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Page added on August 25, 2017

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In China, It’s a Gas


You think Royal Dutch Shell Plc, which paid $54 billion to buy gas producer BG Group Plc, is Big Oil’s biggest advocate of a shift to lighter hydrocarbons. Think again: PetroChina Co., China’s biggest oil producer, is also turning its back on the black stuff in favor of natural gas production, going by first-half results.

Crude oil output fell 7.4 percent from a year earlier, the Beijing-based company said late Thursday, while natural gas production was up 4.4 percent. Crude came to just 60 percent of total oil-equivalent production, versus more than 90 percent at the time of PetroChina’s 2000 initial public offering.

Dry Well
As a percentage of oil-equivalent production, crude output is falling faster at PetroChina than at other oil majors
Source: Bloomberg, Gadfly calculations

It’s a similar picture at Cnooc Ltd., where crude output in the first half was down 2.1 percent while gas increased 1.6 percent. Together, the two companies produced 39 million fewer barrels of oil in the first six months of the year, and 78 billion more cubic feet of natural gas.

That’s barely the start of it. In one of the more science-fiction moments of Thursday’s news conference, PetroChina President Wang Dongjin promised to start commercial production of gas from methane hydrates by 2030. Such technology, based on so-called “flammable ice” deposits on the sea floor, is still in the testing stage — but the fact that Wang called it out is a notable statement of ambitions.

Gas Floats

These shifts matter because China has been a notable laggard in raising the share of gas in its energy mix, hobbled as it is by regulations that keep prices artificially high. While gas comprises more than 20 percent of the total in the U.S. and U.K., it’s stuck at 6.8 percent in the world’s biggest energy consumer, according to Bloomberg New Energy Finance figures. The failure of gas to displace coal-fired generation is one of the major reasons why choking smog blankets northern China’s cities every winter.

The change is happening with government support. Beijing’s oil and gas industry reform plan, published in May, aims to reduce retail gas prices in the short term and increase domestic production in the longer term, with the objective of boosting its share of the primary energy mix to 15 percent by 2030.

That’s probably good news for investors. In contrast to the rest of the world, where a glut of natural gas has resulted in writedowns and thin margins, China’s walled garden is still characterized by high prices and favorable conditions for state-owned incumbents.

Stick That in Your Pipe
PetroChina’s gas and pipeline unit has the best operating margins
Source: Bloomberg, Gadfly calculations

A move toward more natural gas would be beneficial rather than detrimental to PetroChina, which counts the gas production and pipeline unit as its most profitable division. A government push to get state-owned oil companies to spin off their pipeline units appears to be going nowhere, thanks to strong resistance from the companies themselves, according to BNEF associate Nannan Kou. The operators will “accept a regulated equity investment, but refuse to unbundle them,” he wrote last month.

While shareholders this week are mainly cheering PetroChina’s decision to pay out 100 percent of its profits as dividends, that shift offers the prospect of a more sustainable advantage. The company’s youthful days of buccaneering on the high seas of the oil market are fading. Its future will be increasingly characterized by annuity-style returns from its role as a gas supplier to China’s centrally managed primary energy sector.

As long as the profits from those activities aren’t regulated out of existence, PetroChina’s retirement could be a rosy one.


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