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Wood Mackenzie on CNOOC Ltd's strategy update

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Oilfield Technology,


CNOOC Ltd announced its strategic plan for 2019, setting a bullish tone for the rest of the Chinese national oil companies to follow. Wood Mackenzie's senior analyst Maxim Petrov shares his views.

The update should be viewed within the context of increased political pressure to secure China's energy self-sufficiency. President Xi Jinping's call for greater self reliance and the growing economic slowdown in the second half of 2018 have provided impetus for companies to start meeting their national objectives.

Whether this leads to greater collaboration with the Majors and independents in China is yet to be seen; but we expect a stronger push to improve near-term growth and find a sustainable middle ground between commercial and national interests. Increasing output and investment are now front of mind of every Chinese state-owned enterprise. We expect similar themes to emerge from PetroChina and Sinopec Corp when they report in March.

Upgraded domestic production targets, but overseas portfolio will drive growth

Production averaged 1.30 million boe/d during the year, within the targeted range of 1.29 to 1.32 million boe/d. Domestic output rose almost 3% year-on-year to 845 000 boe/d following the ramp up of gas projects (Dongfang, Panyu) and start up of several oil fields (Huizhou, Penglai).

CNOOC Ltd is targeting 1.33 million boe/d in 2019, equivalent to 2% growth. While this is consistent with last year's outlook, management upgraded the domestic target by 9% at the expense of overseas volumes (-12%). Output in China is now expected to grow at 1% per year over the next three years, supported by gas volumes from Lingshui. CNOOC Ltd expects the deepwater project to commence production in 2020 vs. WM 2022 risked timeframe.

Total output is expected to grow at above 4% per year through 2021. Overseas production will underpin the company's outlook, growing at 10% per year (vs. WM estimate of 9%). This will be primarily driven by Nigeria, Guyana and North America (US deepwater GoM, US Eagle Ford and Canadian oil sands). There is potential for outperformance internationally given the success in Guyana.

Capital guidance maintained, but this time could very well be different

CNOOC Ltd massively accelerated its spending in Q4 2018. The company spent close to RMB 27 billion (US$4 billion) in the final quarter of last year, compared with RMB 36 billion (US$5.5 billion) spent in the first three quarters. Much of this was domestically. Annual investment has now recovered to pre-2015 levels, coming in at RMB 63 billion (US$9.5 billion) in 2018.

Guidance for 2019 was kept flat year-on-year at RMB 70 - 80 billion (US$10 - 11.6 billion), in line with our estimates. Having consistently under-spent over the past few years, including a 10% undershoot in 2018, we think this time CNOOC Ltd will make a concerted effort to meet and even overshoot its target. China's political momentum has shifted and the NOCs are being asked for greater domestic investment.

Given the increased emphasis on China, we retain our view that material M&A is unlikely. CNOOC Ltd has the best pipeline of new upstream projects among the Asian NOCs, underpinned by pre-salt Brazil (Libra), Guyana (Liza-Payara) and US tight oil exposure (Eagle Ford, Niobrara). An expanded exploration programme, infill drilling offshore China and high-impact acreage capture in Latin America and West Africa are more likely business development moves.

Exploration spend and activity to increase

CNOOC Ltd is targeting RMB 14 - 16 billion (US$2 - 2.3 billion) of exploration spend in 2019. This is slightly higher than last year's budget of US$2 billion and higher than the exploration budgets for most of the Majors. Over 75% will focus on domestic activity, budgeted at RMB 12 billion (US$1.7 billion), which is up 20% year-on-year.

The company will continue to look for incremental shallow-water discoveries in the Bohai Bay and will increasingly target high-impact, deepwater exploration in the Pearl River Mouth Basin. During the quarter, the company signed a strategic exploration agreement with 9 international companies in Areas A and B within the basin. CNOOC Ltd also plans to raise its reserve replacement ratio to 120%.

CNOOC Ltd drilled 164 conventional exploration wells in 2018, almost a quarter more than planned following accelerated drilling in Q4. The plan for 2019 is equally bold: 173 planned conventional wells (up 6% year-on-year) and 73 unconventional wells (up 109%). The company also aims to increase its 3D seismic gathering, expanding its reach to 19 000 km2 in 2019.

A surprising entry into offshore wind

CNOOC Ltd unveiled that it entered into offshore wind power in Jiangsu Province this month. While we have seen an increasing push by the Majors to establish and grow their new energies businesses, we have yet to see any particular interest from the Chinese NOCs. No details were given on the size or scope of the development, but the announcement is consistent with China's broader strategy of reducing carbon emissions and investing into new technologies. This could be the first foray for CNOOC Ltd to become a more integrated energy company, although we expect any such moves to be limited in the near term.

Read the article online at: https://www.oilfieldtechnology.com/special-reports/25012019/wood-mackenzie-on-cnooc-ltds-strategy-update/

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