Impact of Oil Prices on Chinese NOC Spending

SIA Energy 24 March 2015 Impact of Oil Prices on Chinese NOC Spending 油田秋浓 (Oil Facility in Autumn), Changqing Photography by 许兆超 (Zhaochao Xu) N...
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SIA Energy

24 March 2015

Impact of Oil Prices on Chinese NOC Spending

油田秋浓 (Oil Facility in Autumn), Changqing Photography by 许兆超 (Zhaochao Xu)

NOC Profit Vulnerable to Low Crude Prices PetroChina: Operating Profits by Segment (2007-2013)

Sinopec: Operating Profits by Segment (2007-2013)

40

120

40

30

120

30

10

60

-

20 10

60

30

-10 -20

$/b

$/b

$ bn

20

90 $ bn

90

30 -10

2007

2008

Source: SIA Energy

2009

2010

2011

2012

2013

-

2007

2008

2009

2010

2011

E&P

E&P

Refining and Chemicals

Refining

Marketing

Marketing

Natural Gas and Pipeline CNPC Crude Sales Price

PetroChina is vulnerable to low oil prices because its E&P segment contributes to more than 100% of operating profits, given the fact that other segments suffered from losses. sia-energy.com

-20

Source: SIA Energy

2012

2013

-

Chemical Sinopec Crude Sales Price

Sinopec can weather a low crude price environment better: upstream profit suffer, but refining and chemical sectors will profit from cheaper feedstock. Page 2

How Did Chinese NOC’s E&P Revenue Grow? PetroChina E&P Revenue Growth Attribution 2007-2013 120

Sinopec E&P Revenue Growth Attribution 2007-2013

10% 17%

80

60%

60

5%

35 25%

30 $bn

$bn

100

12%

40

13%

25

58%

20 15

40

10 20 -

5 2007 E&P Oil Price Oil Gas Price Gas 2013 E&P Revenue Increase Production Increase Production Revenue Increase Increase

Source: SIA Energy

70% of PetroChina E&P revenue growth was from price increase since 2007 sia-energy.com

-

2007 E&P Revenue

Oil Price Oil Gas Price Gas 2013 E&P Increase Production Increase Production Revenue Increase Increase

Source: SIA Energy

63% of Sinopec’s E&P revenue growth derived from price increase Page 3

CNPC & Sinopec Domestic Oil & Gas Fields

Daqing Xinjiang

Northwest Tarim

Jilin

Tuha Jidong

Yumen Qinghai

Northeast

Liaohe

Dagang Daniudi Changqing

Huabei

Shengli

CBM

CNPC 2013 Domestic Production by Field 1,200

mboe/d

1,000

Oil Gas

Sichuan

Jiangsu Zhongyuan Shanghai Nanyang Puguang South Yuanba Zhejiang Jianghan East China Sea

800 600 400 200 South

Changqing Daqing Tarim Xinjiang Liaohe Sichuan Qinghai Jilin Dagang Huabei Tuha Jidong CBM Yumen Hainan Zhejiang

0

sia-energy.com

Yinggehai Basin

CNPC Oil Field

Pearl River Mouth Basin

CNPC Gas Field Sinopec Oil Field

Qiongdongnan Basin

Sinopec Gas Field

Page 4

Crude Price Influence on Chinese NOC E&P Profits Margin heavily squeezed

PetroChina E&P Cost Per BOE *Assumption: 2015 Brent at $60/b, 2016 at $70/b

110

100

100

90

90

80

80

70

70

60

60

$/boe

$/boe

110

Sinopec E&P Cost Per BOE

50 40

50 40

30

30

20

20

10

10

-

-

Special Gain Levy Exploration Expenses Resources Tax, etc. PetroChina Crude Sales Price Source: 20-F, SIA estimate

*Assumption: 2015 Brent at $60/b, 2016 at $70/b

DDA Production Cost Value-added Taxes

Value-added Taxes Production Cost DDA Sinopec Crude Sales Price

Resources Tax, etc. Exploration Expenses Special Gain Levy

Source: 20-F, SIA estimate

§  NOCs’ domestic assets are mature and declining, and both of their largest oil fields have water cut above 90%. Lifting costs are high and increasing. Overall cost will hit $49/b and $39/b by 2015 for Sinopec and CNPC, respectively. sia-energy.com

Page 5

Crude Price Influence on Chinese NOC E&P Profits Sensitivity analysis

PetroChina E&P Profit Under Different Crude Prices: 2015 Forecast vs 2013

Sinopec E&P Profit Under Different Crude Prices: 2015 Forecast vs 2013

*2013 E&P Gross Profit: $39 bn

*2013 E&P Gross Profit: $12 bn

40

40

24.1

28.8

19.5

11.4

4.5 30

$ bn

$ bn

30

14.9

8.0

20

20

10 14.9

10.3

19.6

24.2

27.7

31.1

34.6

10 11.6

0

0 50

55

60

65

70

75

80

3.9

2.7

9.9

8.1

7.3

8.5

2.6

6.1

9.8

4.3

55

60

65

70

75

80

Impact on 2015 Profit

Impact on 2015 Profit

SIA Profit Forecast on Different Crude Price

SIA Profit Forecast on Different Crude Price

Source: SIA Energy

As per SIA’s estimates, PetroChina’s E&P gross profit will decreased more than 60% at $60/b Brent from the 2013 level. sia-energy.com

