China And the Global Energy Crisis: Development and Prospects for China's Oil and Natural Gas 1845429664, 9781845429669

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China and the Global Energy Crisis

China and the Global Energy Crisis Development and Prospects for China’s Oil and Natural Gas

Tatsu Kambara Petroleum Consultant (Independent)

Christopher Howe Research Professor, School of East Asian Studies, University of Sheffield, UK

Edward Elgar Cheltenham, UK • Northampton, MA, USA

© Tatsu Kambara and Christopher Howe 2007 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited Glensanda House Montpellier Parade Cheltenham Glos GL50 1UA UK Edward Elgar Publishing, Inc. William Pratt House 9 Dewey Court Northampton Massachusetts 01060 USA

A catalogue record for this book is available from the British Library Library of Congress Cataloguing in Publication Data Kambara, Tatsu, 1936– China and the global energy crisis : development and prospects for China’s oil and natural gas / Tatsu Kambara, Christopher Howe. p. cm. Includes bibliographical references and index. 1. Energy policy—China. 2. Petroleum industry and trade—China. I. Howe, Christopher. II. Title. HD9502.C62K347 2007 333.8⬘230951—dc22 2006018305

ISBN: 978 1 84542 966 9 Printed and bound in Great Britain by MPG Books Ltd, Bodmin, Cornwall

Contents vi vii viii x xi xiv

List of figures List of tables List of photographs About the authors Preface by Ron Oxburgh Acknowledgements Introduction 1 The origins and modern development of China’s oil and gas industry 2 The geological basis of the onshore oil and gas industry 3 Oil and gas administration and the evolution of exploration and development 4 Natural gas: China’s new energy source 5 The Tarim Basin: solution or problem? 6 Refining and distribution 7 Summing up and looking ahead Appendix: The background to China’s energy planning

44 68 81 96 107 128

Bibliography Index

134 137

v

1 7 36

Figures Oil and gas map of China 1.1 The geographical distribution of China’s oil industry before 1949 1.2 The main fields in Daqing oil field 1.3 Crude oil and natural gas production in China, 1971–2005 1.4 Crude oil production in the Daqing oil field, 1960–2005 2.1 The main sedimentary basins in China 2.2 Crude oil production in China, actual and projection 3.1 Organization chart of China’s petroleum companies 3.2 Daqing and Jilin oil fields 3.3 Shengli oil fields 3.4 Oil and gas fields and pipelines in offshore China 4.1 Gas fields and pipelines in the Sichuan Basin 4.2 Oil and gas fields and pipelines in the Ordos Basin 4.3 Oil- and gas-related map of north-west China 4.4 East China Sea conflict 4.5 LNG receiving terminal and planned gas pipelines in Guangdong Province 5.1 The Kucha–Tabei gas area in the Tarim Basin 5.2 Oil and gas fields in the Tarim Basin 7.1 Annual discoveries of crude oil proven reserves in place in China 7.2 Chinese sea-lane for oil tankers: the ‘pearl necklace’

vi

xv 9 15 30 32 38 42 48 49 57 66 69 72 73 76 78 87 88 108 124

Tables 1.1 China’s oil supply, 1949–60 1.2 The long-run output of crude oil at Daqing and its share of national production, 1960–2005 2.1 China’s major sedimentary basins: size, geological resources, proven oil reserves, 1994 2.2 China’s major sedimentary basins: geological resources of natural gas, 1994 2.3 The relation between the different measures of resources 3.1 Activities in oil and gas performance 3.2 Oil and natural gas output in Daqing and their share of China’s total output, 1991–2005 3.3 Oil and natural gas output in the Liaohe field, 1978–2005 3.4 Crude oil and natural gas output in the Xinjiang field, 1956–2005 3.5 Oil and natural gas output in the Shengli field, 1978–2005 3.6 Crude oil and natural gas production by major fields, 2003–2005 3.7 The results of offshore exploration, 1984–98 5.1 Oil and gas fields in the Tarim Basin 5.2 Natural gas demand estimates and share by principal users 5.3 Natural gas demand forecasts by China’s major geographical regions 6.1 Oil refineries in China 7.1 China’s oil balance in 2004 and in 2005 7.2 Demand for crude oil and oil products, 2004–10 7.3 China’s crude oil imports by country A1 Output and energy annual growth rates and elasticity coefficients, 1980–2000 A2 Output, energy and electricity annual growth and elasticities, 2000–2003 A3 Sectoral shares of energy consumption, 2000 and 2020 A4 Shares of primary energy consumption, 1980–2004 and central forecast for demand in 2020

vii

13 19 40 41 41 45 50 53 55 58 60 64 87 93 93 98 107 112 114 130 131 132 132

Photographs 1.1

1.2 1.3

1.4

1.5 1.6 1.7

1.8 1.9 5.1 5.2 5.3 5.4 5.5

5.6

The first known reference to shiyou (oil) appears in Menqi bitan (‘Jottings from a stream of dreams’) an 11th century Song dynasty text on natural philosophy The Yumen field in the 1950s. The basic drilling rig here is of the type common in China in this period Labour hero Wang Jinxi employing his mud-stirring technique as depicted in the Chinese film ‘The Development Battle of the Daqing Oilfield’ The Yanshan refinery in Beijing. Like other refineries in the 1960s, this was placed close to mountains thought able to provide some protection from a Soviet attack Daqing pipelines constructed in the 1970s. Prior to this Daqing crude was transported by long fleets of railway tankers Two Daqing tankers loading crude at Qinhuangdao in the Bohai Gulf, probably en route to southern China Celebrations in June 1973 on the occasion of the departure of the first rail tanker carrying Daqing oil exports to Japan. In the following 30 years Daqing exported some 200 million tonnes of crude to Japan Daqing city today – a prosperous city of high rise apartments and a population of more than one million Oil fields in contemporary Daqing with extraction now at an advanced stage of automation Dynamiting in the Taklamakan desert in the Tarim for seismic information Well head assemblies in close proximity to the Karamai oil field The huge monument is the ‘Black Oil Mountain’ built on the natural bitumen deposits on the Karamai field Exploratory and extension wells in Karamai Pipeline construction work in the Qaidam Basin, near Xining City. The pipeline technology in this case was probably supplied by the Italian firm Saipem Road construction for oil field development in the Junngar Basin viii

8 10

16

17 20 21

22 31 31 83 84 85 85

91 91

Photographs

5.7 6.1 6.2

Crude oil production at Tazhong 4 in the Tarim. A ‘Christmas Tree’ well head assembly and a lookout platform A modern refinery at Maoming, Guangdong Province Most retail petroleum outlets belong to either SINOPEC Corp. or PetroChina. The station shown here, however, is an independent

ix

92 105

105

About the authors Tatsu Kambara has been studying the Chinese petroleum industry since the 1960s and is widely regarded as Japan’s leading authority on the subject. He has published widely in Japanese and English and in the 1970s was one of the first specialists to use fragmentary Chinese information to build up a picture of China’s oil industry. His study in Japanese ‘Chugoku no sekiyu to tennengasu’ (Oil and natural gas in China) published in 2002 has been widely commended. Dr Kambara worked for many years at the Japan National Oil Corporation, the Institute of Developing Economies in Tokyo and the Institute of Energy Economics of Japan. He has unrivalled first-hand experience of China’s oil and gas resources and was a member of many of the Japanese oil delegations that have visited China. In the early 1970s Dr Kambara worked with the late Professor Edith Penrose in London and has collaborated with the co-author of the present work since that time. Christopher Howe, FBA, joined the School of Oriental and African Studies as an economist in 1963 where he studied the Chinese and Japanese languages. He has published many studies on the Chinese and Japanese economies, specializing in recent years on issues of industrial technology and international economic relations in the Far East. In 2001 he was appointed London University’s first Professor of Chinese Business Management. He is now Research Professor at the School of East Asian Studies at the University of Sheffield and is currently Chair of the British Academy’s China Panel.

