China’s huge ongoing economic growth requires vast quantities of energy from various sources, both domestic and international, reports Glenn Freeman
The ongoing dispute between China and two of its neighbours, India and Vietnam, highlights the importance of energy resources for the Asian giant.
The latest episode followed an announcement by Hainan Province in southern China that Chinese vessels would board and search ships in contested areas of the South China Sea, which includes vital shipping lanes through which more than a third of global trade moves.
With global energy demand rising, major consumers such as China are seeking new sources to satisfy their expanding economies. In 2009, China became the second largest consumer of oil after the United States, and its consumption is likely to double by 2030, which would make it the world’s largest oil consumer.
In 2010, it imported 52 percent of its oil from the Middle East, and Saudi Arabia and Angola together accounted for 66 per cent of its oil imports. China has been diversifying its energy supplies to reduce this dependence upon imported oil and has sought to increase offshore production around the Pearl River basin and the South China Sea.
According to Gavin Thompson, Wood Mackenzie’s head of Asia Pacific Gas & Power Research, China’s most important energy import sources are the Middle East and Africa. “Around 10 years ago, China was importing more from Africa – but as the reliance on imported energy grows, the Middle East is becoming more critical, and we expect that trend to continue…the Middle East is a core option over the long term.”
Competing energy claims
Vietnam is the major oil producer in the area, with the state-owned oil company PetroVietnam producing 24.4 million tons, or 26 percent of Vietnam’s total production, in 2010 from three fields in the South China Sea. With production in established fields declining, PetroVietnam has concluded 60 oil and gas exploration and production contracts with various foreign companies in an effort to exploit new ones.
Nevertheless, these new fields are not expected to compensate for the loss. As Vietnam attempts to exploit new fields, there is the possibility of renewed clashes with China, which has consistently opposed Vietnam’s attempts to conclude exploration agreements with international oil companies in the South China Sea.
China has complained that Vietnamese ships have intruded into its waters and that it is within China’s rights to enforce its claim against them. In May 2011, for example, two Chinese maritime surveillance vessels cut off the exploration cables of a Vietnamese oil survey ship searching for oil and gas deposits in Vietnam’s EEZ, some 120 km off the southern Vietnamese coast.
In 2011, the Philippines reported seven incidents involving Chinese harassment. In one case, on March 2, two Chinese patrol boats harassed an oil exploration ship in the Philippine claim zone 250 km west of Palawan. They left the area after the Philippine Air Force was scrambled. On April 5, Manila lodged a formal protest at the United Nations and sought ASEAN support in forging a common position over the issue.
Despite Chinese objections, both Vietnam and the Philippines plan to go ahead with gas exploration projects involving foreign companies. PetroVietnam will work with Talisman Energy and will begin drilling in an area that China awarded to Crestone Corporation in 1992, which is now operated by Harvest Natural Resources. ExxonMobil also plans exploratory drilling off Vietnam, while the Philippines intends to drill in the field where Chinese vessels harassed its survey vessel in March 2011.
Meanwhile, India has also become involved as an external player, which further complicates the situation. China may have leverage over the ASEAN claimants because of its size and proximity, but India has the status and power to resist China. India, moreover, harbours resentment against China for its support of Pakistan and its claims along the countries’ common border.
China has protested against the exploration activities of India’s Oil and Natural Gas Corp (ONGC) around the Paracel Islands, about which the Chinese are particularly sensitive. ONGC takes the view that Vietnamese claims are in accordance with international law, and it will continue with exploration projects in two blocks near the Paracel Islands.
Rapid development spurs energy appetite
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.
Though this has slowed somewhat in 2012, China remains 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 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.
Limited domestic reserves
China held some 20.4 billion barrels of proven oil reserves as of January 2012, up by more than 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 bpd of total oil liquids in 2011, of which 95 percent was crude oil.
Its oil production is forecast to rise by about 170,000 bpd to nearly 4.5 million bpd by the end of 2013. Over the longer term, EIA predicts a flatter incline for China's production, reaching 4.7 million bpd by 2035.
In terms of domestic oil and gas production, China is “overwhelmingly government-owned and controlled, with Petrochina, Sinopec and CNPC together accounting for around 95 percent of production. There is quite tight government control over the awarding of new contracts and the pricing of gas in particular,” says Wood Mackenzie’s Thompson. “The remaining 5 per cent comprises legacy assets from domestic companies that have survived the corporatisation of the big Chinese producers & foreign production sharing contracts.”
