China’s oil giants confronting trying times

China’s oil giants, especially those with major business in upstream sectors including China National Petroleum Corp and China National Offshore Oil Corp, will suffer if oil prices remain at depressed levels throughout the year, said an industry expert.

“The low oil price will benefit companies like China Petrochemical Corp (Sinopec) whose business is mainly downstream, as the refining sectors will benefit,” said Li Li, research director at energy consultancy ICIS China.

“However, companies including CNPC and CNOOC, who focus on the upstream sector, will be under pressure … which will be more obvious in the second quarter,” Li said.

While costs of production are largely fixed, large and capital-intensive drilling operations will be hit harder than smaller rigs under such circumstances, which can shut down temporarily and then restart once prices rise.

Downstream companies will not be hit as hard since they profit by purchasing crude oil and selling the refined products at a premium. Their profit margins should remain fairly stable even with fluctuating crude oil prices.

Oil prices have plummeted to multiyear lows as the price war between major oil producers Saudi Arabia and Russia continues. Oil demand is also collapsing as the spread of the coronavirus pandemic looks increasingly serious, said Goldman Sachs in a research note.

CNPC, the country's largest oil and gas producer, reported expansion in revenue in 2019, which rose 6 percent year-on-year to 2.52 trillion yuan ($355.22 billion), while net profit saw a sharp drop of 45.68 billion yuan, down 13.9 percent from the previous year.

The exploration and production sector, the brightest spot, generated a 30.7-percent increase in profit, according to the company’s annual financial report.

It said the performance was within expectations as major production indicators grew steadily despite the complex and grim situation of the global oil market affected by the gloomy economic outlook and sharp decline in oil prices.

The company has been affected by the pandemic, which helped produce a drastic drop in refined oil demand and slower growth for natural gas. The weaker crude prices have also hurt the group’s revenue and profit, it said.

Facing challenges arising from intensifying downward economic pressure and the further collapse in oil prices, the company vowed to uphold innovative strategies and promote high-quality development.