Chinese oil major Sinopec to shut fields as oil price recovery hopes dim

Iran refuses to join pact between Saudi Arabia and Russia aimed at capping supply, saying it won’t give up its ‘appropriate share’ of global oil market

PUBLISHED : Wednesday, 17 February, 2016, 3:56pm
UPDATED : Wednesday, 17 February, 2016, 3:59pm

China Petroleum & Chemical (Sinopec) has shut four oil fields after hopes for a sustained rebound in oil prices were dashed by a disappointing agreement between Saudi Arabia and Russia on supply that saw oil prices give back much of their recent gains.

Sinopec, China’s second-largest oil producer, will temporarily shut four of the worst-performing production sites at its mainstay, 70-site Shengli oilfield in Shandong province – a rare move since the start of production at the field more than half a century ago – according to a report on a company-run news web site on Wednesday.

“At current oil prices, the shutdown could save 130 million yuan (HK$155 million) of costs and reduce losses by 200 million yuan,” it said, adding low oil prices had reduced the field’s economic reserves and it could only survive by shedding high-cost production capacity.

Chinese oil and gas producers had been hoping for a rally in oil prices so they could escape the need for painful cost reductions and business restructuring.

Saudi Arabia and Russia, two of the world’s largest oil producers and exporters, agreed on Tuesday to freeze their output at January’s near-record-high levels, but said the pact will only stick if other major producer nations join in.

Oil prices remain at risk of edging lower again short term as the hope of production cuts once again fades
ANZ economists

So far Qatar and Venezuela have pledged to join, but Iraq and Iran, the second- and third-largest producers in the Opec cartel, have not.

Iran has refused to join, saying it would not give up its “appropriate share” of the global oil market.

“The supply freeze agreement between Russia and Saudi Arabia failed to support oil prices with Iran [and Iraq] still missing from the equation,” ANZ economists said in a note. “Oil prices remain at risk of edging lower again short term as the hope of production cuts once again fades.”

The Brent crude benchmark fell 3.6 per cent in London on Tuesday after climbing as much as 6.5 per cent to US$35.55 a barrel.

It regained some ground early on Wednesday in London, ahead of talks among the oil ministers of Iraq, Iran and Venezuela in Tehran later in the day.

Iran is eager to raise output after international sanctions were lifted last month following a deal to curb its nuclear ambitions.

With Iranian output around one million barrels a day below pre-sanctions levels, analysts at BMI Research, a unit of credit ratings agency Fitch, forecast the country will increase production by an average 400,000 barrels a day over the course of the year.

They said the risk of the oil price falling below US$20 a barrel in the United States in the absence of an industry-wide supply cut deal was mounting, as they expected US refiners’ lower throughput to lead to more crude stock build-up later this month and next month.

Analysts have cast doubt over the effectiveness of any deal between Russia and Opec, citing Russia’s failure to follow through on its promise to curb output in 2001, when it raised exports instead.

Geopolitical rivalry between Saudi Arabia and its allies and Russia and Iran over conflicts in Syria and Yemen have also dimmed hopes of any quick agreement on a united front to cut oil output amid rising excess supply.

With oil prices around 70 per cent below the mid-2014 high they reached before the industry downturn began, all three of China’s state-backed oil producers are making losses on each barrel they pump as their average production costs range between US$40 and US$60 a barrel.

“Persistently low crude prices compel China to speed up long overdue reform,” Jefferies Securities head of Asia oil and gas research, Laban Yu, said in a report, adding the trio would be forced to cut uneconomic output and meet rising demand by imports instead.

To drive efficiency gains as part of state enterprise reform, Beijing is expected to force the state majors to relinquish exploration licences with unmet investment commitments and auction them to non-state firms this year, a PetroChina official told the Post late last year. A spin-off of midstream pipeline assets into one or more independent entities was also on the cards, the official said.