China Is Joining Global Hunt for Oil And Coming Up Dry
By PATRICK BARTA
Staff Reporter of THE WALL STREET JOURNAL
September 23, 2004; Page C1
With oil prices still high, some see a new reason to think relief is on the way: China's oil companies are joining the global oil hunt, and they've got big money to burn. There's only one problem. They're not finding a lot of oil.
Instead, as China's oil giants fan out across the globe, they're learning what Big Oil has known for decades: Deep pockets don't always guarantee new discoveries, or even a stake in the world's premier oil fields. The best assets are either already controlled by the West, or they're off-limits to foreign investors – as in the Middle East. And China's oil companies don't have a lot of experience prospecting in hard-to-reach places.
As a result, some Chinese companies are settling for lower-return scraps the Western majors didn't want. In other cases, they're opting to spend on big natural-gas projects or refineries that don't bring more crude oil into the pipeline. The upshot is that China's majors are struggling to keep their reserves from dwindling at a time when their country -- and the world -- needs new oil more than ever. Rapid economic growth and declining domestic production are forcing China, a net oil exporter until the early 1990s, to now import 2.5 million barrels a day. That demand is placing a heavy strain on world supply and pushing prices higher. Unless China's oil companies find a lot more oil soon, Chinese imports are expected to more than double to nearly six million barrels a day by 2015, according to the East-West Center, a research center in Honolulu.
Many Western majors are holding the reins on new spending. But China's largest publicly traded oil and gas producer, PetroChina Co., is expected to invest $10.4 billion in new projects this year, compared with less than $7.5 billion three years ago, according to Deutsche Bank AG's global equity research staff. PetroChina's 2004 total is more than that of ChevronTexaco Corp. and all other large oil companies the bank tracked except for the U.K.'s BP PLC, Royal Dutch/Shell Group, France's Total SA and Exxon Mobil Corp. of the U.S.
Another major Chinese company, China Petroleum & Chemical Corp., or Sinopec, is expected to raise capital spending this year by 16% to $6.1 billion. Cnooc Ltd., China's primary offshore oil company, should boost investment by more than 40% this year to $2.2 billion, Deutsche Bank says.
All that cash is raising China's profile overseas, especially in places like Indonesia. In 2002, for example, Cnooc agreed to buy stakes in five Indonesian oil and gas fields from Spain's Repsol YPF SA for $585 million. That was followed by additional investments in other fields. PetroChina followed by paying $216 million for stakes owned by Devon Energy Corp. of the U.S. Chinese oil companies also have exploration and development projects under way in Venezuela, Canada, Thailand, Azerbaijan, Oman and the Sudan.
But while some of the overseas assets are large, many are in declining regions or are small oil producers by international standards. In some cases, China's companies have failed to get their hands on bigger, newer assets. In one example, Sinopec and Cnooc tried to secure a stake in an enormous field in Kazakhstan in 2003. But the other development partners exercised pre-emptive rights to block entry of the Chinese companies.
China's oil companies are thinking big, but "they haven't been involved in any finds that would make a dent in China's oil requirements," says Norman Valentine, an analyst at Wood Mackenzie, an energy consultant in Edinburgh, Scotland. Indeed, production from China's overseas investments is supplying only between 5% and 10% of its needed imports, says Kang Wu, a research fellow at the East-West Center. "I don't think that will rise," he says.
Even with all their spending, PetroChina and Sinopec both reported a drop in oil reserves last year. Cnooc's reserves have increased, but the company is much smaller, so those changes will have a much less measurable impact on China's needs.
China does have promising investments in the Sudan, where China National Petroleum Corp., PetroChina's state-owned parent, holds a 40% stake in a consortium that is developing sizable fields. But for now, the consortium is only producing about 300,000 barrels a day, with China getting a good deal less, analysts say. That is a drop in the bucket when the world is consuming more than 80 million barrels a day, and China more than six million.
CNPC said no one was available at the company for comment.
PetroChina and Sinopec didn't make executives available for an interview. But Mark Qiu, chief financial officer at Cnooc, says he is not surprised that China isn't securing more big fields overseas. Many proven assets are too expensive, he says, and operating in unfamiliar terrain is risky.
