What Investors Want to Know: Energy Transition at Chinese National Oil Companies
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Corporates
Oil and Gas
APAC
What Investors Want to Know: Energy
Transition at Chinese National Oil Companies
Transition Roadmap Announced; Limited Financial Impact
Strategies Linked with China’s Climate Goals
China, as the largest contributor to global carbon dioxide (CO2)
emissions, has pledged to limit global warming to 1.5 to 2.0 degrees
Celsius above pre-industrial levels jointly with other nations, as set
out under the 2015 Paris Agreement. The country officially
announced in September 2020 its goal to reach a CO2 emission
peak by 2030 and to become CO2 neutral by 2060.
China’s three national oil companies (NOC) have pledged to support
the government’s climate objectives by initiating their own energy
transition roadmaps, without compromising national energy
security.
The three NOCs are China National Petroleum Corporation (CNPC,
A+/Stable, Standalone Credit Profile (SCP): aa-) and its key
subsidiary, PetroChina Company Limited (A+/Stable, SCP: aa-),
China Petroleum & Chemical Corporation (Sinopec) (A+/Stable,
SCP: a-) and CNOOC Limited (CNL, A+/Stable, SCP: a).
From Pure-Play to Integrated Energy
The Chinese NOCs aim to transform their oil and gas (O&G)
business models into integrated energy companies. We expect such
adjustment to take time, as fossil fuel remains a large part of China’s
energy mix in the absence of immediate cost-effective substitutes.
The pace of energy transition also hinges on external factors,
including technological progress, demand-side factors as well as
government policy that supports the development of infrastructure
and the adoption of new technology.
This report explores key questions about the energy transition
Related Research roadmap of Chinese NOCs.
Fitch Ratings 2022 Outlook: APAC Oil & Gas (December 2021) What Role do Chinese NOCs Play in the Country’s Energy
Spotlight: Rising Global Gas Prices for APAC Energy Companies Transition?
(November 2021) How are NOCs Positioned to Meet CO2 Neutrality Goals?
Spotlight: APAC Oil and Gas (October 2021)
How Do the Decarbonisation Strategies of Chinese NOCs Differ
China Oil & Gas Watch: 1H21 (August 2021) From Global Peers?
Oil & Gas and Chemicals – Long-Term ESG Vulnerability Scores
How Does Fitch View Associated Energy Transition Risk Among
(January 2021)
Chinese NOCs?
How Will the Energy Transition Affect the Ratings of Chinese
NOCs?
Analysts
Michelle Leong
+ 852 2263 9611
michelle.leong@fitchratings.com
Ding Yi Ying
+86 21 6898 7986
ding.yiying@fitchratings.com
yiying.ding@fitchratings.com
What Investors Want to Know │ 4 January 2022 fitchratings.com 1
Corporates
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What Role do Chinese NOCs Play in the China's CO2 Emissions Based on Energy Mix
2019 Gas
Other
Country’s Energy Transition? 5%
2%
China aims to hit its CO2 emission peak before 2030 and to become Oil
CO2 neutral by 2060, as announced by President Xi Jinping at the 20%
September 2020 United Nation General Assembly. In addition,
China’s State Council issued a peak-CO2 action plan in October
2021. The plan outlines its target of boosting the share of non-fossil
fuels in the country’s total energy mix to 20% by 2025, 25% by 2030
and to exceed 80% by 2060 to attain CO2 neutrality (2020: 15%) Coal
73%
O&G is China’s second-largest CO2 emission source after coal,
Source: Fitch Ratings, Wind Info
accounting for about 24% of the country’s CO2 emissions. NOCs
play a central role in ensuring O&G supply, as they are tasked with NOCs' Scope 1 and Scope 2 Greenhouse Gas Emissions
safeguarding China’s energy security. NOCs maintain strong Sinopec CNOOC Petrochina
control of domestic O&G value chain, account for the majority of (m tonnes of CO2 equivalnet)
domestic production and are key O&G importers, while maintaining
200
ownership of major O&G-related infrastructure assets, such as
refineries, liquefied natural gas terminals and the retail network. 150
China’s NOCs have since aligned their long-term objectives with 100
those of the government. CNPC and Sinopec has announced plans 50
to peak CO2 emissions earlier than 2025 and achieve net-zero by
2050, while CNOOC endeavors to meet the government’s climate 0
2017 2018 2019 2020
objectives. Note: 2017, 2018 data not available for Petrochina
Source: Fitch Ratings, companies
We expect the shift in China’s long-term energy mix to be gradual,
with the NOCs adjusting long-term strategies to meet regulatory Greenhouse Gas (GHG) Emission Categories
and structural demand changes as the transition picks up pace. We Scope 1 Direct emissions from company-owned and
believe fossil fuel will still be a main energy source in the medium controlled resources.