x

Preface For more than 15 years China has maintained a breathtaking rate of economic growth, averaging almost 10 per cent per annum. This growth has propelled China’s energy demand to the point where a country that was a net exporter of oil in the 1970s cannot now meet its domestic needs from its own natural resources. Indeed, today’s price of a barrel of oil ($60+) is attributed by some, perhaps unfairly, to the unanticipated demands that China has been making on the world oil market in recent years. China is a country that in some respects is today not unlike the USA of the 1850s – it has a sophisticated and prosperous east coast and an interior and western region that lags a long way behind, with a much lower standard of living and heavy dependence on agriculture and mining. The interior is also still somewhat remote from the writ of Beijing, as the saying goes ‘The mountains are high and the emperor is far away’. Tens of thousands of towns and villages in western China are still without mains electricity and the benefits of communication and quality of life that they bring. These internal disparities have led to varying degrees of civil unease. For these reasons it is hardly surprising that the priority of the present government is to redress the balance. In part this is being done by a programme of power-plant construction on a scale that has probably never been matched. Currently the equivalent of a large (1Gigawatt) capacity power station is being commissioned every five days. These plants are, however, not being fuelled by oil or gas, but by coal, the one fossil fuel that China has in abundance. Although this choice of fuel would probably have been made in any case, the high world prices of oil and gas have effectively ruled them out as alternatives for power generation. This choice, however, carries a major penalty, namely that of air pollution. Particulates and acid rain continue to pose a major respiratory problem in industrialized cities and as recently as November 2005, Chinese government officials were estimating a cost to the country of around 3.5 per cent of GDP. Both oil and gas can be significantly lower in both local pollutants and greenhouse gas emissions. The greater part of China’s energy resources lie in the west of the country, while the bulk of current demand arises in the urban and industrial east. For that reason the new west–east gas pipeline is of great importance. This is one of the largest and most rapidly completed projects of its xi

xii

China and the global energy crisis

kind in the world. For the future it is worth remembering that the nearest unexploited or underexploited oil and gas reserves in China’s immediate neighbourhood lie to the north-west, in eastern Russia. These are currently being explored by consortia comprising Russian and foreign oil companies. When they are fully assessed it may prove that access to these resources by pipeline could be an important way for China to strengthen and diversify its energy supply. The rate of growth of Chinese oil consumption is matched by the growth of the demand for transport fuels. Perhaps the most visible indication of this growth is the increase in private and other forms of car ownership. China’s new middle class and the growth of its corporate activities now create rush-hour congestion equal to any found in major cities in the East. However, it would be wrong to think that vehicles are the only problem. Increase in both internal and international aviation and increases in the energy demands for shipping have both played a major role. For transport there is no generally available alternative to oil. As the authors show, although China has some reserves of oil and a reasonably effective oil industry, there is no prospect of demand for transport fuels being fully met from internal resources, and hence imports can only rise. This has several consequences. The most obvious are the attempts to secure resources overseas either by direct acquisition or by partnership deals. In recent years China has completed deals in Sudan, Venezuela, Angola, Kazakhstan, Algeria and Indonesia (and has been rebuffed in the USA). It will be surprising if securing additional resources overseas does not remain a major objective of Chinese foreign policy for many years to come. Another consequence is the search for direct oil substitutes. With world oil prices at their present levels, technologies that a decade ago were of research interest only are now attracting urgent attention. In particular, the possibility of new techniques to exploit coal reserves must be of great interest to China. If coal is heated under appropriately controlled conditions, new gases are evolved that may either be used directly, or used to make vehicle fuels. Some work of this kind is going on in collaboration with foreign companies, but so far there does not appear to be any production. If current world prices remain above $50, this may prove to be a cost-effective way of improving supply security for vehicle fuels. As well as being in the world market for conventional oil, China may also have an interest in the ultra-clean vehicle fuel that is being produced by the multinationals in the Middle East from natural gas (GTL – gas to liquid). This would make a welcome contribution to improving air quality in major cities.

Preface

xiii

This is a timely volume. Understanding the oil and gas industry that China has at home is essential to understanding Chinese foreign policy and the future role of China in world oil and gas markets. It is certain to be a major one. Ron Oxburgh, Lord Oxburgh of Liverpool, Climate Change Capital

Acknowledgements The authors are grateful to the following persons and corporations for giving us permission to reproduce the photographs in this book. Professor Katsuhiko Hama, Soka University, Japan for Photograph 5.5. Institute of Energy Economics, Japan for Photograph 1.8. Japan Energy Development Co., Ltd for Photographs 5.3, 5.6 and 5.7. Petroleum Industry Publishing House in Beijing for Photographs 1.1–1.7 (published in Petroleum Industry in China, 1949–1989, Photo issue, 1989, Beijing). Chinese Oil Industry Journal, published in China, for Photographs 1.9, 5.1, 5.2, 5.4 and 6.1. The author (Tatsu Kambara) for Photograph 6.2.

xiv

xv Lhasa

India

Bhutan

0

200

400 Km

Gas pipeline

Oil and gas map of China

Oil pipeline State oil reserve

Haerbin

Daqing oil f.

Thailand

Zhongxian

LNG Receiving terminal

Taiwan

Zhujiangkou basin Pearl river mouth basin

Hong Kong

Shenzhen

East China sea basin

Chunxiao gas f.

Shanghai Pinghu gas f.

Qingdao South yellow sea basin Nanjing

Hangzhou

Fuzhou

Yacheng gas f. Yinggehai Qiongdongnan basin

Dongfang gas f.

Hainandao

Beibuwan basin Maoming Beihai

Guangzhou

Ningbo

Wuhan

Qianjiang Zhicheng Chongqing Kunming Changsha

Vietnam Laos

Sichuan gas f.

Chengdu

Subei basin Liquan Xinyang Luoyang Hefei Wanxian Oil product

Huabei oil f. Linyi Yanchang oil f. Crude oil

Korea

North Korea

Shenyang

Oil product Dalian 5.8 MMt. Ordos Changbei basin gas f. Dagang oil f. Tianjin Zhangye Shengli oil f. Bohaiwan basin

Oil product 5 MMt. Sichuan basin

Myanmar

Daqing

Russia Far East, Sakhalin Gas importation

Japan

Songliao basin Jilin oil f. Crude oil 38 MMt. Liaohe oil f. Crude oil, Tieling product 600,000 t.

Hailaer basin

Manzhouli

30 MMt.

Erlian basin Jinzhou Qinhuangdao Qingchang oil f. Beijing

Xining Gantang Qinghai oil f. Sulige gas f. Gormudo Lanzhou Yinchuan Oil product Jingbian gas f. Xi’an 2.3 MMt.

Sedimentary Oil field Gas field Oil refinery Oil port basin

l

pa

Ne

Turfan

Mongol

Ulanbattar

Turfan Hami oil f.

Qaidam basin Sebei oil & gas f.

Kuerle

Tazhong oil f.

Lunnan

Tarim basin Crude oil 9 MMt.

Xinjiang oil f.

Junggar basin

Dushanzi Urumuqi

Karamai oil f.

Kazakhstan Oil & Gas importation

Russia West Siberia Gas importation 30 40 Bm3

Russia East Siberia Gas importation 30 40 Bm3

Introduction The rapid economic development of China during the past two decades is proving to have profound implications for China’s energy situation. China’s GDP increased fourfold between 1980 and 2000, while primary energy consumption approximately doubled in the same period. By 2004, China’s primary energy consumption had risen to 1386.2 million tons of oil equivalent (mtoe). Of this, coal supplied 68 per cent and oil 23 per cent. In the same year, while China’s domestic output of crude oil had reached 174 million metric tons (mmt), consumption of petroleum products was reported to be 300 mmt – a huge gap that has had to be filled by imports. According to official statistics, net imports of crude oil in 2004 reached 117 mmt and oil products imports were an additional 26.4 mmt. In global terms, therefore, China produced only 4.5 per cent of the world’s oil but consumed 8.2 per cent.1 Bearing in mind that at present Chinese per capita energy consumption levels are less than one-tenth of those in the USA and one-seventh of those in Japan, the scale of the future potential of Chinese consumption and its world impact are both obviously important. On present estimates, energy consumption in China is likely to increase by two- to threefold between 2000 and 2020. Within this total, if oil is to maintain its recent share of energy supply, it is likely that more than 60 per cent of all oil will have to be imported. This far-reaching transformation is all the more remarkable when we remember that when China’s economic reforms began in the late 1970s, China was a significant energy, and especially oil, exporter. Further, whereas before reform China’s economic system enabled the planners to control many of the parameters of demand and supply, this is increasingly no longer the case. Firms and householders, now driven by prices, incomes and profit criteria, make choices that the economy has to respond to. What this means is that while energy issues are bound to remain an important concern of government, both the technical and economic feasibility of solutions to China’s energy problems will, increasingly, have to be consistent with changing market realities. In the days of the planned economy, calculations were largely in real terms, and cost considerations were not decisive in either the planning of the energy supply or in decisions by the major consumers. Today, this has all changed, not least as a result of the internationalization of China’s 1

2

China and the global energy crisis

economy. International participation in the Chinese energy sector means, first, that foreign participants weigh China-related decisions in the balance of a worldwide range of alternatives and, second, that consumers are increasingly able to make choices between both types of fuels and between domestic and foreign suppliers all based on price, reliability of supply, and other conventional market factors. The implications of this are already becoming apparent as a result of the arrival of ‘West to East’ gas supplies in the eastern provinces. These supplies are clean but expensive and have to compete with both coal and imported liquid natural gas. Understanding China’s current and prospective supplies of oil and gas and their international significance is, therefore, a complex problem. To understand it we need to consider four distinct sets of issues. These are: 1. 2. 3. 4.

