China Country Analysis Brief - September 2012
China is the world's most populous country and has a rapidly growing economy, which has driven the country's high overall energy demand and the quest for securing energy resources. According to the International Monetary Fund, China's real gross domestic product (GDP) grew at an estimated 9.2 percent in 2011 and 7.8 percent in the first half of 2012, after registering an average growth rate of 10 percent between 2000 and 2011. Economic growth continues to slow in 2012 as the global financial crises unfolds, industrial production and exports decrease, and the government attempts to curb economic inflation and excessive investment in some markets. China mitigated the 2008 global financial crisis with a massive $586 billion (4 trillion yuan) stimulus package spread over two years. The recent global downturn in 2012 has spurred China's government to begin incremental monetary easing measures and consider a second smaller fiscal stimulus package.
China is the world's second largest oil consumer behind the United States, and the largest global energy consumer, according to the International Energy Agency (IEA). The country was a net oil exporter until the early 1990s and became the world's second largest net importer of oil in 2009. China's oil consumption growth accounted for half of the world's oil consumption growth in 2011. Natural gas usage in China has also increased rapidly in recent years, and China has looked to raise natural gas imports via pipeline and liquefied natural gas (LNG). China is also the world's largest top coal producer and consumer and accounted for about half of the global coal consumption, an important factor in world energy-related CO2 emissions.
Coal supplied the vast majority (70 percent) of China's total energy consumption of 90 quadrillion British thermal units (Btu) in 2009. Oil is the second-largest source, accounting for 19 percent of the country's total energy consumption. While China has made an effort to diversify its energy supplies, hydroelectric sources (6 percent), natural gas (4 percent), nuclear power (1 percent), and other renewables (0.3 percent) account for relatively small shares of China's energy consumption mix. The Chinese government set a target to raise non-fossil fuel energy consumption to 11.4 percent of the energy mix by 2015 as part of its new 12th Five Year Plan. EIA projects coal's share of the total energy mix to fall to 59 percent by 2035 due to anticipated higher energy efficiencies and China's goal to reduce its carbon intensity (carbon emissions per unit of GDP). However, absolute coal consumption is expected to double over this period, reflecting the large growth in total energy consumption.
China is the world's second-largest consumer of oil behind the United States, and the second-largest net importer of oil as of 2009.
According to Oil & Gas Journal (OGJ), China holds 20.4 billion barrels of proven oil reserves as of January 2012, up over 4 billion barrels from three years ago and the highest in the Asia-Pacific region. China's largest and oldest oil fields are located in the northeast region of the country. China produced an estimated 4.3 million barrels per day (bbl/d) of total oil liquids in 2011, of which 95 percent was crude oil. China's oil production is forecast to rise by about 170 thousand bbl/d to nearly 4.5 million bbl/d by the end of 2013. Over the longer term, EIA predicts a flatter incline for China's production, reaching 4.7 million bbl/d by 2035.
China's oil consumption growth eased in 2011 from record high growth of 10 percent in 2010, reflecting the impact of the most recent global financial and economic downturn. However, the country still consumed an estimated 9.8 million bbl/d of oil in 2011, up 400 thousand bbl/d, or over 4 percent from 9.4 million bbl/d in 2010. In 2009, China became the second largest net oil importer in the world behind the United States, with net total oil imports reaching 5.5 million bbl/d in 2011. China's oil demand growth, particularly for petroleum products, hinges on several factors such as domestic economic growth and trade, power generation, transportation sector shifts, and refining capabilities. EIA forecasts that China's oil consumption will continue to grow during 2012 and 2013 at a moderate pace. Even so, the anticipated oil growth of over 0.8 million bbl/d between 2011 and 2013 would represent 64 percent of projected world oil demand growth during the 2-year forecast period.
The Chinese government's energy policies are dominated by the country's growing demand for oil and its reliance on oil imports. The National Development and Reform Commission (NDRC) is the primary policymaking and regulatory authority in the energy sector, while four other ministries oversee various components of the country's oil policy. The government launched the National Energy Administration (NEA) in July 2008 in order to act as the key energy regulator. The NEA, linked with the NDRC, is charged with approving new energy projects in China, setting domestic wholesale energy prices, and implementing the central government's energy policies, among other duties. The NDRC is a department of China's State Council, the highest organ of executive power in the country. In January 2010, the government formed a National Energy Commission with the purpose of consolidating energy policy among the various agencies under the State Council.