term, given the lack of immediate cost-effective replacements, Scope 2 GHG emissions released into the atmosphere
leading NOCs to continue prioritising energy security by boosting from the indirect consumption of an energy
domestic production under China’s 14th Five-Year Plan (2021- commodity (such as electricity, steam, heating &
2025) amid the country’s still-high O&G import dependency. cooling) by the reporting company.
However, NOCs, which have low financial leverage, are in a strong Scope 3 All other indirect emissions caused along an
position to undertake investments in renewables to diversify their organisation’s value chain, including emissions
fossil-fuel focused portfolio mix. They also play a part in from product consumption by end-users.
accelerating the country’s energy transition pace together with
other state-owned power-generation companies, although these How are NOCs Positioned to Meet CO2
are generally burdened by high leverage.
Neutrality Goals?
China's CO2 Emissions
(m tonnes)
Chinese NOCs are initially leveraging on core competencies during
10,600 the early phase of the energy transition. Broad long-term objectives
10,400 have been identified, but specific targets are likely to be revealed
10,200 over the medium term. Announced strategies thus far include
10,000 boosting gas production, cutting CO2 emissions in the existing
9,800 value chain and identifying opportunities in areas such as hydrogen
9,600 and renewable energy.
9,400 We believe investments in existing fossil-fuel businesses that have
9,200 lower CO2 footprints, such as gas, will has a higher rate of success
9,000 in the medium-term than expanding hydrogen businesses or other
2015 2016 2017 2018 2019
efforts, such as decarbonising through CO2 capture and storage,
Source: Fitch Ratings, Wind Info
which can be limited by technological bottlenecks and are vague in
terms of economic returns.
What Investors Want to Know: Energy Transition at Chinese National Oil Companies │ 4 January 2022 fitchratings.com 2Corporates
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Chinese NOCs’ Selected Decarbonisation Targets Decarbonisation Efforts
CNPC, CNOOC and Sinopec are also exploring the implementation
CNPC and
of decarbonisation efforts across the existing value chain, similarly
Petrochina Sinopec CNL
to global O&G peers. This includes CO2 capture and storage (CCS)
CO2 2025 2025 Meet and capture, utilisation and storage (CCUS) projects to remove
emission government’s
GHG emissions. Globally, most of these projects are still under
peak 2030 target
planning or early stages of commercialisation and are yet to become
CO2 Near CO2 neutral 2050 Meet economically attractive. We expect the cost of deployment to fall as
neutrality by 2050 government’s
technological breakthroughs gather pace, encouraging wider
2060 target
deployment, but the timing of this is uncertain and the contribution
Emission 50% cut in methane 12.6 million tonnes in 1.5 million to CO2 reduction levels is likely to be small for the next three years.
reduction emission intensity CO2 cuts between tonnes in CO2
target by 2025 from 2019 2018-2013 cuts between New Hydrogen Businesses
level 2021-2025
Sinopec aims to become China’s leading hydrogen company and has
Gas 55% of production 42bcm in 2022 35% of
earmarked CNY30 billion to develop its hydrogen business in the
mix by 2025 (2020: 30bcm) production mix
(2020: 50%) by 2025 next five years. Currently, the company produces grey hydrogen as
(2020: 20%) a by-product from its refineries; this accounts for about 14% of the
country’s total hydrogen output. Producing grey hydrogen is a
Renewable One third of 120 million cubic 1.5 GW of
target production metre geothermal offshore wind CO2-intensive process, but emissions can be controlled with the
consisting heating service area installed by end- use of a CCS system, turning it into blue hydrogen. Sinopec also has
renewable energy by 2023 2025, securing four green hydrogen projects in the pipeline, including a solar-to-
by 2035; mainly 7,000 off-grid 5-10 GW of hydrogen project that aims to produce 20,000 tonnes of renewable
solar and photovoltaic power offshore wind hydrogen a year by mid-2023.
