Regional report: China

CNOOC is operating a semisubmersible in disputed waters of the South China Sea, also claimed by Vietnam and Phillippines (left). CNPC is increasing domestic oil and gas production through greater emphasis on exploration in the frontier areas, and EOR projects in declining fields (center). In 2014, CNOOC made one major discovery and drilled nine successful appraisal wells in Bohai Bay,

World Oil regional reports typically cover E&P activity in a particular region. China, however, is a special case. The Asian country has extensive E&P activity within its borders, and is also participating in oil and gas projects throughout the world. The other aspect of China that requires coverage is its role as the leading consumer of crude oil, and natural gas that is conveyed via pipelines as well as in the form of LNG.

DEMAND AND SUPPLY

As of January 2014, China held 24.4 Bbbl of proven crude oil reserves and 155 Tcf of proven natural gas reserves, largest in Asia-Pacific. However, production levels of both oil and gas tell a story of deficits, due to growing consumption.

Crude oil deficit. The last time China’s crude oil production matched its consumption was in 1993, at 3 MMbopd. Ever since, due to population growth and increase in manufacturing, the gap has widened to such as extent that China had to import about 5.6 MMbopd in 2013, Fig. 1. China has diversified its import sources across the Middle East, West Africa and Latin America, Fig. 2. To reduce import costs, Chinese companies have taken on partnerships in E&P sectors throughout the world and signed long-term contracts. The turmoil in the Middle East, particularly Libya, Sudan and South Sudan, has affected this supply chain.

Fig. 1. China’s oil production and consumption, 1993-2015.

Fig. 2. China has diversified its crude oil imports across the Middle East, West Africa, Latin America and both Kazakhstan and Russia in Europe.

Natural gas deficit. China’s annual production of 3.8 Tcf in 2012 was three times the output in 2002. Production is expected to increase to about 5.5 Tcf by 2015. China was a net gas exporter until 2007, Fig. 3. Since then, gas imports have increased to 29% of total demand.

Fig. 3. China’s natural gas production and consumption, 2000-2012.

DOMESTIC E&P ACTIVITY

In 1998, the Chinese government reorganized most state-owned oil and gas assets into two firms that own both upstream and downstream assets: China National Petroleum Corporation (CNPC), and China Petroleum and Chemical Corporation (Sinopec). CNPC is the leading upstream player in China and has a publicly listed company called PetroChina. Responsible for offshore oil and gas activity is another listed company, China National Offshore Oil Corporation (CNOOC).

Crude production. China’s oil output reached nearly 4.5 MMbopd, an increase of 50% over two decades. As much as 81% of crude oil production capacity is onshore, while 19% comes from shallow offshore reserves, Fig. 4. CNPC’s Daqing field is one of China’s oldest and most prolific fields, contributing 19% of overall production. In 2012, Daqing produced about 800,000 bopd, after declines of more than 1 MMbopd. Sinopec’s Shengli oil field, near Bohai Bay, produced about 550,000 bopd during 2012, making it China’s second-largest oil producer.

Fig. 4. China’s sedimentary basins are located in the Northeast, South east and Western regions. Offshore production comes from the Bohai Bay basin. Exploration is now being extended to the disputed South China Sea.

Chinese NOCs have invested as much as $13 billion in exploration and EOR spending, on projects such as water injection, polymer flooding, and steamflooding in Liaohe and Jilin fields to offset oil production declines. CNPC also has used hydraulic fracturing and CO2 injection at Jilin field. Exploration focus has shifted from the maturing fields in the northeast to remote frontiers in the central and western provinces, such as offshore Xinjiang, Sichuan, Gansu and Inner Mongolia.

CNOOC’s production from Bohai Bay was 406,000 bopd in 2011, or two-thirds of the NOC’s domestic oil output. China’s largest offshore field, Penglai 19-3, peaked in July 2011 at 122,000 bopd before it had to be shut-in, due to an extensive leak. CNOOC has discovered other sizeable oil fields in Bohai Bay, such as Penglai 9-1, which the NOC claims to be its largest find in the Bohai Bay in recent years.

