China Oil Turns on Cash Taps

Sinopec and Cnooc are boosting budgets by more than global rivals. PetroChina is likely to follow.
At Closing, June 19th
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At Closing, June 19th
5.83 HKD

Recovering from a binge was never meant to be easy.

Five years after the oil industry's capital spending budget first neared the $500 billion mark, it's still not forecast to be much more than half that amount next year.

On the Rebound

Capital spending by the oil and gas industry is recovering, but remains weak

Source: Bloomberg Intelligence

While Exxon Mobil Corp and BP Plc are forecasting modest upticks in expenditure in 2017, Royal Dutch Shell Plc, Chevron Corp. and Total SA are planning to cut their investment budgets for the fourth year in succession 1 . As Gadfly's Liam Denning has pointed out, Big Oil is yet to prove itself capable of doing anything more than burning investors' cash. Until evidence of a more disciplined approach turns up, shareholders are going to be skeptical of further splurges.

Dead Cat Bounce

Capital spending by western oil majors is still falling

Source: Bloomberg

Note: 2017 figures are company forecasts. Where forecast ranges have been given, midpoints have been taken. Shell figures prior to 2016 include capex from BG Group Plc.

It's a different picture in China. The only shareholder that really matters is the government, and Beijing's focus is not so much on returns to investment as on energy security. That helps explain the sharp about-turn in capital spending plans announced over the past week at Cnooc Ltd. and China Petroleum & Chemical Corp, or Sinopec. 

Cnooc cut capital spending by 26 percent to 49.5 billion yuan ($7.2 billion) in 2016, but that's set to bounce back to a range of 60 billion yuan to 70 billion yuan this year, according to a company presentation. The result will be even more dramatic at the much larger Sinopec: Spending will jump about 44 percent, in line with the upper end of Cnooc's forecast change, to hit 110 billion yuan.

Turning a Corner

China's energy companies are all set to increase capital spending this year

Source: Bloomberg, company reports

Note: 2017 figures for Sinopec and CNOOC are company forecasts. 2017 figures for PetroChina are analyst estimates. Cnooc figure for 2017 is the midpoint of a forecast range.

The elephant in the room is PetroChina Co., which typically spends more on capex than Sinopec and Cnooc put together and is set to release annual results on Thursday. Analyst uncertainty around PetroChina is super-sized: The gap between the highest and lowest estimates for its 2017 capital spending bill is 86 billion yuan, more than the total capex budget of Eni SpA or Statoil ASA.

Chinese state-controlled companies tend to work to the same set of objectives handed down by the State Council, so the highest forecast for PetroChina -- which envisages a roughly 40 percent pace of capex growth, in line with Sinopec and Cnooc's upper-end plans -- isn't implausible. Even at the lower end, the big three will together spend an extra $8 billion this year, compared with a $2.2 billion decline at the big five Western companies.

Hey Big Spender

Chinese petroleum majors will be the industry's capex giants in 2017

Source: Bloomberg, company reports

Note: All figures are company forecasts apart from PetroChina, which show a range and median of analyst estimates.

There are two major reasons for this. One is that issue of energy security -- a particularly important consideration when you're the world's biggest net importer of crude. Oil reserves at China's big three have shrunk by about 1.8 billion barrels over the past year, and while much of that change will have been a result of weaker oil prices rather than physical consumption, 2 planners will still want to see them replaced.

Another will be more familiar to Western companies. Free cash flow at both Sinopec and Cnooc more than doubled last year. Sinopec has done particularly well from low crude prices, thanks to its focus on refining and marketing: free cash flow in 2016 came to 138 billion yuan, almost 30 percent more than its combined total in every year since 1997.

One option in the face of such a flood of cash is to pass a mega-dividend up to shareholders, as coal miner China Shenhua Energy Co. did earlier this month. But such a move only makes sense if, as with Shenhua, you have a core business that's in terminal decline. 

Looking at Sinopec's ambitious plans to shift more business away from oil and into gas, it's clear there's scope for investment. China Inc. has opened its checkbook.

(Corrects capex numbers for Western oil majors in paragraphs 3 and 7 and in chart headlined Dead Cat Bounce.)
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. Shell figures are based on combined Shell and BP Group Plc capex prior to merged figures from the 2016 fiscal year onwards.

  2. Oil reserves are calculated based on petroleum that's economically recoverable. Oilfields that can produce crude for $80 a barrel get included in reserves when prices are $100 a barrel, but disappear from the calculation when crude drops to $50.

To contact the author of this story:
David Fickling in Sydney at

To contact the editor responsible for this story:
Matthew Brooker at

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