With China’s global reach in the energy industry, what happens elsewhere is liable to affect domestic companies. After the financial crisis, many debt-laden governments removed restrictions on Chinese investment and, consequently, M&A activity picked-up. A manager at Canadian Rockies International Energy Co Ltd described this progression: “Chinese oil companies seized the opportunity and carried out a lot of large overseas oil asset M&A projects. In 2012, in particular, there was a surge… For example, CNOOC [China National Offshore Oil Corporation] acquired the Canada-based Nexen at nearly USD 20bn.”
When looking at who is making these investments, private companies far outstrip the share of the three major state-owned companies – China National Petroleum Corporation (CNPC), China Petrochemical Corporation (Sinopec) and CNOOC. “In 2016-19, among all the overseas upstream oil and gas asset M&A projects conducted by Chinese companies, only 11% were by the three major state-owned Chinese oil companies.” Adding to China’s state-owned oil and gas entities, December 2019 saw the creation of China Oil & Gas Piping Network Corporation. The goal of this was to break the upstream monopoly, as well as setting up an integrated pipeline network across the country. “However, the progress of the project, including that of asset consolidation and auditing, has been quite slow”, a former market investment manager at China Gas Holdings Ltd told Third Bridge Forum.

With bankruptcies likely to be on the cards owing to plunging energy prices, this could prove beneficial to Chinese oil and gas companies investing abroad. There are various ways to evaluate the worth of different projects. For the oil industry, “non-economic factors far outweigh economic factors”, the manger from Canadian Rockies International Energy pointed out. Other elements to consider include the likelihood of national security audits and renationalisation, in addition to the quality and potential of the M&A target, according to our Interview.
Another obstacle is avoiding overvalued assets. However, undervalued projects could also be up for grabs, a situation made more likely by this low oil price environment. “In 2012, CNOOC acquired a shale oilfield with proven reserves of fewer than 200 million barrels at CAD 2.2bn in Canada. Now that eight years [have] passed, the proven reserves of the shale oilfield have increased by more than 200 million barrels.”
With the global energy outlook still uncertain, companies that provide services to the oil and gas industry are also suffering. Drilling is one of these areas. “The prices of all services offered by CNPC, including well drilling and logging, simulation and fracturing services, dropped by 10%,” a former general manager from Schlumberger (China) Investment Co Ltd told Third Bridge Forum. The cost of these services varies according to the location and drilling depth. For example, the average pre-pandemic daily cost of drilling equipment for 5,000 metres was approximately RMB 78,000, while for 9,000 metres it was RMB 160,000. More advanced projects could cost up to RMB 46m for just one well.
There are various strategies these providers could employ to offset the decline, as “drilling rig services do not generate high profit”. Related technical solutions, such as underbalanced or managed pressure drilling, have high day rates with strong gross profit margins, explains the former general manager. Electrification is another option to explore, and our specialist believes this will be a “main trend” over the coming years as oil and gas companies seek to reduce costs. Approximately 30% can be cut from the total drilling cost. Some companies are already making moves in this direction, connecting to the national grid or generating electricity with natural gas. This includes Sinopec and CNPC, which have electrified nearly 50% of their drilling rigs.
China is leaning towards more natural gas, and recent developments underscore this progression. A marked slowdown in natural imports was reported – for instance, LNG “grew by only 12%, as opposed to 30% or even over 100% in previous years”, highlighted the former market investment manager. Meanwhile, last year was the first time that natural gas production reached double-digit growth and there was a particular pick-up in shale gas output. As a result, China has been expanding its natural gas storage. “As of the end of 2019, a total of 27 underground natural gas reservoirs had been built across the country, including 23 by CNPC.” This adds up to a total storage capacity of “10.2 billion cubic metres, up 44% from a year earlier”. However, this makes up just a fraction of what China consumes, and the country looks set to miss its targets. “The State Council set goals for local governments, urban gas companies and gas suppliers to bring their natural gas storage capacity to 1%, 5% and 10% of their annual consumption or sales respectively by 2020.”
COVID-19 adds to the complexity of China’s energy landscape. Although supply and demand patterns for oil and gas have been disrupted, the main trends, such as overseas M&A and increasing natural gas use, look set to continue. However, these sectors still need to adapt their strategies to make it through the pandemic’s disruption.
The information used in compiling this document has been obtained by Third Bridge from experts participating in Forum Interviews. Third Bridge does not warrant the accuracy of the information and has not independently verified it. It should not be regarded as a trade recommendation or form the basis of any investment decision.
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