geothermal stations by 2025 power by 2025
We expect hydrogen production to stay reliant on fossil fuels in the
Related Low CO2 energy to CNY30 billion Up to 10% of medium-term amid rising investment in CCS technology, but the role
capex account for a third investment in total capex by of renewables should expand faster after 2030. KPMG reports that
of overall spending hydrogen between 2025 green hydrogen costs range at USD2.5-6.0/kilogram, against grey
by 2035 2021-2025
hydrogen costs of USD1.0-2.0/kilogram, while blue hydrogen costs
List is non-exhaustive are estimated to be at the lower end of green hydrogen costs. We
Source: Fitch Ratings, companies, media expect the cost of both blue and green hydrogen to drop over time
as technology improves and expansion leads to economies of scale.
Higher Gas Mix in Portfolio
Sinopec can leverage its large retail network of more than 30,000
Natural gas is estimated to emit 50% less CO2 than coal by the US fuel stations to roll out its nationwide hydrogen stations plan. One
Energy Information Administration and has been identified as a of its targets is the construction of 1,000 hydrogen stations with a
‘transition fuel’ for the next two decades in anticipation of total capacity of 200,000 million tonnes per annum. The company
competition with low-CO2 sources and batteries. We expect also plans to achieve one million tonnes of green hydrogen
China’s natural gas consumption to maintain a CAGR of 6%-7% production capacity by end-2025.
during the country’s 14th Five-Year Plan, driven by coal-to-gas
switching for heating and industrial usage and power generation Petrochina has announced similar plans, although on a smaller
needs. We only expect demand to peak from 2040. scale. Its venture is supported by its readily available refinery by-
products and large retail network, which provides an advantage
CNPC, CNOOC and Sinopec had proven developed gas-reserve against new market entrants.
lives of 5-10 years at end-2020 and we expect the NOCs to
We regard technological bottlenecks and undeveloped
continue investing in this segment. CNPC plans to boost its gas mix
infrastructure as a major constrain to scaling up hydrogen
to 55% of total production (2020: 50%). CNOOC aims to increase
businesses in sectors where it has limited presence, such as
its gas mix to 35% (2020: 20%), while Sinopec intends to boost its
transportation and power generation. We believe such technology
gas output to 42 billion cubic metres (bcm) by 2023 (2020: 30 bcm).
also requires policy support and subsidies to incentivise adoption at
NOCs' Share of Gas Production and Proved Reserve Life the early stage of transition. This could also constrain the pace of
Petrochina (LHS) CNOOC limited (LHS) decarbonisation among oil majors.
Sinopec (LHS) Sinopec (LHS)
Petrochina (RHS) CNOOC Limited (RHS) Diversifying Into Renewables
(% share) (Years) The development of renewable businesses is a key objective in
50 15
China’s energy transition roadmap, but disclosure of long-term
40
10 renewable targets among NOCs is sparse.
30
20 We expect more measures to be revealed over time, but thus far,
5
10 NOCs’ medium-term renewable installation targets are smaller in
0 0 scale than those of large domestic power producers. The NOCs are
2016 2017 2018 2019 2020 2021f mainly capitalising on available land resources and technological
Source: Fitch Ratings, companies
What Investors Want to Know: Energy Transition at Chinese National Oil Companies │ 4 January 2022 fitchratings.com 3Corporates
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capability to expand the segment; for example, CNPC and Sinopec We believe regulatory pressure to cut CO2 emissions in most parts
are exploring new-energy business opportunities, including of Asia is lower than in Europe, given Asia’s emerging economies
developing geothermal, wind and solar power projects among their that call for greater O&G consumption.
vast onshore acreage. CNOOC also plans to build an offshore wind
Higher Oil Exposure Raises Earnings Vulnerability
power plant in light of its offshore capabilities.
