Gadfly

The World's Hidden Gas Giant

The trend away from oil has been accelerating in recent quarters.
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Photographer: Jie Zhao/Getty Images

The world's biggest new gas giant has been hiding in plain sight.

Despite some of the world's largest reserves of natural gas, PetroChina Co. is still predominantly viewed through the lens of crude oil. That's overdue a change.

Oil production in the nine months through September fell 5.2 percent while natural gas climbed 4.5 percent, the Beijing-based company said Monday. Based on those numbers, third-quarter oil production of 224.3 million barrels represented less than 60 percent of the total when set against natural gas output of about 152.1 million barrels of oil equivalent.

As Gadfly has pointed out previously, the trend toward gas at PetroChina has been underway ever since the company's 2000 initial public offering, when crude made up more than 90 percent of output. In recent quarters it's been accelerating, though. Beijing's decision to lift many of the policy restrictions that have crimped gas demand has meant that even in the summer months, when the absence of winter heating traditionally leaves oil as a larger share of the sales mix, crude has looked weaker.

Extrapolate the recent pace of change from liquid to gas and it's easy to see PetroChina join Gazprom PJSC, Repsol SA and perhaps Royal Dutch Shell Plc in the small club of petroleum companies mainly dependent on methane rather than oil.

That's probably a simplistic way of looking at things, since there's no law of nature forcing those trends to continue. The production mix will largely depend upon the state of demand for each product -- should Chinese oil prices rise sharply while gas languishes, the pattern could reverse. Still, a demand-based analysis suggests exactly the same pattern: It's been almost two years since the rate of apparent Chinese oil consumption growth outpaced gas:

PetroChina should be particularly keen to pump more of its own gas because it does very badly from offloading other people's. Net losses from selling imported gas and LNG amounted to 17 billion yuan ($2.6 billion) in the nine months through September, not much less than the 18 billion yuan total operating profit from the gas and pipeline division.

There are ample assets to accomplish this shift. Proven and developed reserves -- essentially, those accessible with minimal additional investment -- amount to about 41 trillion cubic feet, or 7.7 billion barrels of oil equivalent, well ahead of the 5.2 billion barrels of crude in PetroChina's locker.

Include undeveloped reserves and the figure rises to 79 trillion cubic feet, close to twice Shell's 41 trillion cubic feet gas reserve base. Some of PetroChina's most profitable reserves are in gas-heavy basins -- Tarim Oilfield Co., a unit in the western province of Xinjiang whose output is about four-fifths gas, accounted for 67 percent of group profits in the first half, Anna Yu, an analyst at Industrial & Commercial Bank of China Ltd., wrote in an Oct. 18 note to clients.

There's always good reason to watch government policy when looking at Chinese companies, but that's likely to become even more the case at PetroChina in the years ahead. Chinese crude prices track the global market pretty closely, but gas remains behind a great wall, and that should continue to be the case for the foreseeable future.

PetroChina has long resembled a government agency in all but name, and that trend will make it ever more of a utility business. Ask what its profits will be in a few years' time and the answer will increasingly become: whatever Beijing wants them to be.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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