Oil and Gas price crisis is not a new phenomenon; previous instances in 1970s and 1980s had resulted in skyrocketing of oil prices. But the issue is making headlines because of the scarcity of the resource, this means that such emergency will manifest later on too. The statistics does not support the preposition altogether though with better technology and expertise in the field of oil extraction and other conventional oil resources, the oil reserves have increased by 60% of what they were about two decades ago and the production of oil has gone up by 25% too. The current crisis can be attributed to the sudden emergence of the US, as its production to a half a century high. This has put pressure on the OPEC countries which house maximum of the world’s oil reserves. Since these questions their supremacy in the oil industry OPEC has not budged and reduced its production. This has created a competitive environment in the industry by achieving record low prices per barrels. Future Estimates put china as one of the biggest consumers of oil with an increase in demand by 9.4 million barrels per day by 2030. The regions with spurting refinery capacities are OPEC nations, India. US and China. This spells out an excellent opportunity for capacity augmentation as the consumption trends will increase in these regions especially Asia. Estimates also say that several fields in China are yet to reach their peak output.
The Company in focus here is not a part of the Major two geographies discussed above i.e. the US and the OPEC, Sinopec is a Chinese oil and gas company based in Beijing, it is a state owned company and in terms of the revenue generated, it is one of the largest oil companies in the world. Apart from oil and gas refining and exploration Sinopec is also into production and sales of petrochemicals, chemical fibres, chemical fertilizers, and other chemical products; storage and pipeline transportation of crude oil and natural gas; import, export and import/export agency business of crude oil, natural gas, refined oil products, petrochemicals, and other chemicals. Sinopec has made some good acquisition in Europe and Africa, specifically Africa (Angola, Nigeria, Cameroon, Egypt, Ethiopia, Sudan and Gabon).
The Chinese oil and Gas industry can be disrupted by some factors both internal and external.
- Brittle Politics: the Chinese Political Scenario is such that it has not opened it markets freely. The Government was slow to approve new IPO’s for promising start-ups. The financial system also inflated the bubble during the recent crisis as large sums of money were pumped into the market. The problem also arises with the inability to find investments with good returns which has started investment frenzies in various sectors, also the fact that when the markets do well the Medias project it as though it is the result of the financial measures taken by the government. Now that it‘s falling the regulators want to shore up the leaderships reputation.
- The Structure of the Markets: the communist government has never minced its words while describing the feeling of distrust for the market forces. Therefore, the markets have played a smaller role in China. The amount available for trading in Chinese markets is a third of the GDP, compared to 100% in developed countries. Hence a panicked response to the July crisis will only cast a doubt on the minds of the investors about the government’s stance over such crisis situations.
External Factors: Competition:
Even though the growth in capacity and refining capabilities is immense in China, OPEC countries still have the maximum reserves and have strength to control prices. The balance between returns on capital and host countries’ interests is a delicate matter. A number of countries, for political reasons, have limited the access of international companies, if China has to have a view of the bigger picture, it has to relax a lot of regulations. Also the emergence of US as a strong produces will also hamper China’s market. The current weakness in the oil market, which stems in large part from strong growth in tight oil production in the US, is likely to take several years to work through.
The current scenario pegs china in a favourable position in the oil and gas industry against its contemporaries in Asia. The main competition will arise only from US and the OPEC. I feel, Sinopec with its current position is a favoured investment, as it has decent offshore projects as well the capability to build on the existing local demand.