We expect producers with a high reliance on liquids in their energy
Initiatives among the NOCs also take the form of investment, rather mix to be the most affected under a scenario where global peak oil
than owning and operating projects, to minimise execution and occurs in the late 2030s and demand gradually falls thereafter,
operational risks, while capitalising on the core expertise of resulting in excess capacity and falling oil prices. In contrast, gas
renewable energy producers. We believe NOCs’ strong balance demand is likely to continue rising with limited disruption till 2040.
sheets support their ability to scale-up renewable businesses more
so than at local power producers’, which tend to be more leveraged. CNPC, CNL and Sinopec have high exposure to oil in their
This will be especially so when the energy transition picks up pace. production mix, although CNPC is likely to have the lowest share of
oil within its portfolio by 2025 given its announced plans.
Total Renewable Energy Capacity of China's Big-Five
We believe a rising share of natural gas in an oil-dominant
Independent Power Producers
production mix will smooth producers’ earnings profiles, as natural
(GW) 2020 (LHS) 2025E (LHS) CAGR (RHS) (%) gas is typically sold under long-term contracts. In addition, China’s
160 25
regulated pricing for piped gas lowers volume and price volatility.
20
120 Integrated Operations More Defensive
15
80 CNPC and Sinopec are integrated energy producers, with varying
10 degrees of integration across the O&G value chain. We believe the
40
5
companies’ integrated position, with exposure to refining,
marketing and petrochemicals, give rise to more diversified cash
0 0 flow and lower earnings volatility compared with pure upstream
China Energy China China State Power Datang
producers, especially once oil demand falls. CNL, which is mainly an
Investment Huaneng Huadian Investment International
Corporation Group Co., Corporation Corporation Power upstream company, is more vulnerable to falling oil demand and
Ltd. (A/Stable) Ltd. (A/Stable) Limited Generation prices, but is buffered by its low-cost position.
(A/Stable) Company Ltd
Source: Fitch Ratings, companies, media CNPC and Sinopec are also deepening their petrochemical
capabilities to reduce reliance on simple refined-oil products, which
How Do the Decarbonisation Strategies of are facing oversupply in the domestic market and are likely to be
substituted as electric-vehicle adoption accelerates over the longer
Chinese NOCs Differ From Global Peers? term. Cash flow streams would also benefit from greater
petrochemical product diversity due to weaker linkage to oil prices.
The decarbonisation strategies of Chinese NOCs are comparable
with those of global peers, which aim to transform into integrated Petrochina's EBITDA Breakdown
energy companies rather than focusing on O&G. This is to be 2020 Marketing
Refining and 6%
achieved by pivoting towards gas over the medium term, while
Chemicals
increasing renewable energy generation in their business mix. All 8%
European O&G majors aim to achieve GHG emission neutrality by
2050, similarly to the goals of CNPC and Sinopec.
Natural gas
Chinese NOCs have not announced specific targets to cut oil output, and pipelines Exploration and
17% Production
unlike some global peers. We believe this is due to Chinese NOCs’
69%
strategic function of maintaining energy security, especially as China
is still highly dependent on oil imports, compounded by the lack of
immediate cost-effective substitutes. We expect China’s oil demand
to rise by low single digits, peaking at 730 million-750 million tonnes Source: Fitch Ratings, Fitch Solutions, Petrochina
in late 2025. Meanwhile, European peer, BP plc (A/Stable), expects to
shrink its hydrocarbon output by 40% by 2030, while Royal Dutch Sinopec's EBITDA Breakdown
Shell plc (AA-/Stable) expects its oil output to fall by up to 2% a year. 2020 Refining
13%
How Does Fitch View Associated Energy
Marketing
Transition Risk Among Chinese NOCs? Chemical
35%
We already incorporate the medium-term impact on demand and 22%
prices arising from China’s energy transition in NOCs’ ratings, as
well as business and operational changes. We expect the transition
to take place over the long term, with risks varying among O&G Upstream
companies. These depend the region of operation, energy mix (gas 30%
versus liquid) and integration level within the value chain. Source: Fitch Ratings, Fitch Solutions, Sinopec
What Investors Want to Know: Energy Transition at Chinese National Oil Companies │ 4 January 2022 fitchratings.com 4Corporates
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Stable Renewable-Energy Business Boosts Debt Capacity China NOCs' Free Cash Flow
Renewable energy businesses, such as solar, wind and geothermal, Free cash flow (LHS) Free cash flow margin (RHS)
(CNYbn) (%)
typically yield lower return than O&G businesses, but this is 30 7
balanced by lower price volatility and upfront capital outlay. Wind 5
and solar power operations may have greater intermittent risks, but 0
3
enjoy higher priority in power dispatch and limited fuel costs.
