Chinese NOCs enjoy bumper profits in 2022 [Gas in Transition]

China’s three NOCs, fresh off strong earnings for 2022, will be looking to maintain momentum from last year’s stellar performances by capitalising on an expected uptick in oil and gas demand driven by the Chinese economy’s reopening.

PetroChina, CNOOC and Sinopec all reported financial results in late March that indicated this year is shaping up to be one of reset and normalisation for China as the Chinese government looks to put an unprecedented past 12 months behind it.

Beijing’s abrupt decision to abandon President Xi Jinping's signature zero-COVID containment strategy that prompted mass protests last November will be welcomed across the economy – not least the energy sector, which contended with weakened oil and gas demand last year.

China is poised to account for half of oil demand growth for 2023, according to the International Energy Agency. Consumption will also pick up in the rest of Asia as economic activities continue to rebound in the region, while Europe and the US face higher downside risks with recession still a possibility. With little contribution to growth from the west anticipated, the bottom line is that China will be key to growth in global energy markets this year.

PetroChina captures big performance

PetroChina’s net profit in 2022 jumped by 62.1% year-on-year to 149.38bn yuan ($21.7bn), meaning last year was the best year on record for China’s biggest oil and gas producer – surpassing even the heydays of 2006-2007. Domestic gas production accelerated by 5.9% to 4.47 trillion ft³, while sales of the fuel grew by 6.4% to 207.1bn m³. For this year PetroChina is targeting domestic gas output growth of 5.0% to 4.69 trillion ft³.

The shock OPEC+ production cut of 1.16mn barrels/day announced on April 3 prompted crude oil prices to lurch immediately towards the $100/b mark, but they have since given up gains to return to the low $80/b range. The general expectation is that they will continue to hover in this area – the US Energy Information Administration’s latest short-term energy outlook released on April 11 forecasts Brent to average $85/b this year, up from a previous estimate of $83 in March.

A range of $80-90/b is seen by analysts at Credit Suisse as a “goldilocks” price environment that would favour both upstream E&P and downstream segments. While lower oil prices will reduce PetroChina’s E&P profitability to an extent, China’s reopening stands to provide a silver lining to its downstream and gas business. Stronger domestic demand should drive a recovery for its chemical and fuel marketing segments as well as gas sales growth, mitigating lower E&P earnings.

Stable or lower oil prices moving forward could also ease PetroChina’s massive losses from domestic resales of expensive imported gas. The company has not disclosed how much money it lost on these sales for all of 2022 but it likely breached a target of limiting them to 20-25bn yuan as it already lost 18.5bn yuan on gas imports in the first nine months. But the oil price downtrend in the first half of 2022 should start to be reflected in reduced import costs soon as the NOC buys LNG and piped gas on oil-indexed contracts with a lag of 9-12 months.

Gas remains a core focus for PetroChina’s energy plan. The NOC expects to add 600bn m³/yr of gas reserves through 2025, while gas production is targeted to reach 150-160bn m³/yr by 2025 – representing annual growth of 5%. As such, the share of gas in PetroChina’s output mix will grow from 45% last year to 50% in 2025.

The new energy business – comprising geothermal, hydrogen, wind and solar power – will represent 7% of production capacity by 2025, one-third by 2035 and 50% by 2050, by which time the company should also be net-zero.

CNOOC eyes production boost

CNOOC’s net profit last year grew to 142bn yuan, doubling from 2021. China’s main offshore oil and gas producer had a phenomenal 2022 and is looking for another strong performance this year as underlined by its annual strategy preview in early January.

The NOC’s production guidance for 2023 was better than expected at 650-660mn barrels of oil equivalent with nine projects slated to start up – up from an estimated 620mn boe in 2022, which handily beat a target of 600-610mn boe set out in last year’s strategy preview. The share of overseas production will increase from 30% to 34% as output in Guyana ramps up.