In third-quarter 2014, CNOOC achieved total net production of 103 MMboe, which was basically flat, year-on-year. The company made one new discovery and drilled nine successful appraisal wells. This includes Jinzhou 23-2, which has excellent reservoir quality, and the successful appraisal of the Luda 21-2 structure, which is expected to be developed into a large-sized oil field. The Jinzhou 23-2 structure is located in the northern part of Bohai’s Liaodong uplift, with an average water depth of about 10 m. The Jinzhou 23-2-3 well was drilled and completed at a depth of 1,097 m and encountered oil and gas pay zones with a total thickness of 68.4 m. The oil production of the well was tested at 260 bpd.

Gas production. China’s major onshore natural gas-producing areas include the Sichuan basin in the southwest, Tarim Junggar and Qaidam basins in the northwest and the Ordos basin in the north, Fig. 3. In the Sichuan basin, recent discoveries include Sinopec’s Yuanba (120 Bcf by 2016) and Puguang (350 Bcf in 2012) fields. Tarim’s major fields, Kela-2 and Dina-2, have proven gas reserves of about 16.2 Tcf. In the Ordos basin, the Changqing oil and gas area includes Sulige gas field, containing over 35 Tcf of proven gas reserves. Changqing’s production rose steadily this decade to 1,022 Bcf in 2012, constituting 27% of China’s total gas output. CNPC anticipates increasing Changqiung annual production to 1,236 Bcf by 2015. Sinopec’s Danuidi field, also in the Ordos basin, produced 130 Bcf during 2012.

Shale gas. The U.S. EIA estimates China’s technically recoverable shale gas reserves at 1,115 Tcf, the largest in the world. Most of these resources are in the Sichuan and Tarim basins. Transforming these reserves into production has been quite challenging. Shale gas production in 2012 was only 1.8 Bcf from test drilling in the Sichuan basin. China’s NOCs are in discussion with several IOCs for partnering to gain technologies for developing these geologically challenging resources.

China held its first shale gas licensing round in 2011 for four blocks in the Sichuan basin and awarded the tenders to two Chinese companies, including Sinopec and Henan Coal. Tendering is available, not only to NOCs, but also to private and local companies, and foreign investors may participate indirectly if they hold a PSC contract with a participating Chinese firm. The State Council released shale gas from the jurisdiction of the NOCs, allowing the Ministry of Land and Resources (MLR) to open a larger second bidding round in mid-2012. The MLR awarded 19 blocks to 16 domestic companies, mostly to coal producers, power companies and local energy firms. Since these companies have limited shale gas experience and lack capital required for such projects, they may partner with China’s larger state-owned companies or foreign firms.

International operators. Several IOCs have been granted production sharing contracts (PSCs) to develop oil and gas production in China. These include ConocoPhillips, Shell, Chevron, BP, BG, Husky, Anadarko and Eni. China’s NOCs must hold the majority participating interest in a PSC and can become the operator once development costs have been recovered. Husky is controlled by Hong Kong billionaire Li Ka-Shing through his Cheung Kong Holdings entity. CNOOC has held three licensing rounds since 2011, for foreign companies to join it in exploring and developing offshore blocks in Bohai Bay, South China Sea and East China Sea. The latest round occurred in 2013 and included 25 blocks, 15 of which are in deepwater areas.

One of the success stories of international participation in China’s oil and gas development comes via Husky Energy. The Canadian operator is participating offshore, in Liwan gas field and Wengchang oil field. The Liwan gas project is Husky’s largest development to date and the first deepwater gas project offshore China. Located in South China Sea, about 300 km southeast of Hong Kong, the project delivered first production only seven years following its discovery. Liwan consists of three gas fields: Liwan 3-1, Liuhua 34-2 and Liuhua 29-1, which share a subsea production system, subsea pipeline and onshore gas processing infrastructure.