National oil companies
China's national oil companies (NOCs) wield a significant amount of influence in China's oil sector. Between 1994 and 1998, the Chinese government reorganized most state-owned oil and gas assets into two vertically integrated firms: the China National Petroleum Corporation (CNPC) and the China Petroleum and Chemical Corporation (Sinopec). These two conglomerates operate a range of local subsidiaries, and together dominate China's upstream and downstream oil markets. CNPC is the leading upstream player in China and, along with its publicly-listed arm PetroChina, accounts for roughly 60 percent and 80 percent of China's total oil and gas output respectively. CNPC's current strategy is to integrate its sectors and capture more downstream market share. Sinopec, on the other hand, has traditionally focused on downstream activities, such as refining and distribution, with these sectors making up nearly 80 percent of the company's revenues in recent years. The company seeks to acquire more upstream assets gradually.
Additional state-owned oil firms have emerged over the last several years. The China National Offshore Oil Corporation (CNOOC), which is responsible for offshore oil exploration and production, has seen its role expand as a result of growing attention to offshore zones. Also, the company has proven to be a growing competitor to CNPC and Sinopec by not only increasing its exploration and production (E&P) expenditures in the South China Sea, but also extending its reach into the downstream sector, particularly in the southern Guangdong Province. The Sinochem Corporation and CITIC Group have also expanded their presence in China's oil sector, although they are still relatively small.
Whereas onshore oil production in China is mostly limited to CNPC and CNOOC, international oil companies (IOCs) have been granted greater access to offshore oil prospects and unconventional gas fields, mainly through production sharing agreements and joint ventures. IOCs involved in offshore E&P work in China include: Conoco Phillips, Shell, Chevron, BP, Husky, Anadarko, and Eni, among others. China's NOCs must hold the majority participating interest in a production sharing contract (PSC) and can become the operator once development costs have recovered. IOCs offer their technical expertise in order to partner with a Chinese NOC and make a foray into the Chinese markets.
The Chinese government launched a fuel tax and reform of the domestic product pricing mechanism in 2009 in efforts to tie retail oil product prices more closely to international crude oil markets. This in turn is likely to attract downstream investment, ensure better profit margins for refiners, and reduce energy intensity caused by lower domestic prices and higher demand. The current oil product pricing system allows the NDRC to adjust retail prices when the moving average of imported crude prices fluctuates outside of a 4 percent range within 22 consecutive working days for diesel and gasoline.
When international crude oil prices increased in 2010 and 2011, the NDRC did not increase downstream fuel prices at the same rate, causing refiners, especially NOCs, to incur profit losses on their downstream businesses and increase their fuel product exports. Despite the price alterations, NOCs have experienced negative margins in 2012 and use their upstream and other business segments to offset losses on downstream sales. Volatility in international prices that has occurred in late 2011 and 2012 spurred China to react more quickly with price adjustments. NDRC raised retail oil prices twice at the beginning of 2012 to the highest levels recorded and reversed course by cutting prices three times by about 14 percent in mid-2012 to match dropping international oil prices and economic deceleration.
The NDRC plans to revise the pricing regime by shortening the adjustment period to 10 days and lower the 4-percent price boundary. They also plan to add more benchmark crude streams as part of China's basket of international crudes to reflect better the country's shifting sources of imported oil.
In November 2011, China also installed an ad valorem resource tax of 5 percent on all oil and gas production, including unconventional resources output, in an attempt to increase revenues for local and regional governments and encourage more efficient hydrocarbon production. The resource tax was extended in 2012 to projects involving joint ventures (JVs) of international and Chinese firms.
Exploration and production
China's largest oil fields are mature and production has peaked, leading companies to focus on developing largely untapped reserves in the western interior provinces and offshore fields.
