MAY
8

Tough Challenges for China’s Bloated Oil Industry

 
Talks about merging China’s oil companies into a mega-NOC that can compete with the likes of ExxonMobil and Royal Dutch Shell have hit roadblocks. A few potential mergers are being explored, which would ostensibly help China’s four state-owned oil companies weather the current low price storm, has been met with skepticism from economists who say China needs more competition to nurture long-term growth and rebalance its economy. Echoing this sentiment, China’s oil industry executives argue that market-driven overhauls would be of greater utility than government-orchestrated consolidations. Rather than create a large, state-run company that could compete with Western IOCs, it is believed that combining China National Petroleum Corporation (CNPC) and China Petroleum and Chemicals Corporation (Sinopec) would lead to a less efficient, state-run monopoly. Another proposal, to combine China National Offshore Oil Corporation (Cnooc) and Sinochem group, would cause similar problems. With or without a mega-merger, many experts have identified cutting the workforces of many of these companies as critical to streamlining operations and enabling them to help meet China’s energy needs during this challenging time for the industry. According to the Wall Street Journal, PetroChina, a subsidiary of CNPC, has roughly 530,000 employees world-wide—more than seven times the workforce of Exxon Mobil—yet its net profits last year were roughly half those of Exxon. At the same time, cutting jobs is not high on the current Chinese government’s list of priorities. China’s oil companies are also in a tight spot given the strategies they were adopting prior to the price crash. They paid top dollar to acquire various oil assets worldwide, buying companies including Canada’s Nexen, the U.S.’s Devon Energy, and part of Woodside Petroleum. In the four years between 2009 and 2013, China’s oil companies spent $92 billion on energy company acquisitions, as well as joint ventures in Angola and Brazil. In a special report from last year, IEA commented on the unprecedented volume and size of overseas acquisitions from Chinese companies, whose overseas production increased from 1.36 mbd in 2010 to 2.5 mbd at the end of 2013. This strategy might not have played out as well as PetroChina, Cnooc, and CNPC might have hoped. They invested heavily in unconventional resources such as Canada’s tar sands, deepwater, and offshore LNG projects, with which they had very little experience. High oil prices afforded a cushion to gain experience and know-how, but in the low-price environment, many of these projects will struggle to maintain profitability or increase their scope in the hands of inexperienced operators. IEA also noted that many of these projects have suffered from geopolitical disruptions and other above-ground challenges in the Middle East and South America, far beyond China’s control. China’s oil companies have also encountered a standstill in talks with Iran over developing the Middle Eastern country’s oil reserves, pending the planned lifting of oil export sanctions. Iran’s Oil Ministry recently visited China with a $2.5 billion proposal for Sinopec to develop the country’s Changuleh oil field, a deal through which the producing companies could draw upon $40 billion of Iranian assets currently locked in China for payment. China was one of the few countries willing to continue working with Iran’s oil sector in recent years, but they are reportedly punting on Iran’s offer for first access to some of its promising fields. Although the Chinese cited bureaucratic red tape and ongoing corruption investigations in their decision to turn Iran down, rumor has it that they may have declined the offer under pressure from Saudi Arabia not to deepen relations with its traditional enemy, in return for a price cut on oil imports. With unwillingness from Beijing to streamline operations, cheap oil flowing in from the Saudis in exchange not to develop Iran’s resources, and a highly bloated workforce, it looks like China’s oil industry faces obstacles that extend far beyond low oil prices, with no clear solutions in sight.