China’s natural resource endowment for these industries. The technological and business capabilities available domestically to develop this. The organizational structure of the sector and the extent to which market-type incentives are operating within it. The role of foreigners in China’s energy sector.

Foreign involvement can now take several forms. These include: supplying energy imports; supplying the technology for exploiting domestic resources; and, increasingly, entering into partnerships for on- and offshore exploration and development both in China and overseas. From this last point we can see that, even in an age when economic growth and reform are so high on the national agenda, China’s thinking about energy policy is bound to be coloured by international politics, strategic and security considerations. We believe that this is an opportune moment at which to reappraise the present and prospective oil and gas situation. One reason for this is that China’s transition to an oil-importing status is relatively recent and its implications are only beginning to be fully appreciated both within and outside China. Second, in the post-Iraq-War situation oil and gas prices have begun a trajectory that is certainly upward but very possibly unstable. It remains unclear what the prospect for long-term price trends really is. Pessimists are convinced that the high prices of summer 2005 represent the future, but some dimensions of the supply situation remain potentially highly favourable. Strong development in Russia and a renewal of stability in Iraq could, for example, transform the supply situation. Also, the events of the past two years have renewed pressures for technical innovation and also for investment and policy measures to constrain demand and improve supply. Thus the post-crisis history of rapid market adaptation that took place in

Introduction

3

the 1970s and 1980s may be repeated. However, for the immediate future, world energy price trends remain crucial to China because the viability of several of China’s current plans and options is critically dependent on them. The new factor in the global situation, not present in the 1970s, is the emergence of China, India and other developing nations as major consumers of energy. The problem of the two oil price crises of the 1970s was essentially the conflict between producers and consumers – largely a conflict between the interests of Middle Eastern producers and the big net importers in America, Japan and Europe. The contemporary problem looks increasingly like a competition between consumers, whose numbers have been enlarged by the rapidly growing demand of Asian potential superpowers. Some of these issues have been vividly illustrated since 2002, the year in which China entered an open electricity supply crisis. This reflected a planning failure of the late 1990s: in the first quarter of 2004, 24 of China’s provinces had power shortages and one-third of all the Chinese provinces had serious power deficits in the summers of 2003 and 2004.2 So severe was this crisis that the national planners had to make emergency changes to the current five-year plan and at the local level, in the summer of 2004 the Beijing authorities had to decide whether to keep the air conditioning in the city’s offices and hotels functioning, or to interrupt for weeks on end the power supply to local industrial consumers. (They chose the former.) The knock-on effect of these shortages was a jump in China’s demand for imported oil as consumers fell back on small-scale diesel-driven generators to make up for the deficiencies of the grid supply. Then, in the summer of 2005, there were yet more manifestations of China’s energy problems, first in the form of a shortage of gasoline in southern China caused by a refiners’ ‘strike’. This arose because crude prices (linked to international prices) reached levels that forced losses on Chinese refiners who were required to sell at the regulated prices of refined products. As a result, long queues of unhappy consumers appeared on the petrol forecourts in Guangzhou. Meanwhile, up the coast in Shanghai, taxi drivers caught between rising fuel prices and regulated fare levels were also in uproar. Events of this kind would have been unimaginable just a few years ago and the energy flexibility of China and other developing economies is, therefore, something that we must urgently seek to understand if we are to think sensibly about the global energy future. In China, such flexibility is very much a matter of both physical resources and of the systems and efficiency with which these are used. One other new factor in the Chinese situation is political. Since March 2003 a new ‘fourth-generation’ leadership has come into power. By spring of 2006 and the announcement of China’s Eleventh Five Year Plan (2006–2010) at the National People’s Congress, this change had already brought a great deal of new thinking to economic policy generally and, if

4

China and the global energy crisis

words are turned into action, may be important for strategic aspects of energy development as well. There is, for example, new emphasis on achieving a better balance between industry and agriculture, between industrial and trade growth and the claims of environmental factors, and between coastal and inland development. All of these changes have energy implications. Further, the future of the economic reform itself remains at an important juncture as the Chinese wrestle with the problems of reconciling development of a market economy with the maintenance of a society with distinct Chinese and socialist characteristics. China’s organizational capability to handle energy problems is one of the large unknowns of the sector at the present time, but such capability is clearly critical. It is essential that both household and commercial consumers have strong incentives to economize energy consumption and that suppliers of energy work in an effective and coordinated way to satisfy the market. The success or otherwise of the continuing drive to economic reform is bound to be a key factor determining China’s energy future. The purpose of this book is to provide a concise introduction to China’s energy problems by focusing on the growth and development of the oil and gas sector. These realities provide a starting point for all other dimensions of China’s energy situation. Important as the subject is, we find it remarkable how limited is knowledge of these issues outside China and outside a very small group of foreign specialists. This is a serious issue, particularly bearing in mind the growing tendency among some politicians and commentators to blame the world’s economic ills on the Chinese. The graph that appeared in the press in 2005 showing a close fit between the trend of Chinese oil imports and world oil prices was a good example of this type of misleading and alarmist analysis. We hope that this book will do something to remedy this situation.3 We start our study by analysing the historic trajectory of the oil and gas sector. Present energy resources and the infrastructure to exploit them are very much a product of history and, in Chapter 1, we briefly review the Chinese development of oil and gas from the earliest times to the present. In particular we examine the changing emphases between the eastern and western phases of exploration and the story of the offshore oil mini-boom of the 1980s. In Chapters 2 and 3 we discuss the geological basis for this progress and the record of exploration and development. Chapter 4 focuses on the role of natural gas and in Chapter 5 we look at the development and prospects for the Tarim Basin – often seen as China’s new energy Klondike. In Chapter 6 we examine the infrastructures of refining and transportation. These are both topics critical to oil and gas development but about which relatively little is known outside China. In the last chapter we sum up and analyse the prospects for longer-term supply and discuss some of the policy

Introduction

5

options confronting the Chinese authorities and the implications for the global energy future. Finally, while the main emphasis of this book is on our analysis of the issues, in the Appendix we outline what appear to be the current Chinese perspectives and approach to their country’s energy future.

NOTES 1. International date for oil and gas are from BP Statistical Review of World Energy, June 2005. 2. This crisis is described in The State Grid Corporation of China, Zhongguo dianli shichang fenxi yu yanjiu 2004 chunji baogao (Research and analysis of China’s electricity market. Report for Spring 2004), Beijing: The China Electricity Publishing House, 2004, pp. 25–35. 3. The Worldwatch Institute has suggested parallels between China’s search for resources and that of Japan in the 1930s: Worldwatch Institute, The State of the World 2006, Washington, 2006. The graph appeared in The Economist, 17 February 2005.