By PATRICK BARTA
Staff Reporter of THE WALL STREET JOURNAL
September 23, 2004; Page C1
With oil prices still high, some see a new reason to think relief is on the way: China's oil companies are joining the global oil hunt, and they've got big money to burn. There's only one problem. They're not finding a lot of oil.
Instead, as China's oil giants fan out across the globe, they're learning what Big Oil has known for decades: Deep pockets don't always guarantee new discoveries, or even a stake in the world's premier oil fields. The best assets are either already controlled by the West, or they're off-limits to foreign investors – as in the Middle East. And China's oil companies don't have a lot of experience prospecting in hard-to-reach places.
As a result, some Chinese companies are settling for lower-return scraps the Western majors didn't want. In other cases, they're opting to spend on big natural-gas projects or refineries that don't bring more crude oil into the pipeline. The upshot is that China's majors are struggling to keep their reserves from dwindling at a time when their country -- and the world -- needs new oil more than ever. Rapid economic growth and declining domestic production are forcing China, a net oil exporter until the early 1990s, to now import 2.5 million barrels a day. That demand is placing a heavy strain on world supply and pushing prices higher. Unless China's oil companies find a lot more oil soon, Chinese imports are expected to more than double to nearly six million barrels a day by 2015, according to the East-West Center, a research center in Honolulu.
Many Western majors are holding the reins on new spending. But China's largest publicly traded oil and gas producer, PetroChina Co., is expected to invest $10.4 billion in new projects this year, compared with less than $7.5 billion three years ago, according to Deutsche Bank AG's global equity research staff. PetroChina's 2004 total is more than that of ChevronTexaco Corp. and all other large oil companies the bank tracked except for the U.K.'s BP PLC, Royal Dutch/Shell Group, France's Total SA and Exxon Mobil Corp. of the U.S.
Another major Chinese company, China Petroleum & Chemical Corp., or Sinopec, is expected to raise capital spending this year by 16% to $6.1 billion. Cnooc Ltd., China's primary offshore oil company, should boost investment by more than 40% this year to $2.2 billion, Deutsche Bank says.
All that cash is raising China's profile overseas, especially in places like Indonesia. In 2002, for example, Cnooc agreed to buy stakes in five Indonesian oil and gas fields from Spain's Repsol YPF SA for $585 million. That was followed by additional investments in other fields. PetroChina followed by paying $216 million for stakes owned by Devon Energy Corp. of the U.S. Chinese oil companies also have exploration and development projects under way in Venezuela, Canada, Thailand, Azerbaijan, Oman and the Sudan.
But while some of the overseas assets are large, many are in declining regions or are small oil producers by international standards. In some cases, China's companies have failed to get their hands on bigger, newer assets. In one example, Sinopec and Cnooc tried to secure a stake in an enormous field in Kazakhstan in 2003. But the other development partners exercised pre-emptive rights to block entry of the Chinese companies.
China's oil companies are thinking big, but "they haven't been involved in any finds that would make a dent in China's oil requirements," says Norman Valentine, an analyst at Wood Mackenzie, an energy consultant in Edinburgh, Scotland. Indeed, production from China's overseas investments is supplying only between 5% and 10% of its needed imports, says Kang Wu, a research fellow at the East-West Center. "I don't think that will rise," he says.
Even with all their spending, PetroChina and Sinopec both reported a drop in oil reserves last year. Cnooc's reserves have increased, but the company is much smaller, so those changes will have a much less measurable impact on China's needs.
China does have promising investments in the Sudan, where China National Petroleum Corp., PetroChina's state-owned parent, holds a 40% stake in a consortium that is developing sizable fields. But for now, the consortium is only producing about 300,000 barrels a day, with China getting a good deal less, analysts say. That is a drop in the bucket when the world is consuming more than 80 million barrels a day, and China more than six million.
CNPC said no one was available at the company for comment.
PetroChina and Sinopec didn't make executives available for an interview. But Mark Qiu, chief financial officer at Cnooc, says he is not surprised that China isn't securing more big fields overseas. Many proven assets are too expensive, he says, and operating in unfamiliar terrain is risky.
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