0.8 50

5.2

6.4

Source: SIA Energy

Sinopec’s E&P gross profit is much thinner due to higher costs and lower realized oil prices compared to CNPC. It will lose most of upstream profit at $60/b Brent. Page 6

Crude Price Influence on NOC E&P Spending Cut Sinopec Capex by Segment

PetroChina Capex by Segment

50

100

50

100

40

80

40

80

30

60

40

20

40

10

20

10

20

-

-

-

-

30

60

20

E&P Marketing CNPC Crude Sales Price

Refining and Chemicals Natural Gas and Pipeline Source: SIA Energy

E&P Marketing Sinopec Crude Sales Price

$/b

120

$ bn

60

$/b

120

$ bn

60

Refining Chemical Source: SIA Energy

CNPC

Sinopec

E&P – Domestic Oil

12% cut – CNPC has lowered Daqing’s production target from 800 mb/d in 2014 to 640 mb/d by 2019. CNPC will import more ESPO blend from Russia to meet refinery need in northeast China.

15% cut – Like Daqing, Sinopec might lower Shengli’s production target. Given its high cost of $47-49/b, it could be cheaper for the company to import crudes from overseas to meet refinery need.

Refining

18% cut - After a hasty refining capacity additions (695 mb/d) between 2009-2012, CNPC’s refineries are facing regional oversupply challenges. The company will delay some new projects.

14% cut - Sinopec will freeze the green-field refining proposals and only move forward with brown-field expansion and upgrade projects to grow capacity. The NOC focuses on keeping high utilization and improving efficiency.

sia-energy.com

Page 7

Crude Price Influence on China Oil Production Sinopec: Domestic Oil Production 2,400

2,100

2,100

1,800

1,800

1,500

1,500

mb/d

2,400

1,200

Daqing Liaohe Dagang Yumen Source: SIA Energy

Changqing Sichuan Huabei Hainan

Tarim Qinghai Tuha Zhejiang

Xinjiang Jilin Jidong

Shengli Huabei Jiangsu

Zhongyuan Xinan Other Sinopec

2016

2015

2014

2013

2012

2011

2010

2009

2007

2016

2015

0

2014

0 2013

300 2012

300

2011

600

2010

600

2009

900

2008

900

2008

1,200

2007

mb/d

PetroChina: Domestic Oil Productoin

Xibei Henan

Source: SIA Energy

Short- to mid-term: mild decline as a result of production cuts in the onshore mature fields such as Daqing and Shengli Long term: oil production plateau through 2020, afterwards steady decline China will not aggressively cut production due to complicated reasons: 1) crude viscosity and API requires continued EOR efforts; 2) employment consideration; 3) refining configuration not easy to change; 4) control on import dependency. sia-energy.com

Page 8

Chinese NOC Refining Margins in Recent Years Refining Margin: Sinopec vs PetroChina 5

120 100 80

-5

60 -10

40

-15

20

-20

2007

Source: SIA Energy

USD/b

USD/b

-

2008

2009

Sinopec

2010

2011

PetroChina

2012

2013

China Import Crude Price

Compared to CNPC, Sinopec refineries have better location, higher efficiency and petchem integration, higher realized product prices and lower feedstock costs. Sinopec imported 82% of crude feedstock from 36 countries (99 grades) in 2013. sia-energy.com

Page 9

CNPC: Refinery Map

sia-energy.com

Page 10

Sinopec: Refinery Map

sia-energy.com

Page 11

Will the NOCs Be Opportunistic Buyers? Chinese NOCs: Acquisitions by Region $40 $35

US$ bn

$30 $25 $20 $15 $10 $5 $2005 North America Latin America

2006

2007

2008 2009 2010 Asia-Pacific Middle East & North Africa

2011 2012 Europe Russia & Caspian

2013

Source: SIA Energy

US$123.5 bn spent on overseas M&As by three Chinese NOCs between 2005 and 2013 sia-energy.com

Page 12

Will the NOCs Be Opportunistic Buyers? CNPC: Acquisitions by Asset Class Onshore Conventional Shallow Water Deep Water

20

Sinopec: Acquisitions by Asset Class

Integrated LNG Shale Oil and Gas Oil Sands

$20 $18

16

$16

14

$14

$bn

$ bn

18

12

Integrated LNG Deep water

Shale oil and gas

Oil sands

$12

10

$10

8

$8

6

$6

4

$4

2

$2

-

Onshore conventional Shallow water

$-

2005 2006 2007 2008 2009 2010 2011 2012 2013

2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: SIA Energy Source: SIA Energy

The low crude price may bring the best acquisition opportunities for North American unconventional oil and gas assets, but the NOCs do not have the appetite—cash flow or bank credit is not the real issue, the problems are: 1) they have not digested the unconventional assets acquired in the previous years, and 2) the top managers are afraid of taking on more risks at this sensitive moment. Small to mid-scale M&As are more likely, especially by Sinopec, but they tend to be de-risked oil assets that contribute to overseas equity production. CNPC, instead, has to prioritize their overseas gas asset monetization plans before make new offers. sia-energy.com

Page 13

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