Energy & Resources

Don’t be crude

State press shoots down report that China will profiteer from oil


Announced a major new oil find in the Bohai Sea

“The coronavirus is stalling other countries’ economies, but the world’s factory will be able to produce more products to extend China’s influence across the world.”

So concluded a recent editorial on, framed by widely reported news that China’s fleet of 84 very large crude carriers (VLCC) had set off for the Middle East to buy oil at prices that have crashed to 20-year lows.

The domestic press was pleased that the fleet had set sail, believing that cheaper energy would help companies cut some of their operating costs or end up in the government’s strategic oil reserves.

“This is an opportunity to get rich,” one netizen added of the armada heading for the Gulf. “We should send warships to escort them.”

Signs that China is trying to profit from the pandemic rather than atoning for it are going to anger its critics, who point angrily to the origins of the virus in Wuhan.

Perhaps mindful of this, the People’s Daily was quick to run a lengthy rebuttal of the original article about the 84 tankers heading for the Middle East, describing it as fake news.

It explained how the story originated from a blogger but was inadvertently given credence by the China Shipbuilding Industry Association, which posted it on its website. The original report has since been deleted.

The state-owned newspaper cited analysis instead from a local securities firm, which said there were 12 VLCCs on their way to the Middle East, but concluded that this was “likely to be part of their regular operations”.

The newspaper further highlighted that when China finishes the latest phase of building out capacity at its strategic fuel reserve by the end of 2020, it will only be reaching the International Energy Association’s (IEA) requirements that countries hold 90 days of the previous year’s net oil imports as a strategic reserve.

China is not an IEA signatory, but energy security has been a priority since the government began building up its reserve facilities in 2007 (see WiC6).

By the end of 2020, it should have the capacity to store 503 million barrels of oil, or 85 million tonnes.

The People’s Daily also emphasised how both the United States and India have been bolstering their own reserves during the global oil glut.

On March 19, for example, the US announced that it would buy 30 million barrels of oil from mid- and small-sized producers to help them through the crisis.

Shipping news platforms then reported that one of China’s VLCC’s, the Sea Splendour, has been booked by a Saudi company to ship crude to the US.

Another possible end use for VLCCs is oil trading as companies store crude in a bid to take advantage of the contango in the futures markets (a period when near term prices are lower than future ones).

Over the past month the stand-off between Saudi Arabia and Russia has resulted in a collapse in oil prices of more than 50% (West Texas Intermediate traded below $20 per barrel on March 30) but a tenfold increase in daily tanker rates. The Sea Splendour was booked at $351,961 per day for its trip, up from about $30,000 per day a month earlier. India’s Reliance has just set a new record by paying $411,000 a day for another VLCC charter.

China’s offshore E&P giant CNOOC has been hit hard by the collapse in the price of crude, seeing its share price halve since January. But until shortly before reporting its 2019 results on March 25, it was saying that the crisis in the oil business would not change its plans to increase production and capex as part of a blueprint to double reserves by 2025. However, that’s no longer the position, with company executives acknowledging that spending in the previous plan was predicated on an oil price of $65 a barrel.

“Without a doubt we will reduce this year’s production levels and capital expenditure by a certain degree,” its chief executive Xu Keqiang told reporters, despite reporting a 16% profit increase for last year, which was better than most expected. A multi-year efficiency drive reduced all-in production costs per barrel to $29.78 as of 2019 – which is much lower than its domestic peers Sinopec and PetroChina but still barely profitable in the current conditions.

Another problem for CNOOC is that its operations are heavily concentrated in upstream exploration and production, which makes its profitability much more sensitive to oil prices.

On March 18 there was some better news when CNOOC announced a big new find in the Bohai Sea. The reports were well received domestically. “This is of great significance to guarantee China’s energy security,” state broadcaster CCTV celebrated.

The Kenli 6-1 find – which was drilled to a depth of 1,596 metres – displayed the “characteristics of large reserves, with good oil properties and high test productivity,” CNOOC added.

The government has been putting a renewed focus on domestic oil and gas exploration as a way of reducing oil imports, which accounted for 72% of domestic demand last year.

At the end of March, the ministry of natural resources also announced the extraction of a record 861,400 cubic metres of gas hydrate ( a form of natural gas trapped in frozen water). Average daily extraction rates from the project in the South China Sea also hit new highs, with output during the trial period providing a “solid technical foundation for commercial exploitation,” the ministry said. Economic Daily reported in 2017 that China’s reserves of gas hydrate could be comparable to about 100 billion tonnes of oil, 80% of which are in the South China Sea.

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