Exploration losses loom for oil majors

Industry experts are predicting losses in the upstream exploration activities of China's top three oil giants this year, as a result of the plunge in global oil prices.

Li Yan, a researcher with domestic energy consultancy Shandong Longzhong Information Technology Co, thinks all three－China National Petroleum Corp, Sinopec Group and China National Offshore Oil Corp－are likely to have slipped into the red for the full-year 2014, after six months of falling crude prices since June.

"If the global crude price falls to $40 per barrel, the three companies' exploration activities will definitely show a loss in 2015," he said.

The spot price for West Texas Intermediate Crude fell to $46.07 per barrel and futures for Brent crude oil price dropped to $47.43 a barrel on Tuesday, their lowest levels since 2009.

The Goldman Sachs Group Inc forecast on Monday that the WTI price will decline to $41 per barrel and Brent to $42 a barrel in the next three months.

The bank has cut its 2015 forecast for Brent to $50.40 per barrel from its previous $83.75 per barrel, and for WTI the price target is $47.15 from previous $73.75.

Liu Yijun, a professor at the China University of Petroleum, said: "The crude price drop harms CNPC the most since it has bigger upstream oil and gas businesses compared with Sinopec and CNOOC."

According to CNPC's financial report for the first three quarters in 2014, its exploration and production unit saw profits drop 0.7 percent year-on-year to 145.95 billion yuan ($23.59 billion).

Liu said the drop in the price of retail oil products especially will harm Sinopec's refining sector profits.

"Although Sinopec's raw material costs are lower when the price of crude falls, the price cuts (by the authorities) in the retail market will result in a huge decline in profits for the company," he said.

Sinopec, Asia's largest refiner, which has been increasing its upstream businesses in recent years, reported a 10.69 percent drop in sales revenue to 41.75 billion yuan in its exploration activities for the first nine months in 2014, according to company figures.

"The sales drop is due to the falling price of oil and rising costs, especially from July to September," said the company.

The global crude price drop started in June last year when the price was still above $100 per barrel.

CNOOC's oil and gas sales revenue was 117.1 billion yuan during the first half of last year, up 5.7 percent year-on-year while the company's third quarter sales dropped 4.6 percent year-on-year to 53.57 billion yuan in 2014 because of the price falls.

Liu said the big three could cut their investments in unconventional energy exploration in 2015.

"The price fall is not good news overall for those companies. But on the positive side, it might be a good chance for them to invest in innovation, which might position them better in the market in future."