Adaptive Reform and Perspective of China and USA Oil & Gas Industry in Low Crude Price Environment. September 2016

Transcription

1 Adaptive Reform and Perspective of China and USA Oil & Gas Industry in Low Crude Price Environment September 2016

2 Outline 1.Impact of Low Crude Price to Oil & Gas Industry 2.Necessity of Adaptive Reform 3.Sinopec s Adaptive Reform 4.Perspective and Suggestions for Cooperation 1

3 1.Impact of Low Crude Price on Oil & Gas Industry From 2013 to 2014, the weak global economy resulted in a weak energy demand. Meanwhile, due to the explosive increase of shale oil production in USA and Saudi s policy of securing market share and giving up production limit, the international crude market was over supplied. Since mid 2014, the international crude price continued to decline causing a universal downturn of oil and gas industry. Since 2016, the crude price fluctuated at the range between 45 to 50 USD/barrel after the continuous decline. The average crude price of the first half was 39.5 USD/barrel, down by 31.8 y-o-y. In the first half of 2016, although the international crude price hit the bottom and rebounded, the fundamentals of global crude market has not been changed. Moreover, the price rebound triggered supply increase and a stronger trend of US dollar, which brought more pressure on crude price. As a result, the recent crude price was still weak and below 50 USD/barrel. In the near future, the crude price will continue to fluctuate at a low level. 2

4 (A) Different Impacts on Different Countries Oil producers heavily relied on crude export will be severely stricken If low crude price lasts for a long time, only few oil producers such as Kuwait and Qatar can maintain a fiscal balance. Others are not able to sustain. Venezuela and Nigeria might be the first ones to fail due the high cost and overdependence on crude export. Russian foreign exchange reserve has dropped by 20% and Ruble depreciated by 50%. Russian central bank estimated Russian GDP will decline by 3.5%-4% this year. Venezuela s inflation rate reached 68.5% with shortage of food and basic products. 3

5 (A) Different Impacts on Different Countries Decline of crude price benefits crude importing countries Decline of crude price decreased import cost. Benchmarked by 65 USD/barrel crude price in 2015, China s crude import cost will be reduced by 51 billion USD which will help to raise the GDP growth by 0.5%. NEA estimated USA average gasoline price will drop from 3.36 USD/gallon last year to 2.33 USD/gallon this year, equivalent to saving 750 USD for each USA family. Crude import accounts for 12% of China s total import volume Crude import accounts for 6% of USA s total import volume 2,500 2,300 2,100 1,900 1,700 1,500 1,300 1, % 11.4% 11.2% 12.1% 11.3% 9.7% 8.3% 8.8% 2007 年 2008 年 2009 年 2010 年 2011 年 2012 年 2013 年 2014 年 原油进口金额 Crude import 占比 Ratio 14% 12% 10% 8% 6% 4% 2% 0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 4

6 (B) Significant Impact on Oil Companies A universal phenomenon:with continuous low crude price, oil companies performances declined significantly Profit of Oil Companies in 1H 2016 (USD/barrel) 120.0% 100.0% 80.0% 60.0% Decline of 1H profit ( ) % % %

7 (B) Significant Impact on Oil Companies Since 2016, oil price maintained at a low level, which made the upstream business more difficult and further worsen the upstream loss. Profit (100 million USD Upstream Profit and Oil Price 埃克森美孚 ExxonMobil 壳牌 Shell BP BP 雪佛龙 Chevron 道达尔 Total 中石油 CNPC 中石化 Sinopec 油价 Crude Price Average Brent for 1Q 2016 was 36 USD/barrel Quarterly reports showed, since 1Q 2016, many oil companies including CNPC and Sinopec started to suffer from increasing loss in upstream. 6

8 (B) Significant Impact on Oil Companies Till mid 2016, the upstream profit of 1H was in a downturn momentum with downstream profit growth slowing down. The downstream (refining and chemicals) profit of Sinopec and CNPC kept increasing. 1H Upstream Profit in 2015 and 2016(100 million USD) 1H Downstream Profit in 2015 and 2016 (100 million USD) 上半年 2016 上半年 2015 上半年 2016 上半年 7

9 (B) Significant Impact on Oil Companies Sharp decline of Investment According to Barclay,annual capex for 2016 will significantly declines comparing to the capex for Wood Mackenzie is even more pessimistic with a survey of 116 oil companies in the globe. Exploration business suffers the most. The announced budget showed an average 30% cut down of exploration capex comparing to last year Oil companies shut down low efficiency capacity and divest non-core business 8

10 (C) Impact on Sinopec 1 Since 2013, Sinopec kept stable crude output and significantly increased natural gas production. Crude Production(million barrel) Natural Gas Production(bcf) 原油总产量 total 国内产量 domestic 海外产量 overseas It has been two years since the decline of crude price from July During the period, Sinopec upstream production kept stable growth regardless of the crude price fluctuation. 9

