Key Takeaways
- China's oil demand growth will remain sluggish in 2025 due to a slowdown in economic growth and waning demand for transportation fuel. Support will mainly come from increasing demand from chemical feedstocks.
- Energy security will primarily drive China's oil and gas production growth, with natural gas playing a key role as a transitional energy source.
- The creditworthiness of Chinese national oil companies (NOCs) will remain resilient in 2025, underpinned by robust output and sufficient financial headroom to support sizable capital expenditure.
Another year of tepid demand for Chinese oil looms. Soft momentum in manufacturing and potential protectionism may choke prospects for economic growth. One offset may be policy support for the property sector and private consumption, which will boost domestic demand.
Our ratings on the oil majors include sufficient headroom for the sizable spending and the fluctuations we anticipate in this relatively volatile sector.
Slower Economic Growth to Cloud Demand Growth For Oil
S&P Commodity Insights (SPCI) expects China's oil demand to grow modestly by 2% year on year in 2025, slightly up on its estimate of 1% growth in 2024 (see chart 1).
Demand for chemical feedstocks will push growth slightly higher in 2025. This compares with average annual growth of 5% over the past decade.
S&P Global Ratings projects China's GDP will grow 4.1% for 2025 and 3.8% for 2026, slower than its estimate of 4.8% for 2024 and 5.2% for 2023. (See "Economic Outlook Asia-Pacific Q1 2025: U.S. Trade Shift Blurs The Horizon" published on RatingsDirect on Nov. 24, 2024). China's stimulus measures should support economic growth, but we expect its economy to be hit by U.S. trade tariffs on its exports.
Chart 1
Oil And Gas Production Will Stay Robust To Support National Energy Security
China will sustain its large production scale mainly through the NOCs in 2025-2026. The Chinese government continues to back domestic production to support national energy security. The country relies heavily on oil and gas imports, which account for more than 70% of its oil consumption and 40% of natural gas consumption.
SPCI forecasts China's total oil and gas production could grow by 3% each year in 2025-2026 (see chart 2). The production growth will largely be driven by gas growth of 5%-6% each year due to the fuel's role as a transitional energy source. Oil production will stay largely flat. Gas only accounted for 9% of China's primary energy consumption in 2023, lower than in many developed economies and the global average of 25%.
Chart 2
Robust Upstream Production, Stringent Cost Control To Help NOCs Stay Resilient
We anticipate this robust upstream production will be the case even under moderating oil prices. In our view, NOCs can achieve average upstream production growth of 4% in 2025, mainly from gas growth. At the same time, we believe NOCs will maintain stringent cost control to prepare for normalizing oil prices. Lifting cost--the expenses of producing oil and gas from an existing well--will decline slightly in tandem with oil prices. These factors will underpin NOCs' robust EBITDA generation (see chart 3).
Chart 3
We assume Brent oil prices will stay relatively high, despite softening to US$75 a barrel (bbl) in 2025 onward, from US$80/bbl in 2024. The retreat in oil prices reflects market concerns regarding the global economy and the possibility that OPEC will shift its strategy to focus on capturing market share versus supporting higher oil prices. We believe it is unlikely oil prices will be sustained at or above US$80/bbl at least through 2025. (See "S&P Global Ratings Revises Its Oil Price Assumptions; North American And Dutch Title Transfer Natural Gas Price Assumptions Unchanged," Oct. 1, 2024).
Peak In Chinese Demand For Key Refined Products Will Constrain NOCs' Downstream Performance
We believe gasoline demand and diesel demand peaked in 2024 and 2023, respectively. Increasing fuel substitution from new energy vehicles, liquefied natural gas (LNG) heavy trucks, and biofuels will dampen the sales volume of refined products in the transportation sector.
Declining new refining capacity additions in 2025 could partly mitigate slower demand growth. Key new refinery projects coming on stream in 2025 include an independent 400,000 barrels per day (b/d) project in Yulong and 220,000 b/d expansion project in Ningbo by China Petroleum & Chemical Corp. (Sinopec Corp.).
However, we expect refining margin will rebound this year on lower feedstock costs, based on our assumption of lower oil prices of US$75/bbl. Under this oil price level, China's refined oil product pricing mechanism will allow for a higher margin.
Chart 4
Chemical Feedstocks Will Be The Main Support Of Refined Products Growth
The launch in 2025 of China's new crackers and propane dehydrogenation (PDH) projects will provide solid support for the demand of naphtha and liquefied petroleum gas (LPG). That said, growth from chemical feedstock refined products will add little to profit growth because transportation fuels (gasoline/diesel/jet fuel) still contribute more than 80% of the NOCs' total refined products sales in general.
Chinese NOCs continue to shift from fuel-oriented to chemical-oriented production models despite weaknesses in the chemical sector. The NOCs' chemical businesses and the sector as a whole could remain subdued as soft demand and oversupply persist. The shift aligns with China's national strategy to reduce imports of commodity chemicals, and to increase domestic production of advanced chemicals.
Sinopec's key new chemical projects include the ethylene projects in Zhejiang Zhenhai and Guangdong Maoming. China National Petroleum Corp.'s (CNPC) refining and chemical transformation and upgrading projects are located in Jilin and Guangxi.
SPCI forecasts the demand for naphtha and LPG will grow by 4%-6% for 2025, whereas that for gasoline and diesel will drop by 1%-2% (see chart 5).
Chart 5
NOCs Have Financial Headroom For Ongoing And Sizable Capex Investments
We expect the capex requirements for NOCs will still be sizable over the next two years. The NOCs will keep their capex high for upstream expansion and investment in decarbonization initiatives. Downstream-focused Sinopec Corp. also aims to allocate a quarter of its capex to the expansion and upgrade of its chemical business.
The three NOCs have sufficient rating buffers to shoulder these investments. We expect CNPC and CNOOC's operating cash flow to be sufficient to cover their capex in 2025-2026, 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 6
Ratings for China's oil majors are solid, but buffers will be crucial, especially with its operations in a volatile sector and external challenges such as trade tensions add another layer of complexity to the outlook.
Table 1
| Rated Chinese oil and gas entities | ||||||
|---|---|---|---|---|---|---|
| Issuer | LT ICR | Outlook | ||||
|
China National Petroleum Corp. |
A+ | Stable | ||||
|
China Petrochemical Corp. |
A+ | Stable | ||||
|
China Petroleum & Chemical Corp. |
A+ | Stable | ||||
|
China National Offshore Oil Corp. |
A+ | Stable | ||||
|
CNOOC Ltd. |
A+ | Stable | ||||
| LT ICR--Long-term issuer credit rating. Source: S&P Global Ratings. | ||||||
Editor: Lex Hall
Related Research:
- Economic Outlook Asia-Pacific Q1 2025: U.S. Trade Shift Blurs The Horizon, Nov. 24, 2024
- China Petrochemical Corp. And China Petroleum & Chemical Corp., Nov. 13, 2024
- China National Offshore Oil Corp. And CNOOC Ltd., Sept. 25, 2024
- S&P Global Ratings Revises Its Oil Price Assumptions; North American And Dutch Title Transfer Natural Gas Price Assumptions Unchanged, Oct. 1, 2024
- China National Petroleum Corp., Aug. 18, 2024
This report does not constitute a rating action.
| Primary Credit Analysts: | Crystal Wong, Hong Kong + 852 2533 3504; crystal.wong@spglobal.com |
| Annie Ao, Hong Kong +852 2533-3557; annie.ao@spglobal.com | |
| Secondary Contact: | Danny Huang, Hong Kong + 852 2532 8078; danny.huang@spglobal.com |
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