Breakingviews – China’s oil and gas titans heed the call to spend

China’s oil and gas titans are heeding the call to spend. President Xi Jinping called for a boost to energy security, and first-half figures suggest state giants listened: $81 billion Sinopec, for one, nearly doubled capital expenditure. That contrasts with caution seen abroad. U.S. sanctions only add urgency to national service.

Energy is a perennial concern among the country’s security hawks, and last year Xi put it firmly back on the agenda. Then, the state-owned majors pledged to explore more actively for new resources at home. They forecast spending this year would reach 517 billion yuan ($72 billion), nearly a fifth higher than in 2018.

Numbers for the first six months of 2019 suggest they are on track. Sinopec reported on Sunday that capex in the first half surged to 43 billion yuan, compared to just 24 billion yuan in the same period last year, while national offshore producer CNOOC reported that its own figure rose 60% year-on-year.

It’s affordable too, thanks in part to a balance-sheet clean-up over recent years. Even with higher spending, S&P Global Ratings reckons Sinopec’s debt, for instance, should remain below 1.5 times its EBITDA in coming years.

But committing to big outlays before a drop in prices has long been the undoing of resources giants, and China’s energy heavyweights have demonstrated poor timing before. The current push also comes as Western oil majors show restraint, and edge into greener areas. The International Energy Agency expects a modest 4% increase in global upstream oil and gas capital spending this year.

It’s unclear too how efficiently cash can be spent inside China, as hardliners prefer. Tapping poorer-quality resources at home can expensive and challenging: PetroChina and Sinopec, for instance, have both made major pushes into shale with questionable results. Geological and other challenges mean it’s still just 7% of China’s total gas production.

Analysts at Jefferies note that past efforts to secure oil supply have involved snapping up equity stakes abroad or arranging loan-for-oil schemes. But that isn’t much use when U.S. regulators wield threat of secondary sanctions against the likes of Sinopec and China National Petroleum Corp for dealings with Iran and Venezuela, as they have lately. The energy security tax may be here to stay.

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