Dai Jinliang And Wang Dongjin'S Golden Stone Policy: Oil Prices Continue To Increase Production And Storage

In March 25th and March 26th, 00883.HK and PetroChina (00857.HK) held a performance conference in succession. Both companies announced that they would adopt measures including capital expenditure adjustment to ensure the company's performance.

Since 2020, under the influence of the "price war" between the new coronavirus epidemic situation and the oil producing countries, the international crude oil price has come to the biggest decline since 1991.

In less than two months, Brent crude oil price dropped from nearly 70 US dollars / barrel to less than 30 U.S. dollars / barrel. The fast falling oil price not only caused panic in the market, but also tested the ability and action of the major oil producing countries to deal with low oil prices.

As the world's largest consumer of crude oil and the seventh largest producer of crude oil, changes in international oil prices are very important to China, especially what measures China's oil and CNOOC, which are the two main oil exploration companies in China, take measures to deal with the low oil price era, not only affect the company's own performance, but also affect China's domestic energy supply security. 。

"China's domestic oil and gas reserves and production is a national strategy and is unlikely to change because of some short-term price changes," Huang Xiaodan, an analyst at standard & amp; rating agency, told the twenty-first Century economic news reporter. "To see China Petroleum Corp's measures, we must first establish such knowledge and conduct an analysis and forecast of their actions."

As a result, when international oil companies generally adopt strategies such as reducing capital expenditure and selling assets, Chinese companies make another way. "China's large oil companies are still able to withstand the impact of the oil price collapse for the time being." Those people believe that.

For oil companies, if they want to get more income, they must increase oil reserves and output and sell more oil. Gan Jun photo

Why not choose to slash capital spending?

In 2019, China Petroleum Corp based on upstream industry achieved good performance.

PetroChina, the company achieved operating income of 2 trillion and 520 billion yuan, an increase of 6% compared to the same period, operating profit of 121 billion 762 million yuan, a slight decline in the same share; CNOOC realized oil and gas sales revenue rose 5.7% to RMB 197 billion 200 million yuan, net profit increased to 61 billion 50 million yuan, an increase of 15.9% over the same period.

At the same time, the output of the two companies also recorded a sharp rise. PetroChina's oil and gas equivalent output in 2019 reached 1 billion 560 million barrels, an increase of 4.6% over the same period last year. CNOOC's annual equivalent output of oil and gas reached 506 million barrels, the first time to break 500 million barrels, the best level in history.

Behind this achievement is a substantial increase in capital expenditure, especially the result of exploration and development inputs. In 2019, PetroChina spent 296 billion 776 million yuan year-on-year, an increase of 15.9% compared with the same period last year. CNOOC spent 79 billion 600 million yuan year-on-year, an increase of 27.48% over the same period last year. Driven by the two companies, China's crude oil output also returned to 1.91 billion tons in 2019, reversing the three year decline.

For an oil company, if you want to get an increase in income, you must increase oil reserves and output and sell more oil. But because of the "diminishing" of oil production, the output of single well will decrease over time. This means that if we want to increase production, we must continue to invest, and offset the natural production of oil by new reserves and new production. Diminishing.

Therefore, in the period of stable or growing crude oil prices, in order to pursue the increase in performance, capital expenditure needs to maintain a certain growth.

However, after the crude oil prices entered a period of rapid decline, the oil that could be produced in the original plan could be reduced or even negative because of the decline in efficiency, which led the oil companies to choose ways to reduce capital expenditure and save money directly or simply sell the less profitable assets. The core of these measures is to save more cash and accumulate power to wait for the oil price to recover.

"During the period of low oil prices, an important criterion for evaluating the practices of oil companies is cash flow," Huang Xiaodan told reporters. "Having more cash flow means more flexibility, whether it is paying dividends or paying debts, or increasing investment in the future when oil prices are warmer."

As a result, reducing capital expenditure is a common practice for all companies in the world to face low oil prices.