1. The origins and modern development of China’s oil and gas industry OIL AND GAS BEFORE THE ESTABLISHMENT OF THE PEOPLE’S REPUBLIC OF CHINA Although small and economically insignificant, oil and gas were known in pre-modern China. Both oil and gas seeped or even gushed through the earth and the Chinese found ways to use them. For example, along the Yanshui River in Shanxi Province crude oil was used for fuel and other traditional uses included the lubrication of axles and the making of pitch to seal ships’ hulls.1 Even more remarkable was the development of natural gas in Sichuan Province. This was transported through bamboo pipes and burnt in the process of extracting salt from underground wells of salt water. The first known use of the term we now use for oil – shiyou – was over 900 years ago, since when the term has been common usage in both China and Japan (see Photograph 1.1). In the modern age oil became of major importance when, in the form of kerosene, it began to be widely used as a lighting fuel. Western oil companies rushed to this new Asian market, importing large quantities of kerosene into both India and China. Shell oil company (Royal Dutch Shell) had a large oil market in Asian countries. From less than half a million gallons in 1870, imports from the USA alone to China reached 165 million gallons by 1920 as consumption rose, boosted by marketing campaigns which even included the free distribution of kerosene-burning lamps by the Standard Oil Company.2 This new industry was based mainly in Shanghai, where American and European major oil companies established large storage facilities. Drilling for oil in China using modern technology began at the turn of the century. Qing government officials invited Japanese engineers to prospect for oil at Yanchang in Shanxi Province, where its presence was already known from surface seepage. Although we now know that oil reserves of significant magnitude were indeed there, at the time the Japanese technology and the financial constraints on the prospecting firms 7

8

China and the global energy crisis

Photograph 1.1 The first known reference to shiyou (oil) appears in Menqi bitan (‘Jottings from a stream of dreams’) an 11th century Song dynasty text on natural philosophy were major limitations on what could be done. The result was that little oil was ever produced. The Standard Oil Company also undertook some work at Yanchang, but it too was disappointed. In spite of these setbacks, rival domestic political interests remained involved with the site. Both the Guomindang and the Chinese Communist Party sought to exploit any resources that could be found, and in 1935 the Red Army took control of the field, establishing the Yanchang Petroleum Factory. This establishment achieved some success, producing an estimated 3000 tonnes of crude oil between 1939 and 1946. This was refined at a small and unsophisticated refinery on site, and the products were consumed locally.3 The first major success in the modern history of China’s oil exploration was development and production in the Yumen oil fields in China’s northwestern province of Gansu. Again, the region of the Hexi Corridor had long been thought to have promise, and a geological survey was made by the government as early as 1906. But it was not until the arrival of modern techniques and equipment in 1937 that serious progress could be made. In 1937–38, the Nationalist government established a Preparatory Office for Establishing Gansu Petroleum Exploration and the Red Army’s equipment was used to drill four test wells. In 1939, oil was struck at Laojunmiao and the Yumen fields began their important history. Between 1938 and 1944, 44 wells produced a cumulative total of 455 000 tonnes of oil and by 1949 the field was producing 80 000 tonnes annually. This was refined at the city of Lanzhou into a variety of products, including gasoline for vehicles, fuel oil and lump kerosene. Lanzhou thus became the centre of the Chinese oil

Origins and development of the oil and gas industry

Dushanzi Oil field

Urumuqi

Haerbin Changchun

Yanchang Oil field

Shenyang

Yumen Oil field Lenghu

Beijing

Oil Shale Factory Dalian

Tianjin

Yinchuan Xining

Bohai

Taiyuan Zhengzhou

Lanzhou Oil Centre Xi’an Lhasa

Yellow Sea

Nanjing Shanghai

Chengdu

Wuhan

Chongging

Hefei

Changsha Fuzhou

Guiyang Kunming

Guangzhou Nanning

Bengal Gulf

9

East China Sea Taiwan

Hong Kong

South China Sea

Figure 1.1 The geographical distribution of China’s oil industry before 1949 industry and this fact was marked by the establishment there of the Academy of Petroleum (see Figure 1.1 and Photograph 1.2). Another location for early oil development was the province of Xinjiang. Again oil seepage had been observed at Dushanzi, and the Karamai field (as it became known) took its name from a small hill actually created by the accumulation of oil pitch formed on the surface from underground sources. In 1933, after initial exploration, the Nationalist government formed a joint venture with the Soviet Union to develop these fields. Altogether 33 wells were drilled before the joint venture was terminated in 1943. Production peaked in 1942 at just under 7000 tonnes per annum. It was not until 1950, therefore, that full-scale exploration of the Xinjiang Junngar Basin field began. Another place where pre-Liberation development occurred was Taiwan. Some early American exploration had been undertaken by American engineers at Miaoli as early as 1878. But it was not until the Japanese period (1895–1945) that a major effort was made in both oil and gas exploration. At Jinshui and Chukuangkeng, oil and gas fields were identified and exploited. Between 1904 and 1948 over 168 000 tonnes of crude were produced. Small refineries were established at Miaoli and Gauxiong. Japanese initiative was also responsible for one other important energy development in pre-Liberation China. This was the establishment of

10

China and the global energy crisis

Photograph 1.2 The Yumen field in the 1950s. The basic drilling rig here is of the type common in China in this period shale-oil distillation at Fushun in Liaoning Province, Manchuria. The Fushun open-cast coal mine (the largest in the world at that time) was covered in oil shale. Starting from a test plant, Japanese companies developed facilities that by 1942 were producing 250 000 tonnes of shale oil.4 In the same year, the Japanese also produced 24 000 tonnes of coal-based synthetic petroleum from plants at Jinzhou, Jinxi and Jilin. By that time, as well as small refineries at Lanzhou, Yanchang and Dushanzi, the refinery at Dalian run by the Manchuria Petroleum Company of Japan had a capacity of 680 000 tonnes per annum. In spite of these domestic developments, China remained heavily dependent on imports. In the 40 years to 1948 a total of 28.8 mmt of petroleum products were imported, which meant that the domestic share of supply was only approximately 10 per cent. Domestic supply in fact was inadequate to meet even the demand for gasoline, gas oil and lump kerosene.

THE PETROLEUM INDUSTRY DURING THE PERIOD OF SOVIET SUPPORT The problem of energy development was one of the most urgent tasks of the PRC after 1949. Immediate measures were taken to prospect and make plans for the production of oil and coal. In April 1950, the first National Petroleum Congress took place and the Ministry of Fuel Industry (ranliao gongyebu) was given the overall responsibility for petroleum. In 1955, the Petroleum Administration Department of that Ministry was upgraded to

Origins and development of the oil and gas industry

11

the rank of Ministry of the Petroleum Industry (MPI). The MPI initiated and supervised all activities relating to exploration, oil-field development, and the construction of refineries. During the First Five Year Plan (1953–57) a variety of programmes of geological investigation, geophysical surveying and exploratory drilling was undertaken. The location of these efforts was basically those regions that had been found to have oil in the pre-Liberation period. In particular, efforts were focused on the Junngar Basin in Xinjiang, the Jiugan Basin in Gansu (where subsequently the Yumen field was developed), and the Ordos Basin in Shanxi, where the Yanchang fields were confirmed. Of these efforts, it was the work in the Junngar Basin that achieved the earliest success. In October 1955 what proved to be the huge oil fields of Karamai– Uruho were discovered in the Junngar Basin.5 The successful exploration and subsequent development of the Karamai fields depended heavily on Soviet technical support. The Dushanzi oil-field development had already been undertaken as a Sino-Soviet joint venture and in the development of the Karamai field, the Soviet contribution was enormous. A decision to develop on the basis of a further joint venture was made in 1959. Under this arrangement the early geophysical survey and the test drilling programmes were undertaken with engineers, materials and equipment supplied by the All Soviet Institute of Petroleum Engineering. These efforts enabled the field to come on stream on a provisional basis as early as 1959. Without this Soviet support the Chinese would have had the greatest difficulty in developing their oil and gas resources in the 1950s, although in the cooperative process, the Chinese specialists undoubtedly acquired knowledge and experience with great speed. As in other aspects of economic work, however, technical dependence on the Russians went hand in hand with the adoption of Soviet-style administrative arrangements. Planning was highly centralized, and under the MPI, an Oilfields Administration Department and an Exploration Supervision Department were formed. Meanwhile the Ministry of Geology (MOG), also modelled on Soviet practice, took charge of geological surveys. The Soviet specialists were engaged in every aspect of oil development, extending not only to geological and geophysical surveys and the drilling of test wells, but also to extraction technology, transportation by pipeline, lorry and rail, storage establishment, refining and so on. In addition to these practical forms of support, the Soviets also helped the Chinese by accepting Chinese students to undertake advanced study in all the relevant academic fields in Russian colleges and universities. These students later formed the backbone of the new Chinese industry on their return from the Soviet Union.6

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China and the global energy crisis

