bodyType

customContents

entityId

entityUuid

articlePageQuery

filter

article

articleBaseAdvertisingInfoArticle

articleListArticle

articleSeoArticle

helpersCheckIsPostiesArticle

hooksArticleAcknowledgementGateOverlayArticle

hooksTrackPageViewArticle

hooksContentInterestArticle

articleLinkingDataContent

hooksAmpRedirectArticle

articleSchemaContent

liveArticle

advertZone

sentiment

contentLock

topics

types

sections

moreOnThisArticles

urlAlias

commentCount

authorLocations

authors

paywallTypes

corrections

sponsorType

displaySlideShow

multimediaEmbed

printHeadline

seriesContainer

socialHeadline

headline

flag

firstTopic

glossary

flattenTypeIds

publishedDate

additionalInfoBoxes

images

image

relatedLinks

relatedNewsletters

__typename

createdDate

sponsor

pdfFiles

seriesReverseOrder

series

disableOffPlatformContent

published

updatedDate

summary

subHeadline

body

keywords

readingTime

customTimezone

liveContents

Eric Ng

Strategic Outlook '09
Things look pretty bad for the mainland and world energy sector this year, with the global economic crisis depressing prices and casting gloom over industry expansion. Yet, beneath the dismal conditions lies opportunities for the strongest companies to emerge even more powerful when the market recovers.
The global economic slump led by the United States and Europe  saw  US oil prices fall 71.7 per cent to US$41.68 a barrel last Friday from a peak of US$147.27 in July last year. It closed as low as US$33.87 on December 19.
Coal prices have followed closely on the heels of oil, with the Australian Newcastle benchmark tumbling about 60 per cent since the July peak, and the mainland's Qinhuangdao benchmark declining a lesser 40 per cent as state price control limited earlier gains.
The International Energy Agency, which represents 28 consumer nations, predicted global oil demand would fall for a second year this year by 0.6 per cent, after a 0.2 per cent drop last year.
It projected mainland consumption to rise a mere 1.1 per cent this year, down from an estimated 4.2 per cent last year.
The mainland fuel market would see a 'fundamental change', from a seller's  market in recent years to a buyer's market this year, the China Securities Journal  quoted the country's largest oil refiner and fuel distributor China Petroleum & Chemical Corp's (Sinopec) chairman Su Shulin as saying.
Mr Su's comment followed a brief price war between Sinopec and rival PetroChina in the eastern coastal market to shed fuel inventory.
Analysts expect more energy price weakness ahead.
'Early shutdowns of China's coastal factories ahead of the Lunar New Year holiday could foreshadow more negative demand data  in January and February,' wrote Gordon Kwan, CLSA's head of China energy research, in a report.
'Investors should be braced for more downside in oil prices during this year's first quarter barring a sustained decline in the US dollar or escalating tensions in the Middle East.'
The global credit crunch and the ensuing economic slump have squeezed oil companies' bottom lines and forced them to cut back on output, exploration and investment while governments of oil-rich nations in the Middle East and Russia have predicted major budget deficits for this year because of  the slump in oil-related tax revenues.
The output cut has been led by  the Organisation of Petroleum Exporting Countries, which is responsible for 40 per cent of global output. The oil cartel has slashed its output target by 4.2 million barrels per day since September last year, or about 5 per cent of global output, in an attempt to arrest precipitous price falls.
Russia, the world's second-largest oil exporter, also indicated a plan to reduce output. Analysts expect the country to produce 1.6 per cent less oil this year after a 0.9 per cent drop last year, the first decline in a decade, according to a Reuters poll.
'[The first half of this year] will see the credit crisis triggering both demand and supply destructions, and it will be a tug of war,' Mr Kwan wrote.
Already, some companies are looking beyond the current difficult market conditions and are eyeing expansion opportunities.
PetroChina chairman Jiang Jiemin had said that the nation's largest oil and gas producer would seek to boost its overseas business through acquisitions this year, taking advantage of depressed energy prices.
This global oil industry slowdown has presented opportunities rarely seen in the past five years for mainland oil firms to acquire stakes in companies and projects squeezed by the credit crunch. That may unleash a round of mergers and acquisitions of a scale not seen since the late 1990s when oil prices were last at depressed levels.
'We believe this down cycle could offer cash-rich Chinese oil companies opportunities to boost oil and gas production and reserves overseas, potentially helping to stabilise share prices in the energy space,' Mr Kwan said.
But even with low oil prices, the acquisition trail would not be easy, said Kim Eng Securities analyst Larry Grace. 'I think difficult-to-produce areas or difficult countries will be available, but [the opportunities] will be limited by a significant amount of protectionism, reducing acquisitions to projects rather than whole companies.'
