Bidness Etc discusses how European oil majors are impacted by the slowdown in the Chinese economy

By: Micheal Kaufman: Sep 25, 2015

The slowing Chinese economy has impacted the overall world economy and various other sectors. According to a Moody’s Investor service report EMEA (Europe, Middle East, and Africa)’s mining sector is totally exposed to the economic crisis, followed by the oil and gas sector. Shipping, chemicals, and auto sector are considerably impacted while some other EMEA sectors including tobacco, telecoms, real estate, healthcare, and railways will be marginally impacted, since they are more regionally focused and their credit worthiness is not genuinely exposed.

On the other hand, sectors like manufacturing, retail, media, utilities, and consumer products have moderate exposure to China. Weak demand for consumer products may result in a shift in consumption patterns for certain companies. Utility sector will be affected by a fall in coal and gas prices. Recently, Moody’s revised it GDP growth forecast for China to 6.3 % for 2016 from 6.8% and believes that the economy will grow at a steady rate of 6.8% in 2015.

EMEA-based Oil and Gas sector has moderately less direct exposure to an economic slowdown in China, but the weakening economy will indirectly affect the sector due to the crisis broader impact on oil prices.

Most of the companies have no or very little physical presence in China as compared to their overall global operations. Companies like Total SA (ADR) and Royal Dutch Shell plc. (ADR) (NYSE:RDS.A) currently have very little upstream investment measured in volume and revenues, and most of their exploration activities in China are at an early stage.

In 2014, Total’s liquid and gas production in China was around 1%, while its pipeline gas sales were about 2%. On the other hand BP plc. (ADR) (NYSE:BP) invested around $112 million in exploration in China about 3% of its overall investment.

Moreover, Gazprom neft’ OAO (ADR) of Russia is more exposed to current Chinese economic slowdown. The Russian company in 2014 signed a 30 year contract with China National Petroleum Corporation to export gas from Eastern Serbia to China. According to the terms of the contract, Russia will provide an annual 38 billion cubic meters of natural gas to China. The terms of the contract related the pricing to oil prices as per the oil-linked formula. Thus, a persistent downfall in oil prices will result in lower prices and less revenue to the company. Eventually, this could hurt the project feasibility and undermine the development.

A weaker demand from China will indirectly affect the oil and gas companies and will ultimately affect the overall global oil prices. Moreover, reduced demand for LNG, refined products, and petrochemicals will result in lower margins from operations for the companies. The decline in oil prices should be a major concern for EMEA oil and gas companies.

In the recent past, many EMEA oil and gas companies invested in China to offset the ongoing economic crisis prevailing in the world and to lower production cost. The ongoing crisis may cause the companies to change their investment strategies in China.

Oil prices have been declining for the past one year. The price fell by more than 50% due to weak demand and over production and the oil and gas sector continues to crumble. Analysts believe that the oil prices will further decline as a result of continuing Chinese economic crisis, and EMEA oil and gas sector will continue to struggle.

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