Woe to oil: why China’s 2017 output will extend record decline

China’s oilfields are likely to pump less crude in 2017, extending last year’s record output decline, as the industry feels the time-lag effect of capital expenditure cuts , while the government arm twists producers to switch their business focus from volume to profits.

Production is likely to fall gradually to 3.5 million barrels a day by 2020, from 4.2 million barrels per day in 2015, according to a forecast by Angus Rodger, director of Asia-Pacific upstream research at Wood Mackenzie.

“China’s domestic oil production accounted for 5 per cent of global supply in 2016, but that share looks set to shrink considerably over the next few years,” Rodger said in an interview with the South China Morning Post from Singapore. “Capital investment cuts by the major Chinese national oil companies, shifting government policies to focus on profitability rather than output volume and oilfield maturity are the key factors behind this decline.”

Two of China’s oldest and largest oilfields, PetroChina’s Daqing (大慶) field in Heilongjiang province, and Sinopec’s Shengli (勝利) in Shandong, have already reduced their 2016 production by 4.8 per cent and 11.8 per cent respectively, as low global oil prices forced them to shut unprofitable wells, according to a Shanghai Securities News report.

The three state-owned Chinese oil majors PetroChina, China Petroleum & Chemical (Sinopec) and CNOOC, which together account for around 92 per cent of the nation’s oil output, slashed their domestic exploration and production spending by 20 to 45 per cent in 2015, and by a further 10 to 16 per cent last year as oil priced halved, Rodger said.

He expects “marginal increases” for this year’s budget as oil price rebounded from a low of around US$28 a barrel a year ago to around US$56 in recent days, amid continued caution and disciplined spending by the majors.

The combined effect of China’s production cuts will worsen the nation’s dependence on imported supply, analysts said.