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China oil giants risk paying high price for energy addiction

Charlie Zhu
Tuesday, 29 Oct 2013 | 9:24 AM ET

* PetroChina, CNOOC, Sinopec invest heavily to boost output

* Rising costs not hitting profits, so far

* Oil, gas output increased in Jan-Sept period

* China's oil needs seen doubling by 2030

HONG KONG, Oct 29 (Reuters) - China's biggest state-owned oil firms, sitting on ageing fields, are scrambling to ramp up crude oil and natural gas production to meet surging domestic demand through a slew of investments that also risk pushing up their costs.

PetroChina, Sinopec Corp and CNOOC Ltd produced more oil and gas in the first nine months of this year, the companies said in the past week. That was partly in response to the government's recent hike of domestic natural gas prices and moves to link pump prices more closely with international crude costs.

The increase, however, is far from enough to bridge the gulf between the energy consumption and production of China, which last month overtook the United States to become the world's largest oil importer.

As domestic oilfields age, the three companies have in recent years poured billions of dollars - the biggest amount in the world so far - into the acquisition of unconventional and traditional hydrocarbon assets overseas to boost reserves.

They have also invested heavily in risky projects such as deepwater drilling at home and abroad.

These investments, which mirror a trend in the global oil industry, will increase costs but, so far, not at the expense of profits. PetroChina and Sinopec both reported on Tuesday net profit growth of around 20 percent in the third-quarter.

"There is a lot of incentive for China to produce as much oil as it can domestically," said Simon Powell, head of Asia oil and gas research at brokerage CLSA in Hong Kong, citing China's soaring oil imports.

China's 2012 oil consumption rose 5 percent to 10.2 million barrels a day from a year earlier, according to BP Plc's Statistical Review of World Energy, a figure that was the highest since the energy major started compiling data in 1965. By contrast, oil production increased 2 percent to 4.2 million barrels a day, the review shows.

China, the world's second-largest oil user, already relies on imports for 60 percent of its consumption and is set to double its fuel use by 2030.

QUEST FOR MORE ENERGY

PetroChina, the country's dominant oil and gas producer, saw its oil and gas output rise 4.3 percent year-on-year in the first three-quarters. Crude oil production edged up 2.2 percent to 698 million barrels while natural gas output jumped 9 percent, the company said on Tuesday.

But higher costs and lower realised crude prices in the period meant operating profits for its exploration and production division fell 10 percent, the company added.

Analysts said the rise in costs was partly due to PetroChina's efforts to stem output decline at its ageing oilfields, including Daqing, China's largest.

PetroChina is now expected to allocate more resources to exploration and production while cutting spending on refining, petrochemicals and pipelines, capital-intensive businesses with lower profitability.

Its refining segment moved into the black in the third quarter following losses for 10 straight quarters, as a result of China's oil pricing reform in March.

Sinopec Corp, Asia's largest refiner which is also involved in exploration and production, posted a 4 percent increase in its oil and gas output in the January-September period, thanks to an 11 percent jump in natural gas production.

CNOOC's oil and gas production rose 17.8 percent in the third quarter, boosted by the output from Canadian energy firm Nexen, which it bought for $15.1 billion earlier this year.

Around two thirds of Nexen's proven and probable reserves are high-cost oil sands and shale gas assets in Canada. Excluding Nexen's contribution of 16.1 million barrels of oil equivalent, CNOOC's output for the first nine months was down slightly.

CNOOC's capital expenditure for the third quarter, excluding Nexen, climbed 18.2 percent to 17.7 billion yuan ($2.9 billion) as the company kicked off more development projects. Capital expenditure of Nexen reached 4.7 billion yuan in the period.

CNOOC, once an investor darling for its high-growth profile, has been struggling to boost its own production.

It has invested in advanced technology to drill in deep-sea areas off the Chinese coast. The company also joined an international consortium which earlier this month won the right to explore and develop a deepwater project in Brazil which is the country's biggest oil field.

CNOOC and China National Petroleum Corp, parent of PetroChina, have a 10 percent interest in the consortium, which also includes Brazil's state oil firm Petrobras, France's Total SA and Royal Dutch Shell Plc. ($1 = 6.0855 Chinese yuan)

(Editing by Miral Fahmy and Ryan Woo)

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