The credit crunch has already taken a toll on drilling activity in the US, where the number of active drilling rigs fell 22.8 per cent to 1,568 on January 16 from a peak of 2,031 in September last year, according to consultancy Baker Hughes.
Outside the US, the rig count fell 2.7 per cent to 1,078 at the end of December from 1,108 at the end of September.
Barclays Capital in December predicted that global spending on oil and gas exploration and production would shrink 12 per cent this year to US$400 billion, as corporate budgets were cut by a steep slide in energy prices and tight credit availability.
In Russia, oil companies could pare their capital expenditure  to the level seen in 2007, ratings agency Standard & Poor's said in a report.
Novatek, Russia's top independent natural gas producer, flagged a plan to cut capital spending by 27 per cent to 50 per cent this year.
In Kazakhstan, oil producer KazMunaiGas Exploration and Production has also slashed its  investment budget by half, based on an assumption that Brent oil price will average US$40 a barrel this year.
Elsewhere, the credit crunch has pushed the weakest and most debt-leveraged to the wall.
Ausam Energy and the North Sea unit of Oilexco, both based in Canada, filed for bankruptcy protection last month  after failing to obtain financing from their lenders.
The fallout does not stop here. Mr Kwan believed oil companies' reserves might be revised downwards as lower oil prices meant less resource could be economically recovered.
Banks were also likely to cut the amount they were willing to lend to less capitalised oil explorers and producers, as they typically based the amount of credit facilities on clients' proven reserves, he said.
A similar story has also been unfolding in the coal sector, with the world's largest listed producer of the fuel, US-based Peabody Energy, announcing in December it would cut US production by up to 5 per cent this year, while rivals Arch Coal and Consol Energy have either idled or will reduce some production capacity.
In the US, the world's largest energy market, the Energy Information Administration projected that the country's coal production would fall 2.6 per cent this year, on the back of a forecast 0.3 per cent drop in electricity demand and 13 per cent decline in exports.
On the mainland, the largest producers have yet to unveil their production plan for this year, but the provincial governments of some of the biggest producing regions, including Shanxi and Henan, have asked producers to cut output to shore up prices amid plummeting power demand.
Still, not all energy companies are in retreat mode. Rex Tillerson, the chairman of Exxon Mobil Corp, the world's largest oil company, said last month  that the company had not revised its US$125 billion, five-year capital spending plan, as it expected the economic downturn would be temporary.
The mainland's dominant offshore oil and gas producer, CNOOC, even unveiled a plan to increase  spending by 19 per cent this year, as it needs to invest to get  proven but undeveloped resources ready for production  to keep expanding  output and meet growing demand.
China National Petroleum Corp, the parent of listed PetroChina, also said it would keep this year's capital investment similar to that spent in 2007.
Indeed, many analysts expect the price of oil  to stage a strong rebound this year after more short-term weakness.
Shell said it would raise its capital spending  marginally this year while Chevron said it would maintain its expenditure at last year's  levels.
Mr Kwan expected oil prices to fluctuate between US$35 and US$45 a barrel in the near term before recovering sharply in the  second half.
Commerzbank said recent declines had been excessive and that a long-term upward trend would start mid-year, with prices reaching US$70 a barrel by the end of the year.
'This time, unlike in the 1980s and 1990s, Opec countries are determined to fully implement those cuts, as by now they are relying on a much higher oil price than only a few years ago and therefore have a stronger interest in preventing oil price from sliding any further,' the German bank said in a  report.
An example is Russia, which reportedly would see a budget deficit amounting to more than 10 per cent of gross domestic product this year if oil prices average US$32 a barrel, compared with US$95 in the original budget.
Macquarie Securities projected the price of oil  to average US$59  this year, DBS Vickers tipped US$60 while Kim Eng Securities expected US$71.
'Oil prices at  US$30 or US$40 look cheap, but prices for a year later are already at about US$60, which means the market is not all negative about future prices,' said DBS Vickers analyst Gideon Lo Wai-yip.
On January 19, when the February contract traded at about US$36 a barrel, the June contract fetched US$51. Bid and ask prices suggested next year's February contract might trade at US$58 and the June 2010 contract at US$63.



Energy firms seek to grow amid slump