March 11 (Bloomberg) -- China, the world’s second-largest energy user, cut investment in domestic oil and gas exploration by 13.8 percent in the first two months after fuel prices fell from July’s record.

Fixed-asset investment in oil and gas drilling dropped to 10.6 billion yuan ($1.5 billion) from a year earlier, the Beijing-based National Bureau of Statistics said in an e-mailed statement today. The spending climbed 22 percent to a record in 2008, according to the data.

The crude oil price in New York has slumped 68 percent from July’s record of $147.27 a barrel, prompting Chinese oil companies to cut domestic exploration and seek overseas acquisitions that have been cheapened by falling commodity prices. China National Petroleum Corp., the country’s largest oil producer, expects oil prices to average at $40 a barrel this year, Vice President Yu Baocai said March 7.

“The lower expectation on oil prices will cause oil companies to cut exploration spending,” Wang Jing, an analyst with Orient Securities Ltd., said by phone from Shanghai today.

The country’s investment in oil and gas exploration rose 34.8 percent in the first 11 months of the year and 34.4 percent in the first ten months, according to the statistics bureau data.

Cut Output

China National, parent of Hong Kong-listed PetroChina Co., will cut its oil and gas output this year from 2008 levels because of weak demand, Vice President Yu told reporter at a meeting of the National People’s Congress on March 7.

The domestic economy, which expanded 6.8 percent in the fourth quarter, may grow 6.7 percent in 2009, the smallest gain in almost two decades, according to the International Monetary Fund.

China National Petroleum will also lower the cost of oil and gas extraction by at least 5 percent from a year earlier and reduce spending on projects by more than 10 percent, the Beijing-based oil producer said yesterday.

While domestic oil exploration slowed, the Chinese government is encouraging its state oil companies to buy resources overseas.

Oil Loans

China will offer preferential lending rates for overseas oil investments and may tap the country’s $1.95 trillion foreign-exchange reserves to help companies buy fields abroad, China National Petroleum said last month, citing the government’s three-year energy plan. The nation may set up an oil fund to boost exploration, it said.

The Reuters/Jefferies CRB Index of 19 commodities this year fell to the lowest level since June 2002. Oil prices in New York traded at $45.82 a barrel at 11 a.m. in Singapore.

PetroChina will maintain its pace of capital spending next year at 2008 levels, Chairman Jiang Jiemin said last year.

Investment in coal mining rose 60 percent to 8.4 billion yuan and power and water spending climbed 20.6 percent to 63.1 billion yuan, according to the statistics bureau statement.

China’s spending on factories and property surged 26.5 percent to 1.03 trillion yuan in the first two months of the year from a year earlier, it said.

To contact the reporter on this story: Winnie Zhu in Shanghai at wzhu4@bloomberg.net

Last Updated: March 11, 2009 00:31 EDT