However, there are a number of foreign operators involved here in the offshore, primarily in the Bohai Bay area. “Since about 1982 there have been a number of significant production projects, involving companies such as Conoco Phillips, Chevron and Anadarko,” explains Thompson, also referring to oil exploration projects that are underway in the South China Sea involving Chevron, BP, Shell and BG.
“However, given that China is ranked as the world’s fifth or sixth largest producer, the amount of international involvement in the upstream is very limited,” he adds, attributing this to access restrictions, with not a lot of acreage offered for foreign investment, particularly in onshore blocks.
“What we have seen in recent years is that access is typically defined by technology requirements, where Chinese companies have sought a particular foreign technology,” says Thompson, “This happened with tight gas in the 1990s, coal-bed methane in the late 1990s and early 2000s, sour gas in the last decade, and is happening now with shale gas.”
“But it is very unlikely we would see a conventional onshore oil project offered to a foreign company under a PSC – the vast majority remains firmly in state control.”
Treading where few countries dare
China’s major state-owned production companies have traditionally been quite open to working in regions actively avoided by others. “Historically they tried to avoid direct competition, so went to places like Sudan, Syria, Iran, Myanmar – where there was less international competition,” says Thompson, but adds that “I think that’s changing, and for a number of reasons.”
One of these is that the “size of the prize in these markets isn’t always as significant and so these companies have internationalised and gone after bigger opportunities…I also don’t think China ever enjoyed being tagged as a country that only invests in dodgy countries.”
These comments are supported by figures from the US EIA. Since 2009, Chinese NOCs have purchased assets in the Middle East, North America, Latin America, Africa and Asia. In 2011 alone, they invested $18 billion in overseas oil and gas assets, having 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.
Thompson also explains that much of what China needed to achieve in the upstream was not possible in these areas – in branching out internationally, Chinese companies are now involved in some of the world’s most dynamic projects. As examples, Thompson refers to Chinese involvement in projects such as Mozambique’s emerging LNG industry, the Canadian oil sands and Australian LNG, “they’ve become much more enthusiastic about OECD country investments.”
China's overseas equity oil production grew significantly over the past decade, from 140,000 bpd in 2000 to over 1.5 million bpd of oil production in 2011. CNPC has been the most of these, though Sinopec, CNOOC, and other smaller NOCs have also expanded their overseas investment profiles.
With hydrocarbon assets in 30 countries, CNPC produced a record 1 million bpd from overseas oil equity by the end of 2011, up from 865,000 bpd in 2010. It also produced 4.9 billion cfd of natural gas in 2010. Likewise, Sinopec's overseas equity oil output reached 400,000 bpd in 2011, with a target of producing 1 million bpd from overseas oil equity by 2015.
Challenges at home
As Wood Mackenzie’s Thompson explains, the last few years in particular have been “pretty painful because the ramp up of high oil prices has overlapped with high energy demand in China – two opposing forces going in the wrong direction. They lost an incredible amount of money in 2011 and 2012, and they’re quite vocal about this.”
Increasing its stakes in international projects, such as those listed above, was one part of China’s strategy to reduce its energy import costs, with a reduction in its import volumes not likely any time soon.
“They can do that by being an equity player in projects so that imports are offset by profitability in the upstream side. They’re looking at more competitive LNG projects such as in Canada and East Africa, and I think they are all sensible,” says Thompson.
He also explains that there is also a process of liberalizing energy prices within China. “Gas prices are still firmly controlled and there is clear recognition that gas prices need to increase... because they just don’t have domestic prices [at a level] to support high oil-indexed gas prices.”
Thompson also attributes this artificially low gas price environment to the relatively slow pace of shale gas development in China. “The fairly slow pace of shale gas development continues to surprise us, given that gas imports are set to rise quite strongly and that we expect those LNG imports will continue to result in losses.”
“The pace of shale exploration [in China] to date has been incredibly slow and ties into that whole issue around gas price reform. Companies aren’t going to fast-track [exploration and production of shale gas]as they’re losing money, they need gas price reform to make this happen.”
“There are other contributing factors, such as land access, water and regulations, but we firmly believe we would see a lot more activity if there had been positive pricing signals from the government.”
But for the foreseeable future, the Chinese juggernaut is sure to roll on, with the national oil companies’ good access to capital and manpower sure to see them involved in even more large-scale international projects.
“They’re foreign upstream forging of M&A activity doesn’t show much sign of slowing down…they’re rubbing shoulders with all the regular international players now,” says Thompson. “[Chinese national oil companies]are now looking at any competitive play anywhere in the world.”