1
The more stable earnings profile of renewable-energy businesses -30
also allows for a higher tolerance of debt capacity compared with -1
O&G businesses, even if investment accelerates. -60 -3
2021F 2022F 2023F 2021F 2022F 2023F 2021F 2022F 2023F
How Will the Energy Transition Affect the Petrochina Sinopec CNOOC
Source: Fitch Ratings, Fitch Solutions, companies
Ratings of Chinese NOCs?
We also believe capex on new segments is flexible and will hinge on
We do not believe that announced strategies will affect Chinese
the success of the new initiatives. We expect NOCs to prioritise
NOCs’ ratings, which already incorporate transition-related
investment returns from any large-scale projects.
changes that can be reasonably expected to occur over the medium
term. The ratings of NOCs and their subsidiaries are ultimately NOCs are also likely to maintain strong funding access due to their
equalised with or capped by the sovereign rating (A+/Stable), based close government linkage and strong market positions. Chinese
on close government linkages. NOCs and their subsidiaries are active onshore and offshore bond
issuers, with a record of low financing costs.
Strong Government Incentive to Provide Support
We do not expect NOCs’ decarbonisation plans to dilute their close NOCs' Offshore Coupon Rate
government linkages, which are premised on their strategic roles in Bond issurance totalled USD30 billion in 1H21
5 year
maintaining national energy security while executing the country’s (%)
energy transition goals. This supports our view of a strong 5
government incentive to provide support should a NOC default. A 4
default could bring about adverse social and political repercussions, 3
including supply disruption of O&G products. We also believe a 2
financial default would severely damage offshore funding access for 1
other central state-owned enterprises. 0
Jan 16
Jan 17
Jan 18
Jan 19
Jan 20
Jan 21
Jul 16
Jul 17
Jul 18
Jul 19
Jul 20
Jul 21
Low Leverage, Strong Funding Access Support SCPs
We expect NOCs’ SCPs to be supported by low leverage, which Source: Fitch Ratings, Wind Info
provides a strong buffer against long-term challenges caused by
NOCs' Onshore Coupon Rate
revised strategies and demand/supply disruption brought on by the
Rates increased in 1H21
energy transition, especially if it picks up pace. We forecast 1 year 3 year >5 year
upstream O&G production and refining to dominate NOCs’ (%)
5
performance till 2025, with risks from the financial performance of
4
new-energy businesses mitigated by their small scale.
3
We also believe leverage pressure from higher capex will be 2
manageable. A large proportion of spending still relates to gas
1
production, storage and import facilities, refining and
0
petrochemical expansion. Capex allocated for new business
Jan 16
Jan 17
Jan 18
Jan 19
Jan 20
Jan 21
Jul 16
Jul 17
Jul 18
Jul 19
Jul 20
Jul 21
remains low, at around 5%-10%, although this should rise as NOCs
fulfil their CO2-neutral commitments. Chinese NOCs tend to fund Source: Fitch Ratings, Wind Info
capex via internal cash generation and we expect this to continue
amid still-strong cash generation from fossil-fuel businesses.
Chinese NOCs' FFO Net Leverage
CNPC Petrochina Sinopec CNOOC
(x)
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
2019
2020
2021F
2022F
2023F
Source: Fitch Ratings, Fitch Solutions, companies
What Investors Want to Know: Energy Transition at Chinese National Oil Companies │ 4 January 2022 fitchratings.com 5Corporates
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