Portfolio Optimization and Restructuring Strategies for NOC under the Declining Oil Price Environment
Authors: Wang Zuoqian , Guo Xiaofei , Zhai Guanghua , Qu Haixu , Huang Shunv , Zheng Daiye , Mohd Kassim Azlan 
Published: October 2015

Since June 2014, the International oil price has been declining and fell below 50USD per barrel by the end of 2014. Although the price has partially recovered in the first half of this year, it hasn't shown signs of further recovery. The high uncertainty of the oil price coupled with the bearish forecast on the capital market exerts a significant impact on oil company operations, and the entire oil industry is facing the risk of reshuffling.

At the China National Petroleum Corporation (CNPC), an exercise of portfolio optimization and restructuring has been carried out to optimize its overseas assets.

First, a sensitivity analysis was carried out to measure the economic impact of price fluctuation, workload and investment level changes on projects under different fiscal terms such as concessionary, PSC and TSC.

Next, based on the economic evaluation results and initial development plan for the projects, portfolio optimization and restructuring were carried out in two steps as follows. Step 1: Optimize the existing projects to meet company strategic goals by controlling the investment ceiling and delaying the on-stream time of large-scale projects without considering assets divestiture and acquisition. Furthermore, more emphasis was put on the projects with higher liquid production ratio to take advantage of the higher economic return of liquids compared to gas to improve the overall portfolio economic results.Step 2: Include divestment and acquisition options based on the results from the Step 1 optimization. Divestment of high risk, low return assets such as unconventional oil and gas, oil sands and deep water projects were included as whole project sales or equity dilution. Conventional onshore projects or potential EOR projects were set as acquisition targets to meet the national energy security requirements and to ensure the sustainable development of the company.

The conclusions of the paper are the following: For CNPC's overseas oil and gas assets, under the current conditions of declining oil price and controlled investment in the five-year plan, large-scale projects under Technical Service Contracts (TSC) and projects with strong profitability will take priority for investment. This is to secure the contribution of these projects to the overall company cash flow. For PSC projects, investment needs to be controlled and the return on investment needs to be stabilized. For concessionary projects which are most impacted by oil price, investment will be reduced and capital outlay will be delayed.The investment sequence for proposed production projects needs to be controlled according to the optimization results.The divestment candidates need to be confirmed and the divestment strategy will be quantified.The Scale and degree of acquisition and participation of new projects will be estimated.Finally, desired optimal investment portfolios and business strategies will be selected in order to provide a solid base for management decision-making under the low oil price environment.