Progress in the 1950s, in addition to the new oil fields in the Junngar and Qaidam Basin fields at Karamai and Lenghu, also took the form of the opening of new natural gas fields in the Sichuan Basin. The Soviets also helped revitalize the older Yumen and Yanchang fields in Gansu and the Ordos Basin. By 1959, production from the latter fields reached 2.76 mmt. Downstream, the Russians installed new refinery capacity at Lanzhou, which in 1959 refined 2.349 mmt of gasoline, kerosene, fuel oil and lubricants. Further development of shale oil was also undertaken. Plant and equipment left by the Japanese at Fushun were brought back into operation and expanded, producing over 1 mmt by 1960. Meanwhile, at Maoming in Guangdong Province, a further shale-oil reservoir was discovered and a distillation plant built on site. In spite of all these developments, China’s energy demand during the 1950s substantially exceeded domestic supply for crude oil and petroleum products. The gap was filled by imports from the Soviet Union. During the 1950s, these amounted to 14 mmt, with a peak in 1959 of 3.048 mmt, of which 2.412 mmt were petroleum and the balance was crude oil. Initially these supplies came from fields on the Sakhalin Islands, but later Caucasian oil from the Baku fields was transported to China via the Black Sea and the Suez Canal. These flows continued even during the Sino-Soviet disputes and, in total, China imported more than 24 mmt at a cost of over 1 billion US dollars (see Table 1.1).7

THE DAQING FIELD: DISCOVERY, DEVELOPMENT AND THE SIGNIFICANCE OF THE ‘DAQING METHOD’ In the late 1950s China’s oil development effort began its fundamental shift from the west to the eastern side of the country. Behind this shift lay complex geological realities and a history of expert debates. The question as to whether oil and natural gas reserves might be held below the Songliao Plateau in north-eastern China had long been a contentious issue. Li Siguang, a prominent geologist and the first minister in charge of geological prospecting at the Ministry of Geology (MOG), had long been convinced of this possibility. Li recommended to Mao Zedong that in developing domestic resources, the prospecting effort be transferred from the older fields in the western areas to new potential fields in the east. Li’s argument was that China’s principal oil and gas reserves were not held by marine sediments but were in lacustrine (terrestrial) sediments of the kind formed beneath sandbars of lakes and rivers. Li considered that such

13

Origins and development of the oil and gas industry

Table 1.1

1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960

China’s oil supply, 1949–60 (000 tonnes)

Crude oil production

Shale-oil production

Total

Crude oil and refined products imports

Total oil supply

National selfsufficiency rate (%)

70 110 154 196 306 382 423 589 861 1472 2763 4196

51 90 151 240 316 407 543 574 597 792 971 1016

121 200 305 436 622 789 966 1163 1458 2264 3734 5212

– 281 729 608 834 904 1582 1732 1803 2507 3294 3273

121 481 1134 1044 1456 1693 2548 2895 3261 4771 7028 8485

– 41.6 26.9 41.8 42.7 46.6 37.9 40.2 44.7 47.5 53.1 61.1

Source: Data calculated from source gathered in, T. Kambara, ‘Petroleum Industry in China’, Sekiyu kaihatsu jihö (Oil Development Review), No. 24, December 1974, pp. 15–41, table 2. Minor corrections made later from official Chinese and Russian sources.

deposits were probably widespread but he advocated that search should be intensified in the depressions of the so-called Xinhuaxia structural system found in eastern China.8 This argument was discussed in detail in 1956 at the First Petroleum Exploration Conference and it was then decided that, in addition to further work in the western regions, a major effort would be made to explore the huge sedimentary basins of eastern China. The MPI and the MOG jointly organized a major effort in the Huabei and Songliao Plains, which extended through the provinces of Shanxi, Gansu and the Ningxia Ordos Basin. Thirty-nine special exploration teams were formed and their planned programme included geophysical surveys and strategic drillings to identify the geological formations in these places. As a first step, magnetic and gravity investigations were conducted from the air covering these vast regions. In 1959, the first test well was drilled in the central area of the Songliao Basin and, on 26 September of that year, crude oil gushed from the Songji No. 3 well at Datongzhen. This result suggested that further exploration and development might well find economically feasible fields, with three other areas of north and north-east China looking favourable. However, it was the stunning result in the Songliao Basin that was so remarkable, and the No. 3 Songji well and its field were renamed Daqing (Great Joy).

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China and the global energy crisis

The fact that this discovery coincided with the tenth anniversary of the establishment of the People’s Republic of China (PRC) was regarded as both fortuitous and highly symbolic.

THE ‘DAQING METHOD’ By 1960 the Sino-Soviet dispute was making the question of Chinese oil self-sufficiency an immensely important one. Also, the dispute itself was about a whole range of issues, including the correctness and relevance for China of the entire Soviet approach to development and economic planning. This approach embodied both a strategy for resource allocation (heavy industry priority) and a method of economic administration (centralized bureaucratic planning). By the late 1950s Mao was convinced that the Soviets had got the fundamentals of both of these wrong. With Chinese agriculture failing towards the end of the First Five Year Plan and the inapplicability and inefficiency of Soviet planning methods in the Chinese environment becoming ever more obvious, Mao turned the whole Daqing enterprise into a showpiece for new, ‘Maoist’, methods of development. The new Maoist model of economic development put the emphasis on self-reliance rather than any form of foreign technological dependence, on labour rather than the scarcer capital resources, and it required political education to take the place of material incentives. None the less, after the loss of Soviet support the technical and human resource challenges of the Daqing field were truly enormous and historically unprecedented. Quite apart from skill shortages, inexperience and lack of equipment, the physical environment of Daqing was itself appalling. The site was basically a swamp in a bleak plain, remote from secure food supplies, and lacking transportation and other basic infrastructural support. Winter temperatures brought by blizzard conditions were typically in the range of minus 30 to 40 degrees Centigrade. It was in these conditions that the Party decreed that capital shortages and technical shortcomings should be overcome by the mobilization of thousands of men in ‘battle’ formation, controlled by military work methods, and driven forward by Maoist ideology. To implement this strategy the State Council gave supreme priority to the Daqing project, requiring all relevant ministries (transport, machinery, construction, railroads, agriculture and forestry) as well as the Heilongjiang provincial government, to cooperate under the umbrella control of the MPI. For the Communist Party, too, the Daqing project became a supreme test of political strength and of its ability to weather the crisis of the post-Soviet years.

Origins and development of the oil and gas industry

15

Lamadian

Saertu

Xinshugang

Gaotaizi

Taipingtun

Putaohua

Aobaota

Figure 1.2

The main fields in Daqing oil field

At any one time up to 40 000 workers were mobilized in the Daqing development. These performed every task, from basic land construction, drainage and the construction of living accommodation, to the transportation of machinery, often by means of long human chains. As its development unfolded, the Daqing field proved to be an agglomeration of many individual fields. The Songji No. 3 well became part of the larger Gaotaizi field and this discovery led directly to discovery of the Putaohua and other fields in the main Daqing central field (see Figure 1.2). In the northern part of this field was the largest discovery of the entire Daqing complex, the Saertu field. On the basis of this series of preliminary discoveries, a full Daqing ‘battle line’ was put in place. In 1960–61 the priority was exploration activity, with the main focus on the area adjacent to the Saertu field. This had the advantage of proximity to a railway station at Saertu – subsequently named the Daqing station. Thousands of wagons laden with equipment were despatched to this station. The geological character of this region was such that individual wells were relatively small; hence in a frantic socialist competition, the plain was soon covered by hundreds of individual drilling rigs. A particular problem of these small adjacent wells was that as they were opened up and air let in, they had a tendency to explode. This phenomenon could only be prevented if large

16

China and the global energy crisis

Photograph 1.3 Labour hero Wang Jinxi employing his mud-stirring technique as depicted in the Chinese film ‘The Development Battle of the Daqing Oilfield’ quantities of muddy water were injected at high speed. The solution to this problem was found by ‘Iron Man’ Wang Jinxi – the greatest and archetypal labour hero of the Daqing enterprise. Wang typically leapt right into the huge containers of muddy water, swirling it around with his body so that it was circulated at high speed, thus avoiding the danger that it might ice over. To maximize production from these small wells, water injection – a technology normally associated with enhanced recovery towards the end of the life of a well – was used at the outset of the well’s life. The Chinese called this method ‘early water injection’ (zaoqi zhushui). This was originally a Soviet technique which, after the Russians left, the Chinese developed to the point where it could be employed to develop large numbers of small wells, each 900 to 1500 metres deep9 (see Photograph 1.3). The development of the Daqing field proceeded with extraordinary speed. In 1960, the output of crude oil produced on an experimental basis reached 970 000 tonnes. Most of this was refined at a simple distillation tower and used for local purposes. The balance was transported as crude to other parts of China. By 1963, nearly 1200 wells had been drilled and facilities at Saertu were sufficient to produce 9 mmt per annum although actual production in that year was only 4.393 mmt, most of which was transported to refineries in north China (see Photograph 1.4).