First gas was produced at Liwan 3-1 field in March 2014. The field’s nine deepwater wells are in 1,200 m to 1,500 m of water, about 75 km from a shallow-water platform, which in turn, is connected by pipeline to the onshore Gaolan gas terminal. The Liuhua 34-2 field is due to be commissioned, subject to final approvals. Negotiations are underway for the gas sales contract for the Liuhua field, with first production expected in 2018.

Husky’s Wenchang oil field is in the western Pearl River Mouth basin, about 400 km southwest of Hong Kong in the South China Sea. Husky holds a 40% working interest in the field, which began production in 2002. Wengchang field is producing from 30 wells, in 100 m of water, into an FPSO stationed between the fixed wellhead platforms.

During 2007, CNPC awarded a 30-year PSC to Chevron to bring a sour gas field online in Sichuan’s Chuandongbei basin. After several delays, initial production began in 2014 and is processed through two sour natural gas processing plants with a combined annual production of 270 Bcf. CNPC is also partnering with Total and Shell Oil to extract natural gas from South Sulige and Changbei fields.

CNPC and Shell signed the first PSC for the Fushun-Yonghchuan Block of shale gas in the Sichuan basin, in March 2012. Shell also has partnered with Sinopec and CNOOC on two other shale gas plays. After investing $950 million between 2011 and 2013 on shale gas exploration in China, Shell had planned to spend another $1 billion, each year, for the next five years to develop these resources. However, in September 2014, Shell announced that it will trim its project in Sichuan province because of geological challenges and the area’s dense population. Shell now plans to focus mainly on the development of Changbei tight gas field in the Shaanxi region.

China may now miss its 2020 target for shale-gas production as lack of infrastructure and technology hampers development of what were expected to be the world’s biggest shale reserves. The nation has set an output target of as much as 100 Bcm by the end of the decade. In contrast, the U.S. production reached about 120 Bcm in 2012.

Meanwhile, Sinopec is working with Chevron and ConocoPhillips to explore shale gas resources in the Qiannan and Sichuan basins, respectively.

GLOBAL E&P ACTIVITY

China has used its foreign exchange reserves, estimated at $3.3 trillion, to acquire oil companies, form partnerships and purchase equities throughout the world. In 2012, alone, Chinese oil companies acquired overseas assets of more than $34 billion. China’s overseas oil production increased from 140,000 bopd in 2000 to about 2 MMbopd in 2012. China’s largest overseas acquisition was that of Canadian oil company Nexen Petroleum for $17.9 billion in 2013. This deal became China’s largest overseas acquisition.

Oil-for-loan deals. By the end of 2012, Chinese NOCs had secured bilateral oil-for-loan deals with Russia, Kazakhstan, Venezuela, Brazil, Ecuador, Bolivia, Angola, and Ghana at a cost of $108 billion. China also extended another $2 billion to Ecuador in early 2013 and is now that country’s primary oil buyer. CNPC and Russia’s Rosneft signed an agreement in 2013 for China to lend $270 billion to Russia for an additional 300,000 bopd through the Eastern Siberia-Pacific Ocean Pipeline (ESPO). The deal involves a JV between CNPC and Russia’s Rosneft to develop Russia’s East Siberian oil fields, where CNPC holds a 49% stake. Russia and China are planning to expand the ESPO transmission capacity to 1.6 MMbopd by 2018.

UK North Sea. CNOOC has been operating in the UK North Sea through its Nexen acquisition since 2012. In November 2014, the company announced first oil from its Golden Eagle Area Development (GEAD), which includes Golden Eagle, Peregrine and Solitaire fields. These fields are in Blocks 20/1S, 20/1N and 14/26a, about 70 km northeast of Aberdeen, with an average water depth ranging from 89-139 m.

The GEAD comprises separate production and wellhead platforms, and two subsea production systems. A total of 15 production wells and six water injection wells will eventually be drilled from these facilities. Two Golden Eagle wells are producing 18,000 bopd. The project is expected to reach its peak production rate of 70,000 bopd in 2015.

