Maintaining employment strains Chinese oil and gas firms’ shrinking profits
Many international oil and gas companies have responded to the steep drop in prices since November 2014 by cutting expenditures. Companies have achieved better financial metrics by increasing efficiencies in their operations, and, in many cases, by reducing their workforce.
Layoffs have been an unfortunate side effect of the price down turn, but they have allowed companies to reduce costs and weather the storm. China’s national oil and gas giants have not been able to use this strategy, however, making it more difficult for them to generate profits.
The listed arms of China’s big three oil companies reported lower earnings this year driven by commodity prices, with Sinopec (ticker: SNP) reporting net profit down 32%, CNOOC ltd. reporting 66% lower net profit, and PetroChina Co. reporting 67% lower profits in 2015 compared to the year before. While substantially lower profits are not unique to China’s oil and gas sector, the added weight of maintaining full employment is clear.
ExxonMobil (ticker: XOM) and PetroChina both reported about $260 billion in operating revenue for 2015. Yet, Exxon’s net profit of $16 billion was roughly three times PetroChina’s, reports The Wall Street Journal. Looking at employees, PetroChina has more than 500,000, compared with fewer than 75,000 at Exxon.
The politics of China’s national oil companies
For national oil companies like those in China, operational and financial concerns must also be balanced with political issues. China is currently in the process of restructuring its cumbersome national giants to make them more competitive abroad, but Chinese leadership appears concerned about cutting jobs to reach that goal.
The Communist Party secretary of China’s biggest oil field, Daqing, told the legislature during its annual meeting that Daqing, which is owned by PetroChina, lost around $800 million in the first two months of this year. In response, Chinese President Xi Jinping said the government must protect its workers first.
“Today’s economic restructuring cannot come at the cost of workers’ well-being,” he said. “We must guarantee the incomes and treatment of the front-line employees.”
With political pressure to keep workers employed while simultaneously becoming more competitive in global markets, analysts expect more cost cutting will come in the form of previously announced divestments of stakes in noncore assets.
