Where this will take the country’s energy strategy from here is unclear, but some observers believe China is unlikely to push too aggressively in other areas of possible controversy, such as the widely disputed Spratley Islands (Nansha islands, in Chinese) in the South China Sea, and the Diaoyu (Senkaku, in Japanese) islands, over which it contests ownership with Japan, in the East China Sea.
The Chunxiao deal with Japan and this year’s resumption of joint drilling operations with Taiwan in the Taiwan Strait, suspended three years ago, also indicate a softening of China’s approach to its neighbours.
Meanwhile, many analysts believe falling crude prices and the world financial crisis could work to the advantage of China’s NOCs. If the IOCs struggle to secure financing in a period of global consolidation, the NOCs, with either full coffers or strong credit lines, could seize the opportunity to move from the fringes into the mainstream of the international oil&gas industry. With the exceptions of Sinopec, which suffers most from the downstream price controls, and CNOOC after COSL’s Awilco purchase, China’s NOCs are generally thought to be comfortably self-financing.
Of the listed companies, only CNOOC reported a rise in first-half net profit, which almost doubled to 27.5billion yuan ($4billion) from 14.6billion yuan in the same period last year. However, PetroChina saw net profit down 34.5%, while Sinopec chairman Su Shulin predicted “the worst year ever for China’s petrochemical sector” as net profit plunged 77%.
Both firms were badly hit downstream as soaring crude prices squeezed their refining operations. Price increases of up to 18% in June eased the pressure and Sinopec stayed afloat on state handouts while PetroChina announced a 60billion-yuan corporate bond sale to overcome downstream losses. However, political support in the form of infrastructure investment and other incentives for overseas ventures is likely to be less forthcoming in future.
“It’s hard to figure out what’s going on, how decisions are made and what money is coming from outside each company, but they have to make their own money work for them,” says Erica Downs.
Chris Sheehan, of IHS Herold, agrees: “I don’t think the pinch they would feel would have any great impact. They’re very well capitalised.”
Margins have been shrinking over the last 10 years as operating costs have risen, says Sheehan, but the NOCs are still well placed to weather any coming storm.
“They face the same challenges as the IOCs in replacing their reserve bases. It has been relatively expensive to grow organically. There will be more corporate consolidation around the globe if the oil prices come down below $80 for any significant time, and they have a very long-term strategy to expand their global footprint.”