Oil and Gas Industry: "The Liar Creator" Conoco launched a Big Wave

The State Oceanic Administration announced that ConocoPhillips failed to thoroughly investigate the risk of oil spills and did not completely block the oil spill source. The Penglai 19-3 oilfield was completely shut down, and the oil spill was a responsibility of operator ConocoPhillips. Investors worried about whether CNOOC needs to bear the liability and amount of compensation in the accident and when the Penglai 19-3 oilfield can resume production.

CICC's September 6 research report pointed out that the impact of the oil spill accident in Penglai 19-3 Oilfield and the overall shutdown, how far is it? How far is it? The State Oceanic Administration announced that ConocoPhillips failed to thoroughly investigate the risk of oil spill and did not completely seal it Blocking the oil source, the Penglai 19-3 oilfield was completely shut down, and the oil spill was a responsibility of operator ConocoPhillips. ConocoPhillips must reorganize the "Oilfield Development Marine Environmental Impact Statement" and the "Oilfield General Development Plan" and gradually resume production after approval.

Investor's concerns:

1) Does CNOOC need to bear the liability for compensation in this accident? How big is the amount?

2) When can the Penglai 19-3 oilfield resume production and can daily production recover to the level of 102,000 barrels/day?

3) Is there a similar safety problem in other oil fields?

4) Can this year's production target be achieved?

Speculation:

1) The State Oceanic Administration has determined that ConocoPhillips is responsible for the oil spill accident and that the country will file an ecological claim against ConocoPhillips. Whether CNOOC may bear joint responsibility or not, it needs to be determined in accordance with the relevant laws and regulations and the production sharing contract signed with ConocoPhillips.

2) It is estimated that the total time of production suspension will exceed more than six months. As the Penglai 19-3 oil field has entered a slow production cut, it will not contribute new production in the next few years. If the period of production shutdown in 2012 does not exceed 4 months, it is still quite possible that the oil and gas production in the next year will achieve the original growth plan. The worst scenario: Assuming that Penglai 19-3 Oilfield will not be able to resume production next year, the impact on net production of CNOOC's equity will be 22.6 million barrels per year, which may be about 6% of CNOOC's annual production. Based on current oil price levels, costs and taxes, the full-year effect on earnings per share may be HK$0.18, which is about 9%.

3) The Penglai 19-3 oilfield was put into production in 2006. ConocoPhillips used a long-term and large amount of pressurized water injection in order to accelerate the production of crude oil, and the simultaneous exploitation of multiple oil layers damaged the stability of the formation and faults. The development plan of CNOOC's self-operated oil fields pays more attention to long-term and safe production, and it is different from ConocoPhillips' development measures. It is expected that other oil fields will have a relatively small likelihood of similar safety problems.

4) The complete shutdown of this field will result in an additional 5 million barrels of oil equivalent in CNOOC’s oil and gas production this year, and CNOOC’s annual production target may decline to 326-336 million barrels of oil equivalent. It is expected that the possibility of CNOOC’s achievement of the lower end of the new target will remain high, but under optimistic conditions, this year's oil and gas production will reach 336 million barrels of oil equivalent. Affected by the overall shutdown of the Penglai 19-3 oilfield, CNOOC's share price has dropped by 9%, which has already reflected the more pessimistic expectations of investors regarding the oil spill accident in Penglai 19-3 oilfield and its suspension of production. With the clear impact of the oil spill accident, The stock price will gradually rebound.

The average international crude oil price rebounded on a week-on-week basis, and the "Asian premium" is still at a high level. As US hurricanes affected crude oil production, U.S. consumer spending exceeded expectations and the market speculated that the Fed may launch a third round of monetary quantitative easing policy. WTI, Brent and the National Development and Reform Commission’s benchmark crude oil prices rose by 3-4% week-on-week. At present, Asian crude oil prices such as Minas, Duri and Cinta are still generally higher than those of other types of crude oil in the world. The premiums to Brent in the North Sea, Dubai in the Middle East, and WTI in the United States are 6-7 US dollars per barrel, 11-12 US dollars per barrel, and 33- 34 US dollars / barrel. The possibility of the recent reduction in the price of refined oil is gradually decreasing, and “de-stocking” has caused the wholesale gross profit of gasoline and diesel to continue to decline. The average moving price of the benchmark crude oil of the NDRC for 22 working days was US$110.8/barrel, which was 2.3% lower than the previous price adjustment benchmark (US$113.4/barrel). The 4% price adjustment condition has not yet been met.

Due to the rebound in international crude oil prices last week, the current price of the benchmark NDRC crude oil is now US$114.1/barrel, which is 0.6% higher than the previous price adjustment benchmark. The possibility of the recent reduction in refined oil prices is gradually decreasing. Since June, gasoline and diesel inventories have gradually declined, and wholesale prices of gasoline and diesel have also gradually declined from highs, and wholesale gross profit has continued to decline. In September, the autumn harvest of most of the major grain-producing areas in the country is about to start, and diesel consumption is expected to rebound.

The chemical segment “Oriental is not bright in the west”: Butadiene and acrylonitrile prices have fallen, but the profitability of polyolefins has improved, synthetic rubber prices have risen, and prices of **, PX, PTA and ethylene glycol have risen. With the declining demand in Europe and the United States, butadiene prices fell by 1,500 yuan/ton last week, up to 4%. In addition, the price of acrylonitrile fell by RMB 600/ton, or 4%, on a week-to-week basis. The gross profit of polyolefins continues to rise: Since the beginning of June, although naphtha prices have dropped by 10%, the prices of polyethylene, polypropylene and ABS plastics have increased by 2-4%, and the gross profit of polyolefins has risen by about 20%. The price of synthetic rubber rose by RMB 600-1,000/ton last week, with a range of 2-3%. Affected by the suspension of production of 700,000-ton PX units at Dalian Fujia Dahua and the repairs of other PX units, prices of **, PX, PTA, and ethylene glycol have risen in different ranges. The price of ethylene glycol has risen by 1,200 yuan/ton, or 10%, the highest increase.

Risks: The international crude oil price fluctuates greatly; the NDRC has, for the consideration of **, reduced the price of Chinese refined oil in advance; the production of the Penglai 19-3 oil field has been suspended for too long, CNOOC may incur significant compensation, and other oilfield production safety risks.