Chinese NOCs play for time [NGW Magazine]

China’s state-run energy giants are pushing greater production of cleaner-burning gas as their answer to meeting Beijing’s long-term carbon goals.

The three national oil companies (NOCs) – Cnooc, Sinopec and PetroChina – are trying to strike a balance between demonstrating a commitment to decarbonisation while warding off potential disruption to their traditional business of extracting hydrocarbons.

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After the president, Xi Jinping, set China on its path to carbon neutrality in his speech to the United Nations last September, they have started to share how they intend to align with the country’s decarbonisation trend.

Most recently, Cnooc – China’s main offshore energy explorer – confirmed at the end of January that it had started drawing up a long-term action plan for mitigating carbon emissions, making it the last of the three Chinese NOCs to announce such a move.

“The top-level design research and action plan preparation fully prepares the company to become a new force for green energy and low-carbon transformation and will help realise the goal of ‘Carbon Peak and Carbon Neutrality’,” Cnooc said in the January 29 statement.

But the announcement was light on details and did not disclose the year for when Cnooc is targeting peak emissions or carbon neutrality. More importantly Cnooc made clear that it would not let its climate plans stand in the way of boosting domestic oil and gas production.

While the government’s pledge of a carbon-neutral economy by 2060 should be treated as an opportunity for future growth, Cnooc first needs to stabilise its oil and gas businesses, and continue with a seven-year program that began in 2019 to increase output and reserves, said company chairman Wang Dongjin.

Fossil fuels remain focus

Cnooc’s reticence to begin transitioning away from hydrocarbons underlines how China’s oil majors remain focused on maximising oil and gas production even as the central government plots to peak carbon emissions before 2030. It signals that despite Xi’s attempts to take a global leadership role on climate, the ambitions of the majors lag those of their international peers when it comes to curtailing emissions.

Indeed, as the European majors like BP, Shell, Eni and Total reposition themselves for the energy transition, the announcements and actions of China’s NOCs so far suggest they will focus – at least in the near term – on fossil-based options to decarbonise, and will seek a balance between energy security and climate goals.

This was emphasised by Cnooc’s Wang, who recommended the company should develop infrastructure for cleaner-burning gas, as well as reduce emissions intensity and promote offshore wind and other forms of new energy.

Wang’s preference for a hydrocarbons-heavy approach dovetailed with the official launch of Cnooc’s carbon-neutral strategy two weeks earlier, on January 15. At the time Cnooc said it planned to peak emissions mainly by increasing gas output and developing what it called “green oilfields” – more evidence that the company has no plans to move meaningfully away from fossil fuels.

China’s other majors have made similar net-zero proposals on how they intend to help deliver on national climate targets, and they also consist of vague promises rather than concrete measures.

PetroChina was first out of the blocks when it said last October it planned to be carbon-neutral by 2050. But the company – China’s biggest oil and gas producer – did not specify if this meant just for its operations, or would encompass the broader environmental impact of the hydrocarbons it sells.

Sinopec said in November that it was targeting carbon neutrality by 2030 – decades ahead of the rest of the country. But, again, China’s biggest oil refiner did not elaborate if it was including the use of the fuel it sells to power cars, planes and ships, the so-called Scope 3 emissions.

One reason for the relatively weak climate ambitions is that NOCs are required to juggle other national priorities, including ensuring energy security for the world’s second-biggest economy. China is the largest miner and consumer of coal, and the three NOCs have all been focused in recent years on boosting production and imports of gas, which is viewed as a crucial bridge to cleaner energy while China weans itself off the dirtiest fossil fuel.

Company heads at PetroChina, Sinopec and Cnooc have likely concluded this provides enough political cover for their nebulous climate plans – indeed, all three firms cited the need to buttress energy security as justification for prioritising more oil and gas production in their 2021 work plans.

Ramping up gas

The climate strategies of China’s energy majors make it clear that producing more gas is how they aim to align their businesses with Xi’s goal of peaking emissions before 2030 and shrinking them to net zero by 2060.