11 (C) Impact on Sinopec 2 Changed Structure of Oil and Gas Reserve Sinopec s Oil and Gas Reverse 探明未开发储量 Undeveloped proven ( 原油 reserve, 百万桶 (crude, ) million barrel) 探明未开发储量 Undeveloped proven ( 天然气 reserve,10(gas, 亿立方英尺 bcf) ) 涪陵页岩气 Fuling Shale (10 Gas(bcf) 亿立方英尺 ) Undeveloped proven crude reserve declined because of the workload reduction caused by low crude price Breakthrough of Fuling Shale Gas Project contributed a lot to the significant growth of gas reserve. 10

12 (C) Impact on Sinopec 3 The crude price fluctuation severely influenced the company s financial performance. The revenue and profit of E&P business showed a sharp decline E&P Performance(100 million USD) 经营收入 revenue 经营收益 profit While we kept stable production, our upstream revenue and profit declined significantly due to low crude price. 11

13 Outline 1.Impact of Low Crude Price to Oil & Gas Industry 2.Necessity of Adaptive Reform 3.Sinopec s Adaptive Reform 4.Perspective and Suggestions for Cooperation 12

14 2.Necessity of Adaptive Reform (A)Global demand of oil and gas will continue to grow Market demand is the precondition of capacity expansion and capex increase. In the long run, we see a sustained global demand of oil and gas. Crude is not only an important fuel for transportation, but also a basic chemical feedstock. According to the studies of research institutions and oil companies, future global oil consumption will keep a stable growth Oil consumption (100 million tonne oil equavelant) 石油消费 ( 亿吨油当量 ) BP Exxonmobil IEA EIA

15 2.Necessity of Adaptive Reform (A)Global demand of oil and gas will continue to grow According to the studies of IEA, EIA, Bp and ExxonMobil, world oil consumption will increase from 4.33 billion tonnes of oil equivalent in 2015 to billion tonnes of oil equivalent in 2030, and further to billion tonnes in The annual growth rate from 2015 to 2040 is between 0.5% to 1.1%. Natural gas is a clean energy and beneficial to emission reduction. According to IEA s World Energy Outlook, global natural gas consumption will increase from 3.47 trillion cubic meters in 2015 to 4.63 trillion cubic meters in 2030, and further to 5.39 trillion cubic meters in The annual growth rate from 2015 to 2040 is 1.8%, which is the fastest among all fossil energy. In order to be adaptive to new normals and be environmental-friendly, China will significantly optimized its energy consumption structure by largely reducing the weight of coal and steadily increasing the weight of oil and gas in the future 5 to 10 years. It is estimated that China s oil consumption will reach 610 million tonnes and gas consumption above 300 billion cubic meters. Continuous investment in E&P is needed to satisfy the sustained growth of global oil and gas consumption. 14

16 2.Necessity of Adaptive Reform (B)Reserve is the guarantee for sustainable development Exploration is the major method to acquire reserves, and the increase of oil and gas reserve is directly connected with exploration capex. Exploration decision is largely impacted by the current low crude price. The new discovery of reserve in 2015 recorded the lowest volume of only 11.6 billion boe since 1960, 62% lower than the average of last 10 years and 22% lower than 新增储量 (bnboe) Incremental Reserve (bnboe) 天然气 Gas (mmboe) 石油 Oil(mmbbl) Source: Wood Mackenzie 15

17 2.Necessity of Adaptive Reform (C)Continuous investment in alternative resources is needed With higher cost and less discoveries of onshore E&P, and depletion of mature oil fields, we urgently need to find new resources for the replacement. Deep water, arctic and unconventional resource will be important areas. But all of these face with E&P difficulties, technological challenges and huge capex. 16

18 Outline 1.Impact of Low Crude Price to Oil & Gas Industry 2.Necessity of Adaptive Reform 3.Sinopec s Adaptive Reform 4.Perspective and Suggestions for Cooperation 17

19 Sinopec s Adaptive Reform (A)Investment optimization Focus on quality and efficiency of projects Capex for 2015 is billion yuan, down by 27.4% y-o-y. E&P:54.7 billion yuan,mainly used for Fuling capacity building(1 st Phase), LNG projects in Guangxi and Tianjin, gas pipelines and construction of overseas projects. Refining:15.1 billion yuan, mainly used for fuel upgrading. Chemicals:17.4 billion yuan, mainly used for acquisition of Sibur equity and revamping of Zhenhai ethylene unit. R & D:2.82 billion yuan, mainly used for R & D facilities and construction of informationization Structure of Capex 2015(100 million yuan) Marketing 221 Chemicals 174 Refining 151 Capex( ) Others 28 E & P 547

20 Sinopec s Adaptive Reform (B)Efficiency-oriented E & P For domestic E & P, we focus on value of reserves, strength management of investment, optimize E & P planning, reinforce cost control, cut down inefficient production and high-cost EOR measures, push forward shale gas development with low cost and high recovery. Multiple Important Discoveries Discovery in Tarim Basin in Xinjiang Discovery in Wei-6 well in Beibu Gulf of Guangxi Industrial flow acquired in Guaican-1 well in Inner Mongolia 19

