More Chinese Oil Output Succumbs to Glut Saudis Seek to Cap

Updated on
  • China's Sinopec shutting four fields in Shandong province
  • Closed fields are among the least-profitable run by unit

As the world’s biggest oil producers show they’re willing to cap output to revive prices, there are increasing signs OPEC’s strategy of driving higher-cost suppliers out of the market by keeping taps open is bearing fruit.

A unit of China Petrochemical Corp. on Wednesday said it will shut its least profitable fields because of the price slump. That’s after Cnooc. Ltd., the country’s biggest offshore crude explorer, announced plans to cut output and capital spending this year. The nation’s production may slip 3-5 percent from last year’s record 4.3 million barrels a day, Nomura Holdings Inc. and Sanford C. Bernstein & Co. say, in what would be the first drop in seven years.

“Sinopec has been maintaining output in its aging oil fields by over-investing and this is no longer possible in the current oil price environment,” said Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein, who estimates the company needs oil to stay above $50 a barrel to break even. “We expect Sinopec’s domestic oil production to drop 5 percent to 10 percent this year as it shuts down aging high-cost oil fields.”

Output Freeze

PT Pertamina, the state-run energy company of OPEC member Indonesia, this month cut its 2016 output target by 9 percent as it reduces drilling activity amid low oil prices. U.S. production is forecast to drop by 580,000 barrels a day, or about 6 percent, from the first quarter to the fourth, according to data from the Energy Information Administration as of Feb. 9.

The shutdowns come as Saudi Arabia and Russia agreed to freeze oil output at near-record levels, the first coordinated move by the world’s two largest producers to counter the slump. While the deal is preliminary and doesn’t include Iran, it’s the first significant cooperation between OPEC and non-OPEC producers in 15 years and Saudi Arabia said it’s open to further action.

“For all the posturing, this is a clear indication that low prices are creating significant pain across the producing world,” analysts at Macquarie Capital including Vikas Dwivedi wrote in a report Tuesday.

Sinopec Shengli Oilfield Co. will shut the Xiaoying, Yihezhuang, Taoerhe and Qiaozhuang fields to save as much as 130 million yuan ($19.9 million) in operating costs, the company said in a statement on its Weibo account.

The four oilfields are among the least profitable among 70 run by Sinopec Shengli, according to the statement. Sinopec Shengli first produced oil in 1961 and has since become one of China’s major producers. Its output since inception is 1.13 billion tons of crude and 57.2 billion cubic meters of natural gas.

Total production last year slipped 2.8 percent to 27.1 million tons, or about 544,000 barrels a day, the company said in January on its website. Fu Chengyu, the former chairman of Sinopec, said last year that output at the unit was being cut “proactively” because of low oil prices.

(Updates with details of Chinese output cuts in second paragraph.)
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