Key Takeaways
- We expect a slowdown in China's oil demand and refined oil products growth this year. Upstream production and refinery throughput at the three oil majors' will stay largely flat.
- Spending will nonetheless stay high for upstream development to enhance national energy security and increase investments related to energy transition.
- Our ratings on the oil majors include sufficient headroom for the sizable spending and expected fluctuations in this relatively volatile sector.
China's three national oil companies (NOCs) will be dealing with both cyclical and structural matters this year. This is par for the course in this sector, given the volatile nature of oil prices and fuel demand, plus the overhang of energy transition. S&P Global Ratings believes the credit ratings on the Chinese NOCs will stay resilient.
Production To Moderate Along With Slower Demand Growth
By our estimates, China's slower economic growth of 4.6% will lower the growth in its oil demand to 3% in 2024, down from a transition-related rebound of 7% in 2023. This will lead to a moderation in production expansion by the respective flagship subsidiaries of the three NOCs--China National Petroleum Corp. (CNPC; A+/Stable/--), China Petrochemical Corp. (Sinopec Group; A+/Stable/A-1), and China National Offshore Oil Corp. (CNOOC, A+/Stable/--).
For PetroChina Co. Ltd. (subsidiary of CNPC) and China Petroleum & Chemical Corp. (Sinopec Corp., subsidiary of Sinopec Group), we expect oil and gas production will be largely flat in 2024.
Chart 1
Chart 2
CNOOC Ltd. (subsidiary of CNOOC) will see the highest production growth at 3%-6%, albeit also decelerating from 9% in 2023. The company's new output will come mainly from the ramp-up of its domestic offshore oilfields in Bohai and South China Sea, and the mega overseas projects in Guyana and Brazil.
Chart 3
We anticipate the oil companies will sustain their output at a robust level, given their roles to strengthen national energy security through enhancing domestic production and reducing reliance on imported oil and gas.
The three NOCs' production increased by 3%-9% in 2023. This was largely driven by the growth (6%-11%) in natural gas, which is regarded as a cleaner transitional fuel to support China's decarbonization.
Solid Oil Prices Will Help
We assume Brent oil price will stay flat at US$85 per barrel (bbl) for the rest of 2024 (US$82 in 2023). The production restraint from OPEC and its allies (OPEC+) will continue to support oil prices this year. Price could moderate to US$80/bbl in 2025 onwards, on anticipated supply growth outside of OPEC+ to exceed global demand growth (see "S&P Global Ratings Revises Its WTI And Brent Price Assumptions For 2025 And Beyond On Anticipated Oversupply," published on RatingsDirect on March 11).
Chart 4
Softer Demand Points To Flat Refinery Throughput
China's refined oil product demand growth may slow down on the rising penetration rate for electric vehicles and sluggish industrial activity. We expect annual demand growth to fall to 530,000 barrel per day (b/d) in 2024 from 1.02 million b/d in 2023.
Demand for diesel has hit a peak, in our view. Jet fuel and gasoline will lead the growth but at a lower rate than recent post-pandemic surges. We expect 23% increase in jet fuel demand this year as as international air travel continues to recover, and 4% for gasoline.
Declining new capacity additions in 2024 could mitigate slower demand growth. We expect the only addition this year will come from a 400,000 b/d capacity from a Shandong teapot refinery; and that will only come on stream in the second half.
Our forecasts on oil and gas, and refined oil products demand is based on forecasts from S&P Global Commodity Insights.
Chart 5
Hence, the downstream-focused Sinopec Corp.'s refinery throughput may only marginally expand by 1% to 260 million ton (mt) in 2024, after a transition-related rebound of 6% in 2023. Sinopec Corp.'s refining margin could be largely resilient in 2024, based on our assumption of flattish oil prices and still-solid demand for oil products in China.
Chemical Segment Still Challenging
The recovery of Sinopec Corp. and PetroChina's chemical businesses may only be modest and gradual over the next two years. The sector is clouded by oversupply and still-high costs and a shaky demand revival. A more meaningful turnaround of China's chemical sector may arrive in 2025 as supply and demand fundamentals improve.
Sinopec and PetroChina have been upgrading their product portfolio with some premium products supplying to niche industries, such as new energy and aviation. Demand for these products could be more robust than for commodity chemicals.
Chart 6
Chinese NOCs Have Financial Headroom For High Capex Plans
The three NOCs have sufficient rating buffers to shoulder their still-sizable capex requirements over the next two years. All three NOCs target to maintain their largely flat capex in 2024. Most of their capex will be spent on upstream expansion. Downstream-focused Sinopec Corp. also targets a quarter of its capex for expanding and upgrading its chemical business.
We expect CNPC and CNOOC's operating cash flow to be sufficient to cover their capex in 2024 and 2025, thus maintaining low leverage. Sinopec Group and Sinopec Corp.'s debt may increase moderately, based on our expectation of negative discretionary cash flow. That said, the parent's debt-to-EBITDA ratio is likely to stay below the downgrade trigger of 2.0x.
Chart 7
The resilient performance of the oil companies' traditional business will help them to fund their investments in energy transition over the next two years. Moreover, compared with oil and natural gas, these investment could still be relatively small at 15%-20% of their total capex.
Over time, transition-related burdens could grow:
Related Research
- Economic Outlook Asia-Pacific Q2 2024: APAC Bides Its Time On Monetary Policy Easing, March 26, 2024
- S&P Global Ratings Revises Its WTI And Brent Price Assumptions For 2025 And Beyond On Anticipated Oversupply, March 11, 2024
- China Commodities Watch: Upstream Will Hold Up, Downstream Will Suffer , Jan. 25, 2024
- China Petrochemical Corp. And China Petroleum & Chemical Corp. , Nov. 6, 2023
- China National Offshore Oil Corp. And CNOOC Ltd. , Nov. 3, 2023
- China National Petroleum Corp. , Aug. 7, 2023
- China Commodity In Focus: National Oil Companies Get Ready To Transition , July 24, 2023
This report does not constitute a rating action.
| Primary Credit Analyst: | Crystal Wong, Hong Kong + 852 2533 3504; crystal.wong@spglobal.com |
| Secondary Contacts: | Danny Huang, Hong Kong + 852 2532 8078; danny.huang@spglobal.com |
| Annie Ao, Hong Kong +852 2533-3557; annie.ao@spglobal.com |
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