Sinopec looks to natural gas as oil prices fall

Energy giant plans to lift output at its mainland sites to almost double in the next five years while cutting back on crude production

PUBLISHED : Wednesday, 30 March, 2016, 8:16pm
UPDATED : Wednesday, 30 March, 2016, 8:16pm


China Petroleum & Chemical (Sinopec), the nation’s second-largest oil and gas producer and the world’s second-biggest oil refiner, aims to almost double its natural gas output in the five years to 2020 while cutting oil production amid low prices.

The company, which needs a crude oil price of at least US$60 a barrel for its oil production operation to break even, has made major natural gas discoveries in the past decade that allowed it to raise gas production substantially. The trend is set to continue.

It has set a target to raise gas output to 40 billion cubic metres (bcm) in 2020 from 20.8 bcm last year. Adding imported gas, it aims to supply a total of 53 bcm in 2020.

“Our proven gas reserves and development work are sufficient to meet our target,” chairman Wang Yupu told reporters Wednesday. “We have made significant new discoveries in the Sichuan and Ordos [gas] basins.”

The 40 bcm target consists of 29.5 bcm of gas extractable by conventional methods, as well as 10 bcm of gas in shale rock formations and 0.5 bcm in coal seams. Both of these require advanced “unconventional” technology.

The conventional gas target will be met from fields in northern China, the East China Sea and Sichuan province, while its Fuling shale gas field in Sichuan will meet the 10 bcm target. Half of this capacity has already been built.

Sinopec’s five-year gas production plan contrasted with its target to cut crude oil output by 5 per cent this year after it fell by 3.1 per cent last year, reflecting maturity and the high production costs of its fields.

Sinopec’s parent, China Petrochemical Corp, has acquired some US$40 billion worth of overseas oil and gas exploration and production assets in the past decade, but Wang said Sinopec has no current plan to acquire those assets because low prices have made valuing deals difficult.

The assets also do not meet Sinopec’s minimum requirements for acquisitions in terms of cash flow generation, chief financial officer Wen Dongfen said.

Sinopec posted a 32 per cent decline in net profit to 32.2 billion yuan (HK$38.6 billion) for last year, in line with the 32.8 billion yuan average estimate of 20 analysts polled by Thomson Reuters.

Its oil and gas production operation reported an operating loss of 18.5 billion yuan compared to a profit of 46.3 billion yuan in 2014.

But oil refining swung to a profit of 19.4 billion yuan from a loss of 2 billion yuan as its low cost position allowed its facilities to be over 90 per cent utilised and it benefited from Beijing’s loosened grip on refined fuel prices.

Downstream chemicals production turned in a profit of 19.7 billion yuan compared to a loss of 2.2 billion yuan in 2014, as feedstock costs plunged.

Fuel marketing saw operating profit fall 8.2 per cent to 27.3 billion yuan.

A final dividend of 0.15 yuan a share was proposed, down from 0.2 yuan in 2014, but it amounted to 56 per cent of net profit, a historical high.

Wang said the high payout took into account Sinopec’s strong cash flow of 67.8 billion yuan last year and its desire to boost shareholders’ confidence.

Capital expenditure to maintain or expand production capacity for this year is budgeted at 100.4 billion yuan, down 10.6 per cent from last year, which in turn was 27.4 per cent less than in 2014.

Sinopec shares surged 5.72 per cent to HK$4.99 yesterday, in a broader market up 2.15 per cent.