China’s oil majors slash costs

China’s oil majors slash costs

China’s oil majors slash costs©Bloomberg

Chinese oil companies are closing unprofitable fields and cutting payrolls as sustained low prices force the industry to take the politically difficult step of cutting spending at home.

The measures put the oil sector in the same camp as the steel and coal industries, which Beijing has marked for capacity cuts and lay-offs to reduce the drag on the economy of underperforming state assets. Last year, when the crude price slide first hit oil company results, analysts expected political pressure to force the Chinese oil majors to cut capital expenditure overseas but maintain spending at home.


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Sustained low prices, combined with the high costs of ageing and depleted fields, have proved too much for the Chinese oil industry. Announced spending cuts as well as job and salary reductions could further weigh on resource-dependent local economies in north and northeast China, where a decline in coal prices is already battering growth.

“Domestic crude oil production growth is slowing and in some cases, costs are high,” said Liu Qiang, an energy expert at the Chinese Academy of Social Sciences. “Employment related to crude oil extraction will be impacted but the refining and processing industry should hold up.”

This week PetroChina, the listed arm of China National Petroleum Corp, reported a $3.8bn asset impairment charge on its international and domestic operations, with net profits last year down 67 per cent. It plans to shut oil and gasfields in China that have “no hope” of making a profit, chairman Wang Yilin said in Hong Kong this week, as he announced the company’s first output cut in 17 years.

He did not specify which fields would close but many of the company’s older fields have recorded falling production over the past several years.

Wang Dongjin, vice-chairman, said workers at the shuttered operations would be pushed into early retirement or transferred to other divisions of CNPC.

Early retirement was a favoured tool during China’s mass lay-offs of the 1990s to avoid swelling official unemployment numbers. In the past few years, CNPC has already seen protests in depressed northeastern oil towns by retired workers angry that their children or grandchildren are not being hired to take their vacant places.

PetroChina’s announcement follows reports that its main rival Sinopec will mothball smaller, older fields in Shandong, near its flagship Shengli operations. The closures would be the first since drilling began at Shengli, or “Victory” fields, 50 years ago. Sinopec reports its 2015 earnings next week.

The cuts are not limited to the majors. Yanchang Petroleum, China’s largest regional oil company, is cutting managers’ pay by 10 per cent and withholding half of all employees’ pay for several months, Chinese media reported, as it struggles with mounting losses. It warned last month that it would report a “significant” impairment charge on its operations in Madagascar and Canada.

China’s third oil major, Cnooc, was more aggressive than its larger rivals when it cut capex by 38 per cent last year. Cnooc said this week it still expects to reduce spending for 2016 another 10 per cent at its listed unit, which includes most of its offshore oil and gas operations but does not reflect its substantial onshore gas operations.

“In an environment of low oil prices, the company has done a lot. We have greatly cut capex and we guard our free cash flow with extreme care,” Yang Hua, Cnooc’s chairman, told reporters. “Everyone is having a hard time, and in such hard times we should be patient.”

Additional reporting by Luna Lin in Beijing and Yuan Yang in Hong Kong

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China’s oil majors slash costs
BDC 285 October 2021

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China’s oil majors slash costs