Chinese oil giant CNOOC plans output, spending cuts to survive Saudi-Russian price war and demand slump caused by coronavirus

Eric Ng

CNOOC, China’s dominant offshore oil and natural gas producer, plans to reduce this year’s production target and spending on projects to cope with the worst industry downturn in two decades.

“Without a doubt we will reduce this year’s production levels and capital expenditure by a certain degree,” chief executive Xu Keqiang told reporters via teleconference after reporting a better than expected 16 per cent net profit increase for last year.

He declined to divulge the scale of the cuts, saying the plan is still pending approval by the company’s board. Most of them will be in high production-cost overseas projects, he added.

CNOOC, like other oil producers, has been caught off-guard by a surprise failure between Saudi Arabia and Russia – the world’s second and third largest producers – to agree on production cuts. It is also coping with sharp falls in demand caused by global transportation lockdowns to contain the coronavirus pandemic.

Oil prices have halved to around US$25 a barrel after Saudi Arabia unleashed a price war following the breakdown in talks early this month.

CNOOC’s net profit amounted to 61 billion yuan (US$8.6 billion) last year, up from 52.7 billion yuan in 2018 and 5.8 per cent higher than the 57.7 billion yuan average estimate of eight analysts polled by Bloomberg. The analysts expect CNOOC’s profit to halve to 30 billion yuan this year.

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“We will continue to exert confidence and remain calm, continue to focus on our own development, implement more stringent cost controls and more prudent investment decisions, strengthen cash flow management, and maintain the company’s long-term sustainable development,” said chairman Wang Dongjin.

A final dividend of 45 HK cents per share was proposed, up from 40 cents in 2018. The full-year payout of 78 cents compared to 70 cents in 2018.

“If the oil price stays at current levels for a long time, we will have to reduce future payouts just as other firms will,” Xu said. “We aim to have a payout that will maintain CNOOC’s attractiveness to investors within the industry.”

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In January the firm’s management set an oil and gas production target of 520 million to 530 million barrels of oil equivalent (BOE) of which domestic fields account for 64 per cent and the remainder would come from overseas. Last year’s output came to 506.5 million BOE, a record high.

The projection was based on total project outlays of 85 billion to 95 billion yuan. CNOOC spent 79.6 billion yuan last year, up 27 per cent from 2018.

Revenue grew 2.4 per cent to 233.1 billion yuan last year, as a 7 per cent rise in oil and gas sales volume more than offset a 5.8 per cent decline in the oil price and a 2.2 per cent fall in the gas price.

Average production costs fell 2 per cent to US$29.8 per BOE last year, the sixth consecutive annual decline.

“We can further reduce it from last year’s level by reducing our fields’ natural production decline rates,” Xu said.

The company is studying plans to buy its parent’s liquefied natural gas import and distribution assets, Wang said without offering any timetable. He said it will be guided by a principle of “maximising” shareholders’ interest.

CNOOC shares closed 7.4 per cent higher at HK$7.65 on Wednesday.

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