China's upstream investments unlikely to slow despite energy transition

PetroChina and China National Offshore Oil Corp. Ltd posted sharp increases in oil and gas output in the first nine months of 2021, a sign that China's top state oil firms are aggressively pursuing plans to boost domestic fossil fuel output despite the nation's energy transition journey gaining speed.

Analysts said most major state-owned companies would be aiming to invest billions of dollars in the coming years to ensure that its upstream sector continues to post production growth, in line with Beijing's vision for energy security.

"China's state oil companies will keep a unique focus on upstream sector investments given the country's growing dependence on imported oil," Kang Wu, head of Asia Analytics and Global Demand at S&P Global Platts, said.

"With energy transition underway and the energy sector set to witness big changes in coming decades, it appears that Beijing wants to ensure that sufficient investments keep flowing in to boost domestic oil production for its own energy security. Whether or not this strategy works to prevent China's oil production from eventually going down in the long run, remains to be seen," he added.

CNOOC's domestic crude output jumped 11.5% year on year to 233.9 million barrels in the January-September period. The 24.1 million-barrel rise in production over the nine-month period accounted for 90% of China's production increment of 26.79 million barrels during the period, the company's recently released Q3 results showed.

It boosted domestic gas output by 11.8% year on year to 348 Bcf in the January-September period as part of efforts to increase the country's supply of clean energy. This growth was slightly higher than the 10.8% year-on-year increase in gas output during the same period, data from the National Bureau of Statistics showed.

The growth is expected to be sustainable as its Lingshui 17-2 deepwater gas field in the South China Sea reached full operation in September after commissioning on June 25. The gas field is estimated to add 3 Bcm to the company's annual output.

Energy security focus

The Chinese government has been urging upstream companies to boost output and lift reserves to secure fossil energy supplies, while starting the nation's energy transition journey.

"As state-owned entities, China's major operators are not solely profit-driven. They also play an important and integrated role in social economics. So even in a less favorable oil price environment, we expect Chinese NOCs to perform in line with government expectations and to continue to make an effort to shore up domestic supply," Peng Li, research analyst at Rystad Energy said in a recent note.

CNOOC has targeted its non-fossil resources to account for more than half of the company's energy resource mix by 2050, and lift gas output to 35% of its upstream production by 2025 from the current 21%.

The company plans to invest 5%-10% of its annual capital expenditure in new energy business developments, led by offshore wind power projects, during the 14th Five Year plan (2021-25), up from about 3%-5% at end-2020. The company spent Yuan 56.96 billion ($8.9 billion) in the first three quarters, up 5.4% year on year. It's total 2021 budget is Yuan 90-100 billion.

Aiming to meet target

PetroChina is also aiming to meet its 2021 oil production target of 924 million barrels, or 2.53 million b/d, Brian Xing, the company's deputy director of investor relations, said.

PetroChina produced 662.3 million barrels, or 2.43 million b/d, of crude over January-September, down 5.6% year on year due to a 28.7% slump in overseas output, the company's results showed.

The reduction in overseas oil and gas output was mainly due to the production curbs set by OPEC+, Wei Fang, assistant secretary to Petrochina's board of directors said.

While its overseas output fell, PetroChina lifted its domestic crude production by a marginal 0.3% year on year to 2.05 million b/d over January-September. Its domestic output accounts for 85% of the company's total crude output and 50.7% of China's total crude production.

Rystad said China was looking to lift oil and gas production in the years ahead to meet rising domestic demand and reduce the record-high share of oil imports.

National oil companies are expected to spend more than $120 billion on drilling and well services in the 2021-2025 period, seeking to meet rising oil and gas demand. At the same time, the country aims to supply more of its oil demand from domestic sources, after the share of imported crude oil has risen steadily from 2014 to a high of almost 75% last year, it added

"To be exact, CNPC, CNOOC and Sinopec together are expected to spend about $123 billion on drilling and well services in the coming five-year period, up from a total $96 billion between 2016 and 2020," Rystad said.