China’s oil major Sinopec has responded to the disappointing results of yesterday’s Doha meeting by announcing the temporary closure of four oil fields that have been in production for over 50 years.
Sinopec (China Petroleum & Chemical), the second-largest producer in China and the largest refiner in Asia, will temporarily shut down four oil production projects after Saudi Arabia, Venezuela, Russia and Qatar said they would pursue an anti-climactic freeze on output to January levels.
From the Chinese oil major’s perspective, the freeze to January levels—which still requires agreement from other producers—is not enough to sustain some operations.
The four sites slated for closure are in the Shengli oilfield in Shandong province, which Sinopec says are among the poorest performers.
With average production costs in China running between $40-$60 per barrel, state-backed producers are suffering major losses, including PetroChina (the largest) and CNOOC.
“At current oil prices, the shutdown could save 130 million yuan (HK$155 million) of costs and reduce losses by 200 million yuan,” the company said on its website. In 2015, Sinopec’s profits declined more than 50 percent, and oil production is expected to further decline this year, by around 2 percent.
Analysts expect an even greater decline.
“Sinopec has been maintaining output in its aging oil fields by over-investing and this is no longer possible in the current oil price environment,” Bloomberg cited Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein, as saying.
Beveridge estimates that Sinopec needs oil to stay above $50 a barrel to break even, and that its domestic production will drop 5-10 percent this year.
But for others, there is some sacrifice involved. Saudi Arabia’s January production levels of 10.2 million barrels per day (mb/d) were actually a bit down from their high point in 2015 at 10.5 mb/d. Also, Saudi Arabia usually increases production in the summer months to meet higher domestic demand, so freezing output would cause Saudi Arabia to take a hit.
The real problem for this deal, though, is with Iran, who is unlikely to sign on to a production freeze when its output is still close to sanctions-era levels. With substantial gains in production expected for this year, the deal would be harder to swallow than it would for other OPEC members. Saudi Arabia would be willing to freeze its output if it meant burdening its rival Iran. As a result, Iran’s acquiescence is an open question. "We have not yet reached our level of pre-sanctions production. So when we get there, we will be on an equal level, then we can talk," a senior source told Reuters, pouring cold water on the deal. Venezuelan officials believe they can bring Iran on board, but that remains to be seen.
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