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Sinopec shuts-in four production sites

As the oil price slump continues amid OPEC’s battle to maintain market share, the group’s goal of eliminating high-cost production appears to be working, but perhaps not where OPEC had originally hoped.

Sinopec (ticker: SNP), China’s second largest crude oil producer, announced today that the company will be shutting in four of its least profitable sites due to low oil prices. The four sites are located at its 70-site Shengli oilfield in Shandong province from which the company has been producing for more than half a century.

“At current oil prices, the shutdown could save 130 million yuan ($19.9 million) of costs and reduce losses by 200 million yuan,” the company said, according to South China Morning Post. The company added that low oil prices reduced the field’s economic reserves and it could only survive by shedding high-cost production capacity.

“Sinopec has been maintaining output in its aging oil fields by over-investing and this is no longer possible in the current oil price environment,” said Neil Beveridge, a Hong Kong-based analyst, who estimates the company needs oil to stay above $50 a barrel to break even, told Bloomberg. “We expect Sinopec’s domestic oil production to drop 5 percent to 10 percent this year as it shuts down aging high-cost oil fields.”


China National Offshore Oil Company Rig

CNOOC Offshore rig

Not the first Chinese producer to cut production

China National Offshore Oil Corporation (CNOOC, ticker: CEO) announced in January that it would be cutting its production target for the year as well. CNOOC, China’s largest offshore producer, said that it plans to lower production 5% from 2015 levels, and cut capital spending roughly 12%.

Li Fanrong, CNOOC’s CEO, said oil prices below $30 per barrel make operations “very difficult.” Fanrong said the company would analyze cash flow on a field-by-field basis and “be more cautious when making major investments.”

“I hope we can cut costs faster than the oil price drops,” he said, “but sometimes that’s not realistic.”

China’s production could slip 3%-5% from last year’s record high of 4.3 MMBOPD, the first drop in seven years, according to Nomura Holdings and Sanford C. Bernstein & Co.

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