Origins and development of the oil and gas industry

17

Photograph 1.4 The Yanshan refinery in Beijing. Like other refineries in the 1960s, this was placed close to mountains thought able to provide some protection from a Soviet attack

‘SELF-RELIANCE’ AND DAQING’S TECHNIQUE AND PERFORMANCE DURING THE CULTURAL REVOLUTION During the 1960s and for most of the 1970s Daqing was the pre-eminent example of Mao’s nationalistic policy of ‘self-reliance’ and the beneficiary of every priority that the political and administrative system had power to make available. The planning environment of the Great Cultural Proletarian Revolution was of course chaotic and while Daqing could not avoid being affected by this, its performance was none the less remarkable. The application of Maoist Party styles of work was universal and the Little Red Book and armfuls of slogans were developed, not only to urge the Daqing workers to ever greater efforts, but to use the Daqing example to spur industry, construction and agriculture throughout China as well. However badly these methods worked in less favoured sectors, for most of the time the combination of enthusiasm, military work style and administrative priority worked

18

China and the global energy crisis

for oil and gas, and both upstream (exploration and development) and downstream (refining and supply) sectors of the industry grew rapidly. The key Saertu field was brought fully on stream by between 1964 and 1966, with annual output reaching 13 mmt. The crude oil produced was transferred by pipelines to gathering stations, stripped of gas and water, and then piped to storage tanks to await final shipment. The chemical properties of Daqing oil, however, created some serious problems for its handling. One property of this oil is that when the ambient temperature falls below 32.5 degrees Centigrade the oil solidifies and cannot be handled. As a result, Daqing crude has to be heated year round except for a short spell in the summer months. Another problem arises from the fact that the oil has a high wax content, requiring that production, transportation and storage facilities be continually de-waxed to keep them working efficiently. As Daqing experience accumulated, the ‘battle front’ techniques matured and improved. If we take a bird’s-eye view of the Daqing field, what we see are hundreds of wells, all employing water injection techniques. These wells are arranged in square, grid-type arrangements and each is capped by a small tree-like structure known in the industry as a ‘Christmas tree’. The structure consists of a shelter made from mud bricks, and inside this are young, usually female, workers collecting data on the stream of output. The shifts cover 24 hours of the day. These data are critical for controlling the water pressure in the system. An excess of water dilutes the oil and the changing characteristics of the crude require other adjustments to the injection process as the well breaches the changing strata of sediment. Although the engineers understood the basic principles of water injection underlying these procedures, the application of them to Daqing was only accomplished by lengthy and exhausting processes of trial and error. In 1966 Daqing development moved on from Saertu to other new fields. Xinshugang was the next to be opened, but by now the disruption caused by factionalist fighting and disruption in the Cultural Revolution were serious problems. Led by activists such as Chen Boda, the Cultural Revolution was taken right into the Daqing field. Iron Man Wang Jinxi was ridiculed, wells and equipment were sabotaged and damaging attacks were made on engineers and white-collar specialists labelled as ‘bureaucratic’ enemies. For a while, there was a complete breakdown of leadership. However, when Zhou Enlai heard of these developments he was ‘extremely upset’ and moved immediately to reinstate Wang and restore order to the field, which he insisted was a good and successful development, vital to China’s interests. In spite of Zhou’s powerful patronage, there was some disruption and delay, and the Xinshugang field did not come on stream until the late 1960s.10 The third Daqing field to be developed was Lamadian, a field close to the Daqing rail terminal. Again water injection methods were applied from the

19

Origins and development of the oil and gas industry

Table 1.2 The long-run output of crude oil at Daqing and its share of national production, 1960–2005 (000 tonnes) Commenced production 1960 1961 1965 1966 1970 1975 1976 1978 1980 1982 1984 1985 1986 1987 1988 1989 1990 1995 2000 2001 2002 2003 2004 2005

Daqing crude oil production (A)

Total China crude oil production (B)

Daqing’s share of national output (%) (A)/(B)

971 2 743 8 342 10 600 17 670 46 260 50 305 50 375 51 501 51 940 53 560 55 289 55 552 55 553 55 703 55 556 55 622 56 010 53 000 51 500 50 130 48 400 46 400 44 951

5 200 5 310 11 310 14 541 30 646 77 060 87 160 104 050 105 950 102 120 114 610 124 890 130 610 134 140 137 050 137 650 138 450 149 060 162 300 164 830 170 280 170 440 174 720 180 861

18.6 51.6 73.7 72.9 57.6 60.0 57.7 48.4 48.6 50.9 46.7 44.3 42.5 41.4 40.6 40.3 40.2 37.6 32.6 31.2 29.4 28.4 26.5 24.8

Source: Various sources.

outset, and output from the whole Daqing field rose from 10.6 mmt in 1966, reaching 17.67 mmt in 1970 and 50 mmt in 1976 (see Table 1.2). These levels of output required a major transportation infrastructure, especially pipeline facilities. The long-distance pipeline from Daqing to Fushun was completed in 1973 and this was later extended to the port of Qinhuangdao and to Beijing. This pipeline replaced the older system of rail transportation, and pipelines are now used to move crude to refineries in all the major industrial centres in north-east China. In most cases, refining includes a variety of products, with petroleum being refined and distributed for local use. Eventually, Daqing crude also made its way by sea not only

20

China and the global energy crisis

to Shanghai and Guangzhou in the south, but also to Japan where it came to form a significant component of the Sino-Japanese Long Term Trade Agreement (see Photographs 1.5–1.7).11 After the start of development at Daqing, China’s oil exploration effort moved to the Huabei Basin of eastern China. Two fields here were to prove of immense importance: Dagang, south of the city of Tianjin, and Shengli, in the delta of the Yellow River in Shandong Province. Again, both of these fields were aggregates of many smaller, independent wells. The Daqing ‘battle-front’ method was adopted for the exploitation of Shengli and this was applied not only to the oil field, but also to the cultivation of adjacent farmland. After four years’ work, output at Shengli of 1.34 mmt was achieved in 1966, and from this beginning a succession of new fields was discovered, taking total Shengli production up to nearly 20 mmt by 1978. At this level Shengli became China’s second most important oil field. In the early stages, most Shengli oil was refined at local refineries in Shandong Province, but as output grew it became necessary to transport the crude elsewhere. For this purpose innovative new pipeline systems were put in place. One system took oil across the Huahe River and another connects the Shengli terminal with the port near Qinhuangdao, from where tankers ship crude to refineries in southern China.

Photograph 1.5 Daqing pipelines constructed in the 1970s. Prior to this Daqing crude was transported by long fleets of railway tankers

Origins and development of the oil and gas industry

21

Photograph 1.6 Two Daqing tankers loading crude at Qinhuangdao in the Bohai Gulf, probably en route to southern China The Shengli fields proved to be even more complex in their geophysical characteristics than those at Daqing. Observations from the fields were recorded and the sedimentary layers modelled by sophisticated techniques using computers obtained from the French. As the centre for this kind of work, Shengli was the natural site for the establishment of an Academy of Petroleum to undertake research and train specialized staff. The development of Dagang was somewhat different. Test drilling began at Gangsi in 1963 and in the following year the MPI sent in teams from Daqing. Although output from Dagang only reached the level of 3 to 4 mmt in the mid-1970s, the exploitation of the field proved to be of great significance. This was because Dagang became the centre from which the offshore exploration in the Bohai Gulf could be launched. Much more dramatic was the discovery of oil at Renchiu in Hebei Province. This eventually proved to be the start of a huge complex of exploitation activity that produced what became known as the Huabei (North China) oil field. First test wells were successful at a ‘buried hill’ oil field in 1975 and test production reached the remarkable level of over 1000 tonnes per day. A ‘buried hill’ field is one in which oil is trapped in cracks in deep subterranean hills composed of Palaeozoic carbonate salt. After the success at Renchiu, a campaign was launched to search widely for similar formations and a series of ‘buried hill’ wells was developed in the Huabei region. Again, the peculiar geological formation posed new problems for

