Oil Price Slump Spurs CNPC to Focus on Natural Gas and Cut Costs

Stung by the slump in crude oil prices, China National Petroleum Corp., the nation’s biggest energy producer, said it will speed up natural gas exploration in 2015 and take “revolutionary measures” to cut costs.

CNPC also signaled its caution on the outlook for crude by pledging to focus on domestic oil and gas fields over foreign projects, according to comments from Chairman Zhou Jiping posted to the state-owned company’s website today.

CNPC is using its annual work conference in Beijing, which runs from Sunday through Tuesday, to set its strategy for the year ahead. Zhou’s comments follows a steep cut in Citigroup Inc.’s 2015 target price on the company’s main listed unit, PetroChina Co., citing the impact of lower oil prices.

Big oil companies are ratcheting back investment and costs as they deal with a 56 percent drop in the price of Brent crude since June due to a global glut. CNPC and its state-owned peers are also in the throes of delivering on government-mandated reforms to give markets a more decisive say in China’s economy.

“Natural gas could be the more economical fuel to produce than crude under the low oil price environment,” said Laban Yu, a Hong Kong-based analyst at Jefferies Group LLC. “In the longer term, natural gas has more growth potential in China than crude as the latter is more likely to just post slow-paced growth for many years to come.”

Maintaining steady domestic supplies of oil and gas given uncertainty on the outlook for crude is “the right way to maintain China’s energy security no matter what happens outside the country,” said Yu.

Promises Change

Zhou promised changes to CNPC’s structure, to foster new growth areas with lower costs. The company will elaborate on its plans later this year, with a view to allowing its business units more freedom to make decisions, according to his comments.

For Citigroup, which cut PetroChina’s target price to HK$6 from HK$7.65, the year ahead will be difficult for the company.

“Management did an excellent job at reducing the rate of cost growth in 2014,” Citigroup’s Hong Kong-based analysts led by Graham Cunningham said in an e-mailed research note dated Jan. 22. “But, since our estimates already factor in significant cost savings in 2015, we see little room from upside surprises from cost control.” The analysts also said that the company’s reform efforts are likely to disappoint.

PetroChina shares fell 1.2 percent to HK$8.81 as of 11:30 a.m. in Hong Kong, while the city’s benchmark Hang Seng Index was little changed.

CNPC produced 113 million metric tons of crude and the equivalent of 86 million tons of natural gas in China in 2014, the company said Jan. 20. By comparison, overseas oil and gas output surpassed 120 million tons last year, it said.

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