NATURAL GAS IMPORTS

In October 2014, CNPC signed an agreement with Gazprom to build the eastern route of the Russia-China gas pipeline. Construction of the Russian section commenced in September 2014, whereas construction of the Chinese section is expected to begin in the first half of 2015, and be completed in 2018. This agreement is part of Russia’s shift away from its existing markets in Western Europe to new markets in the east.

This supply is in addition to the Central Asia-China gas pipeline, which starts at the Turkmenistan-Uzbekistan border city of Gedaim and runs through central Uzbekistan and southern Kazakhstan before reaching Horgos in China’s Xinjiang Uygur region. Currently, the trunkline has three lines in parallel, each running for 1,830 km. Lines A/B have been delivering 30 Bcma since 2012.

Upon completion of all supporting facilities of Line C by the end of 2015, the overall delivery capacity of the Central Asia-China Gas pipeline will reach 55 Bcma. Line D is under construction and will increase the capacity to 85 Bcma.

Lines A and B are supplied by natural gas totaling 13 Bcma from the Amu Darya project, and 17 Bcma from Turkmengaz. Line C is supplied from three countries: Turkmenistan (10 Bcma), Uzbekistan (10 Bcma), and Kazakhstan (5 Bcma). Line D will receive gas from Galkynysh field in Turkmenistan.

LNG IMPORTS

China is the world’s third-largest LNG importer, behind Japan and South Korea and ahead of Spain, at an average import price of $10.43/MMbtu. In 2012, the leading LNG sources for China were Qatar and Australia, Fig. 5. The market share pie will be reshaped through the entry of U.S. and Canadian LNG from 2015 to 2020.

Fig. 5. China’s LNG import sources, 2012

China’s first regasification terminal was built at Dapeng in 2006. Import regasification capacity was 4.1 Bcfd by the end of 2013, and additional capacity of 2 Bcfd is being constructed by 2016. LNG now enters the country through nine major terminals, with another five under construction, and more in various stages of construction and planning.

CNOOC is the key LNG player in China. The NOC operates six existing plants, including the Ningbo terminal at Zhejiang and the Zhuhai terminal, both of which came online in 2013. CNOOC completed construction of China’s first floating storage and regasification unit (FSRU) in Tianjin at the end of 2013, Fig. 6. CNOOC is constructing two regasification terminals in the southern region—Hainan and Shenzhen/Diefu—and intends to expand four of the company’s existing terminals. In addition, CNOOC has proposed two other FSRU facilities that were scheduled to come online in 2014.

Fig. 6. In September 2014, Qatargas delivered its first LNG shipment to CNOOC’s Zhejiang Ningbo terminal in China.

CNPC recently entered the LNG market and commissioned its first two regasification terminals, Dalian and Jiangsu, in 2011. The company’s Tangshan terminal came online by the end of 2013. Sinopec anticipates entering China’s LNG market with the advent of its Qingdao terminal in 2014.

In addition to purchases, Chinese companies are investing in significant equity stakes in Australia’s liquefaction projects, particularly ones involving coalbed methane. CNOOC owns a 50% stake in the Queensland Curtis LNG project, and Sinopec owns 25% of Australia Pacific LNG. Both of these terminals are scheduled to begin operations and supply natural gas to China by 2015. CNPC owns a 20% share in the LNG Canada project, and CNOOC, through its wholly-owned Canadian company, Nexen, recently purchased land in western Canada to explore opportunities to develop a liquefaction terminal.

GOOD TIMES AHEAD

Fig. 7. With the dramatic fall in crude oil prices, CNPC and other Chinese NOCs may be able fulfill their crude oil deficits through purchases in the global markets, rather than rely on growth in domestic production (photo courtesy of CNPC).

If there is one country in the world that is pleased with the recent drop in crude oil prices, it is China. While the value of its oil producing assets has dropped, its import bill for crude oil purchases has been lowered by as much as 35%. In fact, the country may find it advantageous to not fret about the lack of shale production or the high decline rate at its mature fields, Fig. 7, but be ready to purchase crude oil and natural gas on the world markets at highly discounted rates.