PetroChina cuts oil output target as high cost fields eat profits
PetroChina, the nation’s largest oil and gas producer, has cut its full-year domestic oil output target by 3 per cent amid the long drop in oil prices that made some of its high-cost fields unviable.
The firm has also not ruled out selling more assets and booking the gains to help shore up dismal profitability and support dividend payouts as it expects the price of oil to remain low in the second half.
“We have slashed our [full-year] domestic oil output target set early this year from 106 million to 103 million tonnes,” vice-chairman Wang Dongjin told reporters on Thursday. “This is mainly because we stopped construction of some projects whose break-even costs exceed that of expected oil prices, and cut output at high-cost producing fields that could not generate the desired return.”
Its total oil output target, including from overseas, has also been cut by 3 per cent.
Wang said the oil giant has based its business planning on oil prices at US$45 to US$50 a barrel in the second half, US$50 to US$60 next year and 2018, and US$60 to US$80 in 2020.
We stopped construction of some projects whose break-even costs exceed that of expected oil prices
“Our view is that oil price has probably bottomed out in this year’s first quarter,” he said. “With the total cost of oil production globally now at US$50 to US$55 a barrel, it would be unsustainable for oil price to stay below that for much longer without causing declines in future output and reserves.
“I personally believe US$60 to US$80 are more reasonable levels for sustainable development,” Wang said.
With the price of oil staying low, he said PetroChina plans to raise natural gas’ share of its total output to 50 per cent in 2020 from 37 per cent currently.
PetroChina on Wednesday posted a smaller than expected 98 per cent year-on-year decline in net profit to 531 million yuan for the year’s first six months.
Excluding the 24.5 billion yuan gain from the sale of a 50 per cent stake in a firm that owns its gas pipelines linking northwest China to Central Asia for about 14.7 billion yuan, it had an underlying loss. The stake was sold to central government-owned China Reform Holdings.
Analysts said they were in the dark on how the accounting gain was calculated.
“We have yet to figure out how this sum managed to generate a 24.5 billion yuan gain,” wrote Jefferies head of Asia oil and gas research Laban Yu wrote in a note. “According to PetroChina, the gain represents the difference between the [sale proceeds] ... and the fair value of the remaining equity investment and the share of net assets of the former subsidiary.”
Asked how the gain could exceed the selling price by a wide margin, chief financial officer Zhao Dong only repeated the figures without addressing the question.
PetroChina also did not disclose why it booked the pipeline sale gain in its oil and gas production business segment, leading to an operating loss of 2.42 billion yuan instead of a much steeper 22.1 billion yuan loss in the first half.
Still, Wang said the company had recorded a profit of more than three billion yuan in July, without elaborating.
He said PetroChina had been restructuring assets and pursuing a “light asset” strategy in recent years, when asked if it would sell more assets in the second half.
Wang said in an internal benchmarking exercise, PetroChina ranked first among comparable global companies on revenue and second on operating profit.
But as Sanford C Bernstein senior analyst Neil Beveridge pointed out in a report early this month, it trailed behind BP, Royal Dutch/Shell, Total, Chevron and ExxonMobil on average return on capital
invested in the past three years, due to a lack of capital discipline and overinvestment at the top of the industry cycle.
