The Chinese majors’ responses to the collapse in global oil prices and the COVID-19 pandemic: an upstream perspective
The year 2020 is pivotal for China’s upstream sector. This final year of the 13th Five Year Plan (2016–2020) is also the second year in the oil companies’ ‘Seven-Year Exploration and Production Increase Action Plans’, and the inaugural year of domestic upstream liberalization plans, all of which were designed to bolster China’s upstream development. But the ambitious development plans of both government and oil companies have been marred by the fallout from COVID-19 and the subsequent collapse in global oil prices. While the Chinese majors are set to cut Capex, they hope that a number of strategies – such as cost reductions throughout the supply chain, mainly through effective management of service company costs, as well as reduced activity overseas – will allow them to direct more capital toward domestic exploration and production, and avoid sharp drops in output. Moreover, by opening the upstream to private and foreign companies, the Chinese majors hope to unlock new sources of financing and expertise to expand natural gas production and stabilize oil output.
The Chinese majors’ insistence on maintaining domestic production, at a time of abundant global supplies, stems from rising concerns about energy security and the surge in dependence on imported oil and gas. At the same time, the majors can afford to focus on the costlier domestic upstream because their largest shareholder, the state, does not expect them to prioritize profits and revenues at a time of national crisis. On the contrary, enhancement of their domestic activities is a way in which growth and employment in China can be supported. But can these strategies deliver oil and gas production growth? While an increase in 2020 production is highly likely, due to the large Capex investments in 2019, the expected cuts in Capex in 2020 could start weighing on production growth from 2021–2022. It remains unclear to what extent the current cost-cutting efforts will be sufficient to drive growth through 2025, at a time when Capex budgets are being cut. And while the majors’ decision to focus on production in mature fields and delay investments in strategic reserves could help maintain production in the near term, output growth post 2025 might be jeopardized.