Days after Cnooc said it began working on its long-term zero-carbon roadmap, the company released its annual strategy preview that called for accelerated exploration and development of gas – including deepwater reserves in the South China Sea and unconventional resources onshore China – to cut emissions.

To be clear, the dash to gas among China’s majors is nothing new. But what is surprising is how they have stuck to their guns even after Xi’s pledges ramped up the debate over the compatibility of gas with global climate goals. Talking up the cleanest fossil fuel underscores their reluctance to abandon hydrocarbons any time soon – particularly as going big on gas production forms a key plank of a seven-year action plan by the NOCs that started in 2019.

The pivot to the cleanest-burning fossil fuel is apparent across the three companies (Table 1). PetroChina extracted more gas than oil domestically (Table 2) last year for the first time – 10 years ahead of schedule. Sinopec said last November that gas will surpass oil in its output mix by 2023, while Cnooc is targeting 2035.

PetroChina has previously said it is targeting gas production to account for 55% of its domestic primary energy output by 2030. When the company laid out its climate plans last October, it said it would boost investment in gas through technological innovation and green development and form a “multi-energy system” that would oil and gas complement low-carbon and clean initiatives.

Cnooc meanwhile has delved into carbon-neutral LNG trading. China’s largest LNG importer was one of the first companies to import a carbon-neutral cargo – in June 2020, its LNG importing subsidiary signed an agreement with Shell Eastern Trading for delivery of its first two carbon-neutral LNG cargoes to the Chinese mainland.

Three months later, Cnooc received its first shipment of carbon-neutral LNG from Total, delivered from Ichthys LNG in Australia to southern China’s Dapeng terminal. Last year Cnooc procured five carbon-neutral cargoes from Shell and Total that were offset by carbon credits of about 1.12mn metric tons (mt) of CO₂e for the whole life-cycle of the shipments – including production, liquefaction, shipping, regasification, and end-use.

The NOCs may be able to spin their pledges to go greener via cleaner-burning gas as a net positive while the main energy in China remains coal. But it will potentially open them up to accusations that they are willfully misinterpreting the climate goals to suit their own agendas.

And with discussions over the latest five-year plan for China’s economy in full swing, bureaucrats who are gearing up for important annual political meetings in early March will be aware the NOCs have a vested interest in ensuring the country’s energy transition is as gradual as possible.

Betting on gas may not be a sure thing either. Achieving carbon neutrality by 2060 suggests a faster than previously planned decarbonisation will take occur in China over the next decade, which could undercut political support for gas sooner than expected. The Chinese government already looks on course to achieve two climate change-linked targets ahead of schedule. First, non-fossil fuels are anticipated to contribute half of China’s power generation by 2028 – two years ahead of the official target set by the state economic planner.

And second, greater use of renewables to produce electricity will drive out coal, helping to ensure that China’s carbon emissions peak by 2025. That is five years earlier than the country committed to when it signed the Paris Agreement.

Oil clings on

While the Chinese majors are publicly promoting gas, they have not entirely given up on oil either. At an industry event in Beijing in early December, CNPC – the parent of PetroChina – predicted Chinese oil demand would peak at 740mn mt during 2025-2030. This would be equivalent to 14.9mn barrels/day, or 1mn b/d higher than CNPC’s estimate in 2016.

At the same event, CNPC researchers argued that crude has an important role to play in China’s geopolitical strategy. One particular argument claimed increasing crude production and refining did not contradict Xi’s 2060 vision because China may choose to put some oil into storage and also a growing share of the new capacity will be used for petrochemicals.

The second point demonstrates how in addition to increasing gas production, China’s oil companies are shifting more of their businesses to refining and chemicals manufacturing. Over the next five years 10 mega-refining projects will come online with combined processing capacity of more than 200mn mt/year. The country’s total refining capacity is set to grow to 1bn mt/yr by 2025, according to CNPC.