CNOOC also surprised observers with an updated three-year production plan covering 2023-2025. The company reiterated an aim to produce 730-740mn boe by 2025, which would be equivalent to 2mn bl/day long-term target first set by the NOC in 2017 but then quietly shelved as the oil industry entered a downcycle in 2020 due to the start of the COVID-19 pandemic and price war between Saudi Arabia and Russia.

Producing 2mn b/d by 2025 would be a significant milestone for CNOOC and a showcase of its execution capabilities, as it will have managed to weather recent downturns with volume growth targets uninterrupted while maintaining its cost and capital expenditure discipline.

CNOOC drilled 95 wildcats and 142 appraisal wells in 2022, up and down by a respective 30% and 6%. The company is continuing to strengthen domestic exploration with successful discoveries, underpinned by a slow but steady pivot towards gas – it is targeting a 1 trillion m³ resource in the South China Sea to complement a new gas play in the Bohai Bay.

For this year CNOOC’s capex is budgeted at 100-110bn yuan compared with 100bn yuan in 2022. As oil prices are tipped to hover in the low $80/b, CNOOC may decide to be more disciplined over capex as this year progresses and work towards the lower end of the budget range, leaving capex flat year-on-year.

Refining ramp-up for Sinopec

Sinopec’s earnings last year were the weakest of the three NOCs as net profit came in below consensus at 66.2bn yuan, dragged down 8% by persistent downstream weakness amid China’s chaotic exit from its zero-COVID strategy in the final quarter of 2022.

But Asia’s biggest refiner stands out as a key beneficiary of the post-pandemic economic reopening in China – its refining and petrochemicals segments will gain from increased fuel demand from more road and air transport.

Upstream earnings growth at Sinopec may slow given oil prices are projected to decline or remain flat. Still, Chinese oil demand this year is tipped to grow between 3.48% to 5.65%, an increase that should drive better profits across Sinopec’s refining, fuel marketing and chemicals divisions.

COVID-19 lockdowns battered refining profits at Sinopec and other crude processors over the past two years. Chinese refineries cut runs in response to plummeting demand as the zero-COVID strategy isolated millions of people at home frequently in 2021-2022; throughput decreased significantly as a result.

While 2021 profits improved significantly on the back of demand recovery and lower feedstock prices, last year saw a reversal in refining profit as economic activity and consumption slowed significantly in China. Refinery utilisation rates fell to a low of 80% in 2022 compared with at least 90% in pre-pandemic years.

But Sinopec’s refinery utilisation rate is expected to return to more than 90% this year to meet the expected growth in demand for oil products, lifting throughput by 5% to 5.1mn b/d – the highest in two years, according to Bernstein Research.

Refining margins slumped to a decade-low at the end of last year as a COVID-19 wave swept across the country, but could recover to $8/b in H2 2023. This would be up by 10% year-on-year and swell Sinopec’s refining operating income.

A swift recovery in China’s urban mobility and supply chain logistics means Sinopec’s fuel marketing business – comprising 30,808 refuelling stations at the end of 2022, the biggest network of the three NOCs by far – is well-positioned too.

COVID-19 restrictions and the economic malaise beginning H2 2021 depressed Sinopec’s domestic refined oil product sales, which fell by 5.1% to 162.55mn metric tons. But the company has tipped them to rise by 7.4% to 175mn mt this year on the back of recovering kerosene and petrol demand.

Oil product sales should continue to increase as Beijing’s stimulus measures aim to sustain the strong early momentum from the economy’s reopening. While strong domestic competition could keep margins in check, Sinopec’s marketing earnings could grow by 25% year-on-year to a six-year high of 30bn yuan.

Sinopec said in mid-April that it was developing China’s first long-distance pipeline for transporting low-carbon hydrogen. The 400 km-long pipeline will begin in Ulanqab of Inner Mongolia and transit Hebei province before terminating at Yanshan Petrochemical in China’s capital of Beijing. It will be the first cross-provincial, long-distance, and large-scale hydrogen pipeline in China, with an initial capacity of 100,000 mt/yr that could be increased to 500,000 mt/yr.