22

China and the global energy crisis

Photograph 1.7 Celebrations in June 1973 on the occasion of the departure of the first rail tanker carrying Daqing oil exports to Japan. In the following 30 years Daqing exported some 200 million tonnes of crude to Japan extraction. Maintaining water pressure in these structures is very difficult and ‘buried hill’ fields tend to produce a lot of oil in their early life, after which output dwindles rapidly. Production in the Huabei region eventually peaked at 17 mmt in 1978. Finally, the other region where exploration and development in this period were successful was in Liaoning Province. The Liao River Delta was a natural prospect for oil and gas and the MPI began serious prospecting in 1967. This involved diverting teams from Daqing and later Dagang. By 1975 a large field was under development at Xinglongtai. Progress was halted by an earthquake in February of that year. This registered 7.5 on the Richter scale and it caused the adjacent sea to flood the field and damage much of the equipment. Between 1976 and 1978, however, further fields in the region were discovered, most of which were worth development. In Liaohe the crude is of a highly viscous, heavy type. This could only be drawn by using steam injection techniques that lowered viscosity for

Origins and development of the oil and gas industry

23

extraction. By 1978, output was 3.5 mmt and 1.65 billion cubic metres (m3) of gas were also being produced. The location of these fields close to major centres of industrial activity – notably Anshan and Shenyang – made them of particular value since the output could be transported relatively easily by a combination of pipeline and rail. Today, with annual output of 12 mmt, the Liaohe field ranks as the third largest in China. The north-eastern and eastern regions had clearly become the major source of China’s new-found oil during the hey-day of the 1960s and 1970s. However, prospecting and some development were energetically pursued in many other parts of China. In the north-west, Karamai and Lengfu were explored in Xinjiang and Qinghai – China’s remotest provinces. And in the Ordos Basin in the Shanxi–Gansu–Ningxia region, the Yanchang fields were opened. Other major finds were in the Jilin and Zhongyuan fields that extended across the provinces of Henan and Shandong. The other major exploration and development effort was that in the Sichuan natural gas fields. Long known as a source of gas, the province provided output under ‘battle-front’ campaigns from less than 1 billion m3 in 1966 to over 6 billion m3 by 1978. This was mainly transferred by pipe to major cities such as Chengdu, where it was used for both industrial and domestic purposes. Natural gas could be burnt directly as fuel and was also important as feedstock for fertilizer plants. The other major source of natural gas in this period was the Daqing field itself. Here, associated gas was liquefied into LPG (liquefied petroleum gas) and shipped to residents in Harbin and other northern cities. Looking back at these years, one is struck by the astonishing achievements of China’s development effort in the oil and gas sector. Cut off from Soviet expertise and short of all forms of capital equipment and infrastructure, Chinese workers, technicians and high-level specialists of all kinds mounted an heroic effort to bring on stream the country’s oil and gas resources. These resources were beginning to be identified in the period of Soviet assistance, but their actual development called for truly historic human effort and technological ingenuity.

THE ISSUE OF SELF-SUFFICIENCY The exceptionally fast growth of the oil and gas industry in all its departments gave rise to great optimism that China was on the threshold of selfsufficiency. During the early 1960s Premier Zhou Enlai made many personal inspection visits to Daqing and by December 1963 he was able to tell the National People’s Congress that ‘For the oil needed by our country we are basically self-sufficient’.12

24

China and the global energy crisis

This view was based on the estimate that Daqing output had the potential to completely replace Russian imports. By 1966 Daqing accounted for 10.6 mmt, 73 per cent of total production. In the same year imports of Russian petroleum fell to 40 000 tonnes. However, in spite of gushing crude production, the issue was not so simple. First, there is a problem of principle. In a market economy we can speak meaningfully about self-sufficiency and shortage by observing not only price movements but also absolute shortfalls as reflected either in industrial plant operating below capacity or ‘outages’ in power generation attributable to supply shortage. In the planned economy, however, only physical bottlenecks in the latter sense are relevant, since the ‘demand’ for oil or energy is what the planners say it is, not what enterprises and households might determine in a market. Under the Chinese planned system, vehicle gasoline, gas oil and other key products including fuel oil were all allocated directly to organizations and enterprises with no legal secondary markets of any kind. The situation was further complicated by the Cultural Revolution. This not only dislocated output and its growth but, even more seriously, hampered the working of refineries, transportation and distribution arrangements. As a result there was at times almost total gridlock in the system and fuel shortages were clearly visible in bottlenecks, short-time working, power cuts, and a failure to meet minimal household demand – for example even that for lump kerosene, whose production was forbidden although demand for it was enormous in the urban area where often no electricity was available. Even during the 1970s, as matters improved to some degree and a semblance of planning was resumed after the fall of Lin Biao, there was still no sign of the expected national ‘surplus’. Two factors were now at work here. One was the growing gap between crude output and refining capacity. This trend was clear by 1978, for since crude output had by then risen to over 100 mmt per annum (largely based on Daqing), refinery capacity was still limited to about 70 mmt. The other factor was the new policy option open to China after the world oil crisis of 1973–74. This enabled China to consider the possibility of exporting crude oil at very high prices, notably to Japan. This possibility was of great importance to the Chinese since it allowed them to earn the hard currency which they needed to import capital goods embodying advanced technologies. The opportunity was almost equally important to the Japanese for two reasons. One was that Chinese oil diversified Japanese energy sources and thus strengthened Japanese economic security. Of equal significance, however, was the fact that Daqing’s oil, with its low sulphur content, was doubly welcome because its availability coincided almost exactly with Japan’s decision to embark on a rapid programme of pollution reduction. During the 1960s (the era of ‘high-speed growth’), the Japanese

Origins and development of the oil and gas industry

25

government had largely ignored the problems of industrial and transportation pollution. But after the environmental scandals of the 1970s the Japanese government began to control many forms of emissions and because of its use in thermal electricity generation, Chinese oil, together with that from Indonesia, played a useful role in this. The other serious imbalance that developed during the Cultural Revolution was that between production and exploration and the consequent decline in the reserves:production ratio. Between 1965 and 1978, while crude oil output grew ninefold, proven reserves only doubled. One reason for the emergence of this problem was the changing balance of bureaucratic power inside the industry.13

THE CHANGING BUREAUCRATIC STRUCTURE During the 1960s the main ministerial division was that between the Ministry of Geology and the Ministry of the Petroleum Industry. These two ministries operated a division of labour, with the MOG in charge of exploration and the MPI running the production side. But as the pressures to maximize current output grew, so did the MPI’s budget and its power and ability to control exploration as well as production. In 1970 the MPI was merged with the Ministries for Coal and Chemicals, but in 1975 the Ministry was again broken up, with the Ministry of Coal being re-established in its own right. In 1978 the Ministry of Chemicals was also re-established as an independent unit to govern the downstream segment of the petroleum industry. Two results of all this were very important. First, the strength of the MPI in its various forms was a key factor explaining the relatively slow growth of proven new reserves. The MPI gained at the expense of the MOG but had much less expertise and interest in the prospecting side of the industry. Second, however, the political strength of the MPI and its political backing were reflected in the strong growth of the industry. Zhou Enlai was a key figure here, as was Minister Yu Qiuli, who ran the MPI during the 1960s. Mao also supported both Zhou and the MPI since he saw the development of the oil industry not only as a political model for the Chinese economy, but also as an integral part of his ‘Third-Line Battlefront’. This latter was the economic dimension to Mao’s anti-Soviet and anti-American policies and required that the Chinese industrial economy be geographically dispersed to make it less vulnerable to military action. This political and bureaucratic strength meant, in effect, that although subject to some disruption, the sector was broadly immune from the worst effects of the Cultural Revolution and was not disrupted by factionalism and the Gang of Four. Further, in the period after Mao’s death in 1976, the

26

China and the global energy crisis

new Party chairman, Hua Guofeng, entrusted the first steps in the industrial revival of China to the leader of the so-called ‘Oil Group’ – Yu Qiuli. Yu was appointed chairman of the State Planning Commission and was also supported inside the economic bureaucracy by Kang Shien (chairman of the State Economic Commission) together with the ministers for petroleum, metallurgy, and chemicals – Song Zhenming, Tang Ke and Sung Jingwen respectively. This group was intimately related to Hua’s ambitious economic plans – plans that were strongly oriented to heavy industry and premised on the promise that the oil industry could construct ‘ten more Daqings’.14 The rise to power of Deng Xiaoping changed this scene fundamentally. Rejecting Hua’s drive for heavy industry, Deng and his chief economist Chen Yun pressed to rebalance the economy in favour of agriculture and light industry. They also began to implement serious institutional reform. In November 1979, MPI Minister Song was forced to take responsibility for the capsize of Bohai 2, an offshore drilling rig lost in the Bohai Gulf. Subsequent bureaucratic restructuring also weakened the oil industry’s influence. In 1988 the MPI was merged into the Ministry of Energy and in 1993, when electricity and coal were again given ministerial status, oil was not only kept within the Ministry of Energy, but downgraded to a lower bureaucratic status as the China National Petroleum Corporation. The extent and significance of these organizational changes will be discussed further in Chapter 3.

