predicted by several key analysts – as consumption rebounds ahead of summer travel and OPEC+ remains locked into its gradual consumption easing schedule
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