21 Sinopec s Adaptive Reform (B)Efficiency-oriented E & P For overseas E & P, we adopted a linkage system between investment and oil price, optimized E & P planning, enhanced management, actively followed new projects opportunities, carried out non-core assets operation, and improved operation quality. 20

22 Sinopec s Adaptive Reform (C)Giving full play to integration advantage We adjust product mix of refining, reduce crude cost, optimize production planning, expand oil products export, enhance marketing. Refining sector recorded the best performance and became a major profit growth point Refining More high-value added products Million RMB Downstream Profit More profit from LPG and asphalt Marketing Increasing sales volume and retail 43% y-o-y growth of non-fuel business Chemicals Increased high-value specialty ratio Declining cost Refining Marketing Chemicals 21

23 Sinopec s Adaptive Reform (D)Speeding up conversion of R & D achievements We always regard innovation as the core of corporate development. Faced with low crude price in 2015, we further improved R & D mechanism and strengthened integration of production, marketing and research. A series of technologies for shale gas development π-frame seismic data processing and interpretation platform Company s Technology and Innovation Conference held in June 2016 By the end of 2015, Sinopec applied for patents, among which granted (No. 1 in China). We also won numerous awards in China. 22

24 Sinopec s Adaptive Reform (D)Speeding up conversion of R & D achievements We always regard innovation as the core of corporate development. Faced with low crude price in 2015, we further improved R & D mechanism and strengthened integration of production, marketing and research. A series of technologies for shale gas development π-frame seismic data processing and interpretation platform Company s Technology and Innovation Conference held in June 2016 By the end of 2015, Sinopec applied for patents, among which granted (No. 1 in China). We also won numerous awards in China. 23

25 Sinopec s Adaptive Reform (E)Strategy of opening and cooperation Taking the opportunity of Belt and Road Initiative, we will actively develop overseas E & P, refining, chemicals, and international trade businesses and enhance the capacity of international operation. We will actively and steadily push forward SOE reform, explore mixownership reform in marketing sector, and continued to improve corporate influence and anti-risk capacity. 24

26 Outline 1.Impact of Low Crude Price to Oil & Gas Industry 2.Necessity of Adaptive Reform 3.Sinopec s Adaptive Reform 4.Perspective and Suggestions for Cooperation 25

27 Perspective and Suggestions for Cooperation (A)Clear Awareness of the Situation Economy Condition Opportunities Slow growth of global economy New Normals of China s economy Longer period of low crude price Supply-side reform SOE reform Belt and Road initiative Beijing-Tianjin-Hebei Integration Yangtze Economic Belt Made in China

28 Perspective and Suggestions for Cooperation (A)Clear Awareness of the Situation Analysis of future oil price needs to consider demand, supply, cost, alternative energy, etc. Each factor has its own way to influence the oil price. Oil demand still grows at a slow pace. Demand from OECD countries saw a slight decline. Demand growth mainly came from non-oecd countries, China and Mid-East demand growth continued to slow down. Global supply will increase due to US shale oil, Brazil, NGL and OPEC countries such as Iraq. The fiscal breakeven price for OPEC is much higher than production breakeven price. Development of alternative energy constrained rebound of oil price Breakeven price for different regions 27

29 Perspective and Suggestions for Cooperation (A)Clear Awareness of the Situation Scenario prediction:three scenarios of Brent Low range:40usd/b ~60USD/b, economic growth slower than expectation, weak demand, unconventional cost reduced and production increased due to new technologies. Moderate range : 60USD/b ~80USD/b, slow but steady recovery of economy, benefit of supply side and demand side maximized, most possible scenario before High range : 80USD/b ~100USD/b, fast recovery of economy, shortage of reserve replacement due to insufficient investment, escalation of geopolitical conflicts, not long lasting, demand constrained, unconventional production stimulated. Brent prediction before 2030 USD/b 28

30 Perspective and Suggestions for Cooperation (B)Development strategies and measures Development Strategies Measures Value-orientation Innovation-driven coordinating resources open cooperation Adjusting structure Deepening Reform Driven by innovation Enhancing coordination green and low-carbon growth 29

31 Perspective and Suggestions for Cooperation (C)Enhancing Cooperation Enhancing cooperation with research institutions and peer companies home and abroad Cooperating with research institutions outside of the system with a open-approach, trying to reduce research cost, realize resource sharing and achieve leapfrog development. Cooperation with peer companies so as to share the risks and benefits together. Shell, Total and Chevron jointly development standard deep water production equipment under low oil price, which is a very good example to the industry. Sinopec always keeps a close eye on best practices of peer companies under low oil price, especially those of shale business in USA. We are looking forward to discussion with US counterparts on such topics. 30

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