After experiencing an annual growth spurt of 7 percent in 2010 and reaching 4.3 million bbl/d, oil production flattened in 2011. New offshore production and enhanced oil recovery (EOR) of older fields were the main contributors to the growth in 2010. CNPC's Daqing field, located in the Northeast, produced about 800,000 bbl/d of crude oil in 2011, according to FACTS Global Energy's most recent estimate, and has maintained this level for the last 9 years after declines from over 1 million bbl/d. Sinopec's Shengli oil field in the Bohai Bay produced about 547,000 bbl/d of crude oil during 2011, making it China's second-largest oil field. However, Daqing, Shengli, and other aging fields have been heavily exploited since the 1960s, and output is expected to decline significantly in the coming years. NOCs are investing a great deal in EOR techniques such as water and polymer flooding, among others, to stabilize oil production and stem declines from these older fields. Recent exploration and production (E&P) activity has focused on the offshore areas of Bohai Bay and the South China Sea (SCS), as well as onshore oil and natural gas fields in western interior provinces such as Xinjiang, Sichuan, Gansu, and Inner Mongolia.
Roughly 85 percent of Chinese oil production capacity is located onshore, primarily in mature fields. Although offshore E&P activities have increased substantially in recent years, China's interior provinces, particularly in the northwest's Xinjiang Uygur Autonomous Region and central Ordos Basin, have also received significant attention. Recently, China announced its plan to make Xinjiang into one of the country's largest oil and gas production and storage bases by 2015.
The onshore Junggar, Turpan-Hami, and Ordos Basins have all been the site of increasing E&P work, although the Tarim Basin in northwest has been a key focus of new onshore oil prospects. Crude oil production from Sinopec and PetroChina's interests in Tarim grew 4 percent annually to 261,000 bbl/d in 2011, according to IHS Global Insight. PetroChina intends to boost production in the Junggar Basin, one of Xinjiang's oldest basins, from 218,000 bbl/d in 2011 to 400,000 bbl/d in 2015 by using more cost-effective and advanced oil extraction techniques for heavy oil field development.
CNPC's use of various EOR techniques on the Liaohe and Changqing (large, old onshore oil fields) has increased production levels in recent years. Liaohe, located in the Northeast, produced 200,000 bbl/d in 2011. Since CNPC made a significant discovery in the basin in 2011, the company hopes to restore production to 241,000 bbl/d by 2020. Production in Changqing, China's third largest oil field, grew robustly by 10 percent in 2011 to reach 400,000 bbl/d. CNPC plans to use water injection and fracturing to boost Changqing's production to over 1 million bbl/d by 2015. The map below delineates the location of some of the major Chinese oil basins.
About 15 percent of overall Chinese oil production is from shallow offshore reserves, a large contributor of China's incremental oil production growth. Offshore E&P activities have focused on the Bohai Bay region, the South China Sea (particularly the Pearl River Mouth Basin), and, to a lesser extent, the East China Sea.
The Bohai Bay Basin, located in northeastern China offshore Beijing, is the oldest oil-producing offshore zone and holds the bulk of proven offshore reserves in China. PetroChina initiated the first phase of the Jidong Nanpu field development in 2007, and hoped to bring 200,000 bbl/d of crude oil production on-stream by 2012. However, PetroChina recently claimed the production levels were overstated and further exploration and reserve additions in the field would be necessary to meet its goals. CNOOC's production in the Bohai Bay (including volumes from the East China Sea) was 406,000 bbl/d in 2011, or two-thirds of the NOC's domestic oil production. Following an oil leak at China's largest offshore crude oil field, Penglai 19-3, the government implemented a complete shutdown of this CNOOC-owned field in September 2011. Production rates at Penglai 19-3 peaked at roughly 130,000 bbl/d prior to shut-in. ConocoPhillips, a 49 percent stakeholder and operator of the field, and CNOOC are waiting to restart the field once China approves normal operations can resume. CNOOC has discovered other sizeable oilfields in the Bohai Bay such as Penglai 9-1, which the NOC claims to be the largest find in the Bohai Bay in recent years.
