China’s state owned oil companies have spent years preparing for the possibility of major disruptions to global energy supplies, investments that are now helping Beijing manage the shock caused by the closure of the Strait of Hormuz.
Since 2018, Sinopec, PetroChina and CNOOC have invested hundreds of billions of dollars in domestic oil and gas production while expanding strategic storage capacity. Their long term focus on energy security has helped China maintain relatively stable fuel supplies despite disruptions to Middle Eastern oil routes.
The strategy has also come at a commercial cost. China’s oil majors have been required to invest heavily in domestic fields that are often more expensive to develop, while government controls on fuel prices and exports have limited their ability to benefit from higher international oil prices.
Building Domestic Production
China’s push for greater energy security intensified in 2018, when declining domestic oil production prompted Beijing to launch a seven year plan to accelerate exploration and drilling.
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Since then, Sinopec, PetroChina and CNOOC are estimated to have spent around 2.3 trillion yuan, or about $343 billion, on domestic projects, compared with roughly $56 billion overseas.
The investment has helped raise China’s domestic crude production to around 4.3 million barrels per day from lows of about 3.8 million barrels per day. The increase is significant because it is equivalent to roughly one tenth of China’s oil imports from Gulf producers.
Domestic natural gas production has also increased substantially, reducing pressure on liquefied natural gas imports. China’s LNG imports have remained below their pre pandemic peak, partly because rising domestic production has reduced the need for overseas supplies.
However, increasing domestic production has not been cheap. Many Chinese oilfields are technically challenging and require more expensive extraction methods. The average breakeven cost for PetroChina and Sinopec’s onshore oilfields is estimated at around $55 a barrel, compared with about $37 for US shale production.
Some domestic fields have even operated at losses in order to maintain production when prices fall.
Protecting Domestic Fuel Supplies
China’s energy security strategy extends beyond producing more oil. Beijing has also sought to build larger reserves and strengthen its ability to manage disruptions to international supply routes.
Strategic petroleum reserves and commercial storage facilities have provided China with an additional buffer during periods of market disruption. Diversified import sources have further reduced the country’s dependence on any single supplier or route.
This has become particularly important as conflict involving Iran has disrupted energy flows through the Middle East and placed pressure on global oil markets.
Rather than allowing domestic fuel prices to fully follow international prices, Beijing has imposed price controls and temporarily restricted fuel exports. The measures have helped protect Chinese consumers and industries from the sharpest effects of higher global prices.
But they have also limited the profits available to the country’s state oil companies.
Oil Majors Put Energy Security Before Profits
The priorities of China’s oil companies differ from those of many international oil producers.
Sinopec, PetroChina and CNOOC are commercial enterprises, but they also serve a broader national strategy. Their investment decisions are closely connected to Beijing’s objective of maintaining stable energy supplies and reducing China’s vulnerability to external shocks.
The government’s restrictions on fuel exports illustrate this tension.
China capped domestic fuel prices and imposed export restrictions in March as the energy crisis intensified. Although some restrictions have since been relaxed, the measures reduced the ability of Chinese refiners to benefit fully from higher international prices.
Sinopec, for example, recorded an estimated refining loss of 1.8 billion yuan in the second quarter.
By comparison, major international oil companies have benefited significantly from the rise in energy prices. ExxonMobil and Chevron reported strong profits, while international energy stocks generally performed better than their Chinese counterparts.
CNOOC and PetroChina nevertheless recorded record first half earnings, while Sinopec performed better than analysts had expected. Their relatively weaker share price performance reflects the different responsibilities placed on China’s state owned energy companies.
Why It Matters for China
The experience demonstrates why Beijing has spent years treating energy security as a strategic priority rather than simply a commercial issue.
China remains heavily dependent on imported crude oil, particularly from the Middle East. Any prolonged disruption to major shipping routes could therefore expose the world’s second largest economy to severe economic pressure.
Increasing domestic production cannot eliminate that vulnerability. China does not have enough domestic crude to meet its enormous demand, and domestic production is often more expensive than importing oil.
But the combination of domestic production, strategic reserves, diversified imports and state control over refining and fuel distribution gives Beijing greater room to absorb temporary disruptions.
This reduces the immediate economic impact of an external energy shock and gives policymakers more time to respond.
What Comes Next?
China is likely to continue treating energy security as a strategic objective even when doing so comes at the expense of short term commercial returns.
Further investment in domestic oil and gas production, strategic storage and alternative energy sources could reduce Beijing’s exposure to international supply disruptions over the longer term.
At the same time, China is unlikely to abandon imported oil. Domestic production cannot fully replace overseas supplies, particularly as industrial activity and transportation demand continue to require large quantities of energy.
Instead, Beijing’s approach is likely to focus on maintaining multiple layers of protection against external shocks.
Implications and Analysis
China’s response to the energy crisis highlights a fundamental difference between treating energy as a commodity and treating it as a strategic asset.
For international oil companies, higher prices can create an opportunity to maximise profits. For China’s state oil majors, the same crisis creates an obligation to keep domestic supplies stable even when that reduces commercial returns.
That model has imposed substantial costs. Billions of dollars have been directed toward relatively expensive domestic fields, while price controls and export restrictions can prevent state companies from fully benefiting from international market conditions.
Yet the current crisis also demonstrates the strategic value of those investments.
China cannot eliminate its dependence on imported energy, but it can reduce the consequences of that dependence. Higher domestic production, larger reserves and greater control over the country’s refining system give Beijing more flexibility when global supply chains are disrupted.
The broader lesson is that energy security often requires paying for capacity before it is needed. Investments that appear inefficient during stable market conditions can become strategically valuable when geopolitical tensions threaten critical supply routes.
For Beijing, the willingness of its oil majors to sacrifice some commercial efficiency in exchange for greater resilience appears to be part of a much broader strategy: reducing the ability of external conflicts to translate into domestic economic instability.
With information from Reuters.
