China’s Oil Collapse Is Unintentionally Helping OPEC

OPEC’s campaign to prop up oil prices is getting unlikely support from its biggest customer.

China’s production is forecast to fall by as much as 7 percent this year, extending a record decline in 2016, according to analysts at CLSA Ltd., Sanford C. Bernstein & Co. and Nomura Holdings Inc. That’s about the same size as the output cut agreed by Iraq, the second-biggest producer in the Organization of Petroleum Exporting Countries, which late last year reached a deal to trim supply to support prices.

China’s output slumped in 2016 as state-owned firms shut wells at mature fields that had become too costly to operate after the crash. Crude production fell 6.9 percent in the first 11 months of 2016 to about 4 million barrels a day, the first decline since 2009 and the biggest in data going back to 1990.
The International Energy Agency estimates output fell 335,000 barrels a day last year as the country’s biggest producers cut spending, and will slide a further 240,000 barrels a day this year. Production shrank to a seven-year low in October “with no uptick in activity expected from the major companies,” the Paris-based group said last month.

Daqing, Shengli

Supply from the Daqing field, one of China’s biggest and oldest, slipped about 3 percent last year to 732,200 barrels a day, according to data from China National Petroleum Corp. While the nation’s biggest explorer plans to maintain output at the field, it aims to cut spending on exploration and engineering there by 20 percent this year, it said in December.

Output at China Petroleum & Chemical Corp.’s Shengli field, which contributed 65 percent of the company’s domestic crude production last year, will shrink almost 2 percent, the subsidiary that operates it said this month.

There’s “little hope” the country’s aging oilfields can reverse the declines even as prices rebound, while new discoveries may not raise output as much as expected because of high production costs, said Bernstein’s Neil Beveridge, who forecasts the country will pump 4 percent less this year. Even after explorers improved efficiency over the past two years, the break-even point for new onshore oilfields is still about $50 a barrel, he said.

Supporting Imports

CNPC and China Petroleum & Chemical Corp., known as Sinopec, declined to comment. Nobody answered calls to China National Offshore Oil Corp.’s press office in Beijing.

National Energy Administration, the country’s energy regulator, forecasts that output this year will remain stable at about 4 million barrels a day, NEA director Nur Bekri said at the agency’s annual meeting in December, according to a 21st Century Business Herald report. The NEA didn’t respond to a faxed request for comment.

Lower domestic production will help support the nation’s imports, especially in the first half of the year, according to Virendra Chauhan, an analyst at London-based Energy Aspects Ltd. That will increase the country’s reliance on overseas supply, which is forecast to rise above 65 percent of its total crude use this year, according to CNPC’s research arm.

China’s oil imports in 2016 grew at the fastest pace in six years and the nation was the world’s biggest buyer in December. Inbound shipments climbed 13.6 percent last year, while imports in December rose to record 8.6 million barrels a day. This year, though, the Asian nation will boost its purchases by 4.8 percent, according to the median estimate of eight analysts in a Bloomberg survey last month.

Rapidly Aging

China is seen leading a trend across the region. Asia-Pacific’s crude output will drop by about 1 million barrels a day to 6.5 million by 2020, according to Wood Mackenzie Ltd., as exploration since 1990 has yielded mostly natural gas and capital spending was cut because of the slump in oil prices. China will account for 47 percent that decline, according to the consultant.

“China’s largest oil fields are aging rapidly,” said Gordon Kwan, Nomura’s Hong Kong-based head of Asia-Pacific oil and gas research, who sees the country’s output falling 5 percent even as prices rise. “Advanced technology can only mitigate the decline rate, but can’t reverse the structural trend.”

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