Cnooc Succumbs to Crude Rout in First Output Cut Since '99

  • Oil and gas production seen falling as much as 5% this year
  • Capital spending reduced by more than 10% to $9.1 billion

China’s largest offshore oil company will cut output for the first time in more than a decade, prompting speculation the nation’s producers are succumbing to the global price war. Shares in Hong Kong fell to a six-year low on Wednesday.

Cnooc Ltd. will produce 470 million to 485 million barrels of oil equivalent this year, slipping from 495 million in 2015, it said in a statement to the Hong Kong stock exchange Tuesday. That would be the first decline since at least 1999. The company said it will chop spending to a maximum 60 billion yuan ($9.1 billion) from last year’s 67.2 billion yuan.

OPEC’s strategy of flooding markets to drive out higher-cost suppliers has pressured oil prices to the lowest in 12 years, prompting producers from Chevron Corp. to Royal Dutch Shell Plc to delay investments and cut costs as they seek to weather the rout. Cnooc’s acknowledgment that spending cuts are hurting production may be a prelude to further reductions by Chinese explorers, according to Nomura Holdings Inc.

“Cnooc is one of the first of the world’s majors to explicitly say it will cut production,” Michael Barron, London-based director of global energy at risk consultants Eurasia Group, said by phone. “That says a lot about the pressures current prices are bringing with them. The other big companies have all slashed spending and it’s implicit that production will fall at some point in the future.”

Not Aggressive

Cnooc shares lost 6.1 percent at the close in Hong Kong to HK$6.58, the lowest since March 2009. PetroChina Co., the country’s biggest oil and gas producer, dropped 6 percent to HK$4.23, the lowest since Jan. 2005, while China Petroleum & Chemical Corp., Asia’s biggest refiner, fell 7 percent to HK$3.88. The city’s benchmark Hang Seng Index declined 3.8 percent.

Cnooc’s total spending last year missed the company’s original target and its decision not to aggressively invest in expanding oil projects in 2015 contributed to this year’s lower expected output, Chief Executive Officer Li Fanrong told reporters on Tuesday. Oil’s collapse has delayed $380 billion worth of investments on 68 major upstream projects, according to industry consultant Wood Mackenzie Ltd.

Cnooc’s production won’t reach 2015 levels for at least two more years. It’s targeting output of 484 million barrels of oil equivalent in 2017 and 502 million in 2018. The company plans to start four new projects this year while drilling 115 exploration wells, it said.

Price Plunge

Brent crude prices have slumped more than 70 percent in the last 18 months, dipping below $28 on Monday after international sanctions on Iran were lifted, paving the way for increased oil exports.

“This is a classic sign of supply destruction,” Gordon Kwan, an analyst at Nomura in Hong Kong, said of Cnooc’s cuts. The company’s bigger rivals, PetroChina and China Petroleum, known as Sinopec, may reveal similar plans later this quarter, he said.

While the cuts demonstrate the pressure producers face, they are a fraction of what’s needed to rebalance the market. The lower-end of the company’s production target sets output this year at about 1.29 million barrels a day, a drop of more than 68,000 barrels a day. The global surplus is estimated at 1.5 million barrels a day in the first half of the year, the International Energy Agency said in its monthly oil market report on Tuesday.

“Such moves won’t have a major impact to global oversupply as the biggest producers, especially those OPEC members, are still pumping at record levels because their production costs are much lower,” Tian Miao, a Beijing-based analyst at North Square Blue Oak Ltd., a research company, said by phone.

$40 Floor

The government of Xi Jinping announced this month that fuel prices won’t be cut in line with crude as long as it trades below $40 a barrel as it seeks to secure supply by providing a price floor for producers and consumers as well as slow demand growth to curb automobile pollution. Cnooc’s all-in cost last year was about $41 a barrel, it said in a presentation Tuesday.

“Cnooc simply can not afford to expand growth at this price level, as their cost structure doesn’t provide a chance to compete with $30 a barrel oil,” Laban Yu, head of Asia oil and gas equities at Jefferies Group LLC in Hong Kong.

China’s crude output last year rose 1.7 percent to a record near 215 million tons, or about 4.3 million barrels a day, according to to data released by the National Bureau of Statistics on Tuesday. Natural gas production climbed 2.9 percent to 127.1 billion cubic meters.

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