The South China Sea is gas-rich, although CNOOC has also discovered several small oil fields and is focusing on deepwater discoveries. In 2011, CNOOC's total oil production in the SCS was 193,000 bbl/d. In 2010, CNOOC made significant discoveries of the Enping Trough and the Liuhua 16-2 in the Pearl River Mouth Basin of the SCS, opening further opportunities for exploration. CNOOC tendered licenses for 19 blocks in the SCS, most in the Pearl River Mouth Basin, in 2011. The NOC held another licensing round for 9 blocks in the South China Sea in June 2012, and companies will be allowed to bid on the blocks until June 2013 according to industry sources.
Territorial disputes in the East China Sea have so far limited large-scale development of fields in the region, where China and Japan's Exclusive Economic Zones (EEZs). The two countries have held negotiations to resolve the disputes. In June 2008, the two countries reached an agreement to develop jointly the Chunxiao/Shirakaba and Longjing/Asurao fields. However, in early 2009, the agreement unraveled when China asserted sovereignty over the fields. Tensions in the second half of 2010 have resurfaced between the two countries over the gas fields.
Continued territorial disagreements in the South China Sea, including ownership of the Spratly and Paracel Islands, have hindered efforts for joint exploration by the various countries of hydrocarbon resources in the area. ASEAN members signed the Declaration of Conduct in 2002 that encourages countries to use restraint and cooperate in the South China Sea, but no regulations were established. Increasing appetites for oil and natural gas have exacerbated tensions particularly between Vietnam and China, as hydrocarbon development has moved into deepwater areas. China has increased its naval activity in the contested areas, and CNOOC's June 2012 tender for nine offshore blocks in the disputed area overlaps several fields located within Vietnam's 200-nautical mile exclusive economic zone.
China's increasing dependence on oil imports, the need to secure and diversify energy supply, the need to develop technical expertise in unconventional resources, and attempts to capture value upstream are factors driving Chinese NOCs to invest in international projects and form strategic commercial partnerships with IOCs. China is taking advantage of the economic downturn to step up its global acquisitions and use its vast foreign exchange reserves (estimated at over $3 trillion in 2012) to help purchase equity in projects or acquire stakes in energy companies. Since 2009, the NOCs have purchased assets in the Middle East, North America, Latin America, Africa, and Asia. The NOCs invested $18 billion in overseas oil and gas assets in 2011. The NOCs increased their natural gas purchases abroad and invested $12 billion in 2011, out of a total $18 billion of oil and gas purchases, to gain more access to LNG and unconventional gas.
China's overseas equity oil production grew significantly over the past decade from 140,000 bbl/d in 2000 to over 1.5 million bbl/d of oil production in 2011. CNPC has been the most active company, while Sinopec, CNOOC, and other smaller NOCs have also expanded their overseas investment profile. CNPC, holding hydrocarbon assets in 30 countries, produced a record 1 million bbl/d from overseas oil equity by the end of 2011, up from 865,000 bbl/d in 2010. CNPC also produced 4.9 Bcf/d of natural gas in 2010. Sinopec's overseas equity oil output reached 400,000 bbl/d in 2011, and the NOC targets producing 1 million bbl/d from overseas oil equity by 2015. CNOOC produced about 150,000 bbl/d in 2011 and is swiftly increasing oil and gas purchases in 2012 in attempts to gain technical knowledge and acreage in unconventional gas and deepwater hydrocarbon resources. CNOOC signed an agreement in 2012 to purchase Canadian oil company Nexen for over $15 billion. Pending approval from Canada, this will be China's largest overseas acquisition to date. The NOC anticipates increasing its international share of its total oil and gas production from the current 20 percent to 30 percent by 2015 according to PFC Energy.
Since 2008, Chinese NOCs have secured bilateral oil-for-loan deals amounting to roughly $100 billion with several countries in order to obtain hydrocarbon resources and mitigate lending risks with suppliers. China finalized oil-for-loan deals with Russia, Kazakhstan, Venezuela, Brazil, Ecuador, Bolivia, Angola, and Ghana - and a gas-for-loan agreement with Turkmenistan. Venezuela and China have signed oil-for-loan deals, including $32 billion in exchange for 430,000 bbl/d of crude oil and products.