In March 24th, the international oil giant Shell announced its ambitious savings plan, reducing its capital expenditure plan from $25 billion to less than $20 billion in 2020, while stripping nearly $10 billion of assets to ensure that the cash flow of 8 billion -90 billion dollars before tax can be provided throughout the year.

"Since the last round of crude oil prices plummeted, the company has played a very good role in reducing capital expenditure," Shell Companies CEO Fan Bodeng said in an interview with our reporter. "Good cash flow allows us to have sufficient flexibility to face any fluctuations."

Similarly, in the last round of the falling oil price cycle, Chinese companies also made similar choices with foreign counterparts.

CNOOC, for example, sharply reduced its capital expenditure to 49 billion yuan in 2016, down more than 26% from the same period last year. PetroChina's capital expenditure in 2016 was 173 billion 286 million yuan, down 14.8% from the same period last year. At that time, it had maintained a two digit decline for four consecutive years.

Although the net profit of CNPC and CNOOC both fell sharply in the same year, profits remained positive after the oil price resumed. However, the consequences of drastically reducing capital expenditure are that China's crude oil output has declined for three consecutive years, and the domestic energy security situation has been threatened.

Continue to increase production and storage

Unlike international peers, China's oil companies may not choose too radical capital spending cuts during this round of oil price slump.

"The biggest impact on the company is the upstream business," Li Luguang, vice president of PetroChina, said at the performance meeting. "We need to co-ordinate the output and efficiency, the present and the long term, and deal with the three relationships between low oil prices and national energy security, and optimize our production structure."

In the last round of the fall in oil prices, China Petroleum Corp sharply reduced the cost of capital expenditure. In 2016, China's crude oil output fell below 2 billion tons for the first time. Since then, output in 2017 and 2018 was 1.99 billion tons and 1.91 million tons respectively, with a decrease of 7.4% and 4.1% respectively. China's crude oil import dependency also broke through 70% for the first time in 2018, and domestic energy supply security sounded a warning bell.

In 2018, CNPC and CNPC received instructions from the central government to increase investment in exploration and development and promote domestic oil and gas to increase production and output. In 2019, the two companies separately formulated their plans for increasing production and production, so as to push domestic crude oil output back to 2 billion tons.

"Increasing production and production is a national strategy. From this perspective, some high costs, especially overseas high cost projects, will be affected," an oil central enterprise official told reporters. "However, domestic energy security issues will be more fully reflected in the oil price rising cycle, and the effort to increase production and output will remain."

Therefore, for China Petroleum Corp, the more realistic choice is to raise the efficiency of investment as much as possible and at the same time increase the cost reduction.

"Since the fall of oil prices, several meetings held by the company have basically focused on how to reduce costs and increase efficiency," the central enterprises said. "At the same time, we should adjust our pace in production and optimize the output and capacity structure. The aim is to increase our efficiency output."

He told reporters that whether PetroChina or CNOOC had a relatively good foundation in this round of low oil price cycle: the cost of barrel oil had been greatly reduced compared to a few years ago.

According to the S & P rating agency, the total cost of CNPC is $35 / barrel, while CNOOC is $34 / barrel, although it is still a little higher than the current oil price of 30 US dollars / barrel, but it is still much better than the cost of 40 dollars / barrel at the previous round.

If oil prices remain at the current level, the average oil price in the first half of this year will not exceed the cost of the two companies. Therefore, China Petroleum Corp will not introduce a particularly large capital expenditure reduction plan just like the international oil company. The more likely option is to further save costs and costs on the basis of current levels and observe further changes in international oil prices.

"Low oil price lasts for three months or six months, and there is great uncertainty," Wang Dongjin, chairman of CNOOC, said at a press conference. "In the long run, oil price is like the tide of the sea. After the fall, the price will rise to 50-60 dollars / barrel, which will be a satisfactory result for all parties."

It is worth mentioning that Dai Houliang, chairman of CNPC and Wang Dongjin, chairman of CNOOC, are the top leaders of the central enterprises that have been in office for quite some time. The oil price that will drop rapidly will be the first big test after they took office.