THE ‘OPEN DOOR’: NEW ROLES FOR FOREIGNERS AND THE BEGINNINGS OF THE OFFSHORE OIL INDUSTRY We have explained above the way in which the oil and gas industry was a key example of the policy of ‘self-reliance’ and of its associated political work style in managing oil and gas enterprises. Deng Xiaoping’s policy of reform and the ‘Open Door’ changed the prospects for the industry by enabling it to tap into foreign resources of many kinds, by bringing China into international oil and energy markets, and by revolutionizing the organization and management practices of the pre-reform industry. With regard to international markets, China had begun its entry with sales of crude oil developed in the 1970s. However, this had been a highly controversial policy that was associated with Zhou Enlai and, although tacitly supported by Mao, attacked strongly by the radicals and clearly vulnerable to any future leftward shifts of political opinion and power. For both oil and gas, the international dimension was critical to the healthy development of the sector. Trade was one issue, but even more

Origins and development of the oil and gas industry

27

important for the longer run was the opportunity to obtain access to foreign technology and know-how – especially for exploration and development. China’s technological achievements under ‘self-reliance’ were, as we have argued, truly remarkable and there were three elements to these: first, prolonged contact with Soviet experts and use of Soviet equipment; second, assiduous study of technological literature available from Western sources; and third, sustained experimentation on the ground as solutions were sought for China’s particular geological conditions. But however great these efforts, China’s expertise could not, unaided, hope to match what could be done with full access to foreign expertise. Indeed, even the published materials that the Chinese specialists relied upon so heavily could not yield their full benefits without the complementary explanation, advice and tacit knowledge of the authors, which of course were not available in China. These issues had already become serious by the first half of the 1970s and, under the umbrella of Zhou Enlai’s support, some preliminary contracts were signed. However, the unstable and violent political environment made it impossible to bring these to useful fruition. The basic difficulty for the industry was die-hard opposition to allowing foreign involvement in the Chinese oil and gas exploration effort if this required any kind of foreign ownership (or even access) to China’s land and terrestrial resources. These issues were particularly important in the case of offshore oil exploration and development. China had no serious experience of this, could learn little from the Soviets, yet in the worldwide market highly sophisticated skills and technologies were available, honed not only in older fields such as the Gulf of Mexico, but more recently in the very different conditions in the British North Sea. The potential of the continental shelf in the Bohai Gulf and the East and South China Seas had long been a matter of some speculation, but this was not based on actual exploration. In the post-oil-crisis years, the frantic search to diversify oil resources led several Western interests to suggest to China that exploration of the shelf was long overdue. One paper that attracted attention in this way was written by one of the present authors and presented by the US State Department to the Chinese through several channels. At the time, the US Trade Representative in Beijing was George Bush, an oil man who may well have been a factor facilitating these early contacts. While developing a growing interest in the possibilities of offshore exploration, the Chinese side decided that the moment was not yet ripe to advance the issue.15 In March 1978, nine months before the first public steps in the Deng policy revolution, the Chinese invited representatives of foreign oil companies to

28

China and the global energy crisis

Beijing for preliminary discussion. However, the Chinese negotiators had little idea how to deal with this unprecedented situation. On the one hand, with the second oil crisis in the offing, the potential gains from successful exploration and development of China’s continental shelf were enormous. On the other, the practicalities of any contracts required a level of background knowledge and technical sophistication that was not available at the time. Further, the political risks to any Chinese officials participating in what to the radicals of the left would have been seen as a sell-out to foreign capitalism were at the time very real. In July–August 1978, Japan’s first petroleum mission to China took place. This was led by Mr Hitoshi Miyazaki, vice president of the Japan National Oil Corporation, and comprised 13 members, including Kambara. The mission visited the major oil fields at Daqing and Shengli, as well as potential sites for offshore exploration. One important result of this mission was that it offered the Japanese an opportunity to explain to the Chinese what the international legal implications of offshore exploration would be, and what kinds of contracts might be on offer from foreign oil companies were China to proceed with a policy of allowing a foreign role in its offshore industry. In particular it was explained that no foreign contracts would actually deprive China of its rights to its own natural resources. Also, the mission outlined the benefits that could flow from production-sharing agreements (PSAs) of the kind that foreign oil companies had with Indonesia and other countries active in exploration. Under such agreements, exploration is undertaken by the foreign company, assuming all the risks, but sharing any oil or gas discoveries with the home partner on a preagreed basis. In spite of this successful preliminary exchange, it proved difficult to produce any concrete agreements. The main reason for this was that the Chinese negotiators still felt disadvantaged by lack of access to the detailed content of PSAs being made around the world, and hence felt vulnerable to the danger of not achieving the best possible deals for China. To remedy some of the difficulties, a strong Chinese team, headed by the petroleum minister Kang Shien, toured Europe and America on a fact-finding mission to identify current world trends in the industry. In Europe the team visited the British North Sea and Norway. In America they visited Washington, New York, Houston and San Francisco, finally returning home via Tokyo. In each place they discussed the issues involved in offshore contracting and, after the visit, foreign specialists from the United Nations and Norway were invited to Beijing for further consultancy and detailed discussions on what might be involved in these types of agreement. On the basis of what had been learned, in May 1980 the Chinese finally signed contracts with Japan and France for exploration and development

Origins and development of the oil and gas industry

29

of the Bohai Gulf and the Beibu (Tonking) Gulf. The contracting party for the Bohai Gulf on the Chinese side was the offshore sub-corporation of the Chinese Petroleum Corporation, which acted under the supervision of the MPI. For Japan, the acting party was the Japan–China Oil Development Company and for the French, Elf Aquitaine. The Chinese chose the French national oil company Total for the Beibu Gulf contract. Subsequently a further contract in this first round was signed with an American independent, Arco, for the exploration of the Yinge Sea off the southern coast of Hainan Island. In 1982, the prospecting effort was strengthened with a second round of tendering. In this, an open tendering process for PSAs to prospect in the South China Sea was offered to international companies. In many cases these companies had already supplied the Chinese with the results of geophysical surveys. By this time the Chinese government was much better prepared to handle the contracting process and had, in February 1982, established the China National Offshore Oil Corporation (CNOOC). The CNOOC acted under the direct control of the Chinese State Council and was responsible both for offshore exploration as well as the joint contracts with foreign companies. The 1982 round may be considered the point at which serious participation by China in the world offshore industry began.16

OIL PRODUCTION, TRADE AND STRATEGY AFTER THE ECONOMIC REFORMS The long-run trends in China’s crude oil production are indicated in Table 1.2 and Figure 1.3. We see from these that output peaked at 106 mmt in 1979, stagnated, and then actually fell in the early 1980s. Subsequently output rose, but much more gradually and in a form that resembles a series of plateaux of increasing altitude. Understanding the mechanics of this post-reform performance is important if we are to understand the nature of the Chinese oil output trajectory. One reason for the slowdown in output growth has already been touched upon – namely the widening imbalance between resources allocated to maximizing production in existing fields and those provided for prospecting and the development of new fields. This gap reflected both a myopic preference for quick results rather than the longer-term trend and the shifting balance of political influence as the Ministry of Geology ceded power to the Ministry of Petroleum Industry. As a first step to remedying this situation, the government resorