China crude output drops to six year low as oil giants shut ageing fields

PUBLISHED : Wednesday, 14 September, 2016, 1:42am
UPDATED : Wednesday, 14 September, 2016, 1:45am

China’s crude oil output dropped to the lowest in more than six years as the country’s state-run energy giants continued to pump less from ageing, high-cost fields.

Production during August in the world’s largest energy consumer dropped 9.9 per cent from a year ago to 16.45 million tonnes, according to data from the National Bureau of Statistics on Tuesday. That’s about 3.89 million barrels a day, the lowest since December 2009, according to Bloomberg calculations. Output is down 5.7 per cent during the first eight months of the year.

“As crude prices fluctuate at a relatively lower level, there is no incentive for China’s high-cost producers to raise output any time soon,” Tian Miao, an analyst with policy researcher North Square Blue Oak Ltd., said by phone before the data was released. Production will continue to decline through the rest of the year, Tian said.

Output from China, which was the world’s fifth-biggest producer last year, has been sliding as state-run companies shut fields too expensive to operate after prices fell earlier this year to the lowest since 2003. The country is forecast to lead production declines across Asia, helping tighten the global market as the world’s largest-consuming region relies more on overseas supplies.

“The global oil market rebalancing is progressing,” said Gordon Kwan, head of Asia oil and gas research at Nomura Holdings Inc. in Hong Kong. “Massive capital expenditure cuts have translated to more oil supply destruction.”

China’s crude oil imports increased to the highest in four months in August to about 7.77 million barrels a day, according to data by the General Administration of Customs released last week.

“Falling crude production supports rising imports through the rest of this year, coupled with strategic oil stockpiling and increased demand from refiners coming out of maintenance season,” Amy Sun, analyst with Shanghai-based commodities researcher ICIS-China said by phone.

Production declines will accelerate in the final four months of the year, Sun said, with monthly crude production averaging 16.25 million tonnes, while oil imports average 32 million tonnes.

The country’s biggest producer, PetroChina Co. cut its 2016 domestic crude output target to 103 million tonnes (about 2.06 million barrels a day), a drop of about 6 per cent from the previous year, as it shuts some high-cost fields.

Production from China Chemical & Petroleum Corp., known as Sinopec, is on track to shrink by a similar amount to about 763,000 barrels a day, company forecasts show.

“China’s crude output won’t see an apparent rebound unless Brent recovers to US$60 a barrel level, as most of China’s ageing oilfields can’t make a profit below this price,” Tian said. Brent crude, the global benchmark, has lost about half its value in the past two years. Prices have averaged almost $43 a barrel this year, compared with $99 in 2014.

While coal production in August rose 3 per cent from the previous month to 278.09 million metric tonnes, production was down 11 per cent from the same period last year, according to the statistics bureau. Coal mining in the first eight months slowed 10.2 per cent to 2.18 billion tonnes.

Major miners in the world’s largest consumer and producer of the fuel agreed last week to manage supply to stabilise prices in a deal with regulators that will see them increase output when the market is tight and cut production when there is oversupply. Qinhuangdao coal, one of the country’s benchmarks, has jumped more than 50 per cent this year,

The impact of the new policy “could be seen almost immediately” as the country’s biggest miners including China Shenhua Group Corp. and China National Coal Group Corp. “can increase output almost overnight as some of their idled capacities have been in a ready-to-go status,” North Square Blue Oak’s Tian said.