China Firm Passes Exxon in Oil Production

First Apple and now China beats Exxon at something. Just not a good year for Exxon!

After Apple took away Exxon Mobil's championship title as largest market cap company in the world, China (with her 'apparently' slowing economic growth) felt it funnier to also step in and take away another one. - Leland National Gold Exchange (RealMoneyReport.com)

Exxon Mobil is no longer the world's largest publicly traded producer of oil. That title now goes to PetroChina Co. Ltd., a 13-year-old Chinese company that was formed by the Chinese government in order to secure more oil for the nation's booming (yes, 'BOOMING') economy. Yesterday, PetroChina announced that it pumped out 2.4 million barrels a day last year, which surpassed Exxon's figures by 100K. The company's output increased by 3.3% in 2011, whereas Exxon's fell by 5%.

PetroChina has grown quite rapidly over the last decade and the culprit responsible for this is their aggressive two-pronged attack...

First, by squeezing whatever it can get from China's aging oil fields, PetroChina has grown much - pumping everything it can from reserves in China, which are estimated to contain over 6.5 billion barrels. Thousands of oil wells have been drilled across the nation's vast northern grasslands and some of these fields are quite old by industry standards; dating back close to the start of China's communist government in the 1950s. It is this commitment to aging fields that greatly distinguishes PetroChina from even the largest of its Western rivals. Exxon and other major oil companies usually sell their aging low-performing fields or just put them out of commission.

Interestingly there are numerous studies and statistics describing how the average Chinese family saves up a lot more money and spends a lot less than the average American family. Apparently, oil is no different for PetroChina! Maybe we can learn a thing or two from this "savings first" mentality...

The second method lending to the company's growth is how it outspends Western companies in acquiring additional petroleum reserves. PetroChina has been on a fervent shopping spree obtaining new reserves in Iraq, Africa, Australia, Qatar and Canada. Since 2010, the company's acquisitions have actually totaled around $7 billion, which is twice as much as Exxon according to data provider, Dealogic. In fact, there are many other Chinese companies becoming deal-makers around the globe too. Total acquisitions by Chinese energy firms skyrocketed from less than $2 billion between 2002 and 2003, to nearly $48 billion in 2009 and 2010, according to the International Energy Agency. And more often than not, these companies are paying above the industry average to get those deals done.

Of course the West is probably getting a bit intimidated by this, as can be witnessed by prior actions. In 2005 for example, CNOOC Ltd., a company that was mostly owned by the Chinese government attempted to buy American oil producer Unocal. So U.S. lawmakers worked to block the deal by asking President Bush to investigate the role the Chinese central government played in the process. Chevron Corp. then eventually bought Unocal for $17.3 billion.

I suppose 'largest publicly traded producer of oil' was a title worth relinquishing for Exxon, considering how almost every other major oil company in the world is aggressively pursuing new finds to replace their current wells. Analysts say that Western oil firms like Exxon Mobil have been more conservative than the Chinese by paying more attention to their bottom line and investor returns. With oil prices up by 19% in 2011, Exxon still made a decent profit without having to increase its production. Whereas in 2009 and 2010, PetroChina's profit margins for its exploration and production business were only about two-thirds that of Exxon Mobil's. Also, its stock price has climbed less than 1% in the past year, while Exxon Mobil Corp.'s stock enjoyed a 3.7% rise.

PetroChina has a different agenda it seems. Since the Chinese government owns 86% of its stock and the country needs and uses just about every single drop of oil that PetroChina pumps, its demand for gasoline and other petroleum products is projected to double between 2010 and 2035. Energy historian Dan Yergin states, "There's a lot of anxiety in China about the energy question. It's just growing so fast."

To keep things in perspective, however, I should note that while PetroChina dominates other PUBLICLY traded companies in oil production, it doesn't measure up so well against national oil companies like Saudi Aramco, which produces almost 8 million barrels a day. Also, Exxon is still the largest publicly traded energy company when counting the combined output of both oil and natural gas - PetroChina ranks third behind Exxon and BP in this regard.

As for the present and future, PetroChina wants to continue building its momentum in 2012. "We must push ahead," said PetroChina chairman Jiang in January. Fortunately, in the long term, this global Chinese expansion can bring benefits to the U.S. and other economies. By developing as many oil wells as possible, especially in politically unstable regions like Iraq and Africa, China will help expand and increase oil supply.

Personally, I welcome this strong interest in oil from China for two reasons. Firstly, as mentioned above, it will eventually increase global supply - maybe even lower the at-the-pump prices for filling up my American gas-devouring muscle car. But secondly, it can help China's economy during a time when all eyes seem to be judging the country for its 'slow expansion' and other overly-exaggerated doom-and-gloom accusations. I think these allegations are doing unnecessary harm to dependent commodity-based companies and commodity prices at a time when everyone should be purchasing industry-related safe haven instruments.

Ever so Watchful,

- Chris

RealMoneyReport.com

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