Upstream spending on oil and gas operations in China by that country’s three national oil companies jumped to $21.5 billion in 2006 from $12.6 billion in 2004, a greater increase than all of their international spending last year, including acquisitions.
While industry attention has focused on increased international activity by China’s NOCs, the domestic expansion of PetroChina, CNOOC Ltd., and Sinopec is of greater importance in their competition with international oil companies, said Wood Mackenzie Ltd., Edinburgh, in a recent report. “All three companies have dramatically increased their expenditures on domestic exploration and production activities over the last 5 years to the extent that each company is now investing at a greater rate than most of the major IOCs,” said Norman Valentine, senior corporate analyst for Wood Mackenzie.
Chinese NOCs’ spending on field development has increased beyond most of the larger international companies. “At almost $9.40/boe, PetroChina’s domestic upstream field development investment rate in 2006 was substantially higher than the average rate of the international majors at $7.50/boe,” Valentine said. “Sinopec’s and CNOOC’s domestic investment rates of around $12/boe were also greater than the average rate of the international large caps, at $11/boe. In terms of activity, the differences are probably greater, as China has to some extent been sheltered from the full impact of the recent inflationary environment affecting upstream capital costs due to the lower costs of domestically sourced labor and materials.”
The increased spending has paid off in several major discoveries by the Chinese companies. “PetroChina’s multibillion-barrel Nanpu oil and gas field and Sinopec’s giant Puguang gas discovery significantly strengthen the companies’ portfolios, which are dominated by established and maturing producing fields,” Valentine said. “Increased domestic expenditure has also increased liquid output from onshore legacy fields. For example, PetroChina has increased production from enhanced oil recovery projects in the Daqing field, while Sinopec has halted production declines from its Shengli area.”
Wood Mackenzie said these discoveries are likely to maintain China’s long-term production levels rather than trigger much of an increase in current production. However, analysts said the impact on China’s gas development over the next 5-10 years is potentially more dramatic because of the large scale of gas reserves in the Sichuan basin and in Nanpu field. It could mean the NOCs will be more selective in pursuing some of the speculative overseas LNG opportunities and major international gas import pipeline developments, instead concentrating on the development of indigenous gas resources.
“Focusing E&P investment on China in our view provides the best opportunity for value creation for each of the NOCs. We expect the companies’ heavy investment to continue until at least the end of the decade,” Wood Mackenzie reported. Meanwhile, Chinese NOCs will continue searching out overseas acquisition opportunities as they seek to develop into larger, more internationally competitive organizations.
Much industry commentary has been devoted to the increase in overseas expenditure of China’s NOCs, with their increasing appetite for multibillion-dollar asset acquisitions drawing much attention. “According to our analysis, total overseas expenditure by the three companies has indeed increased substantially over the last 2 years and reached $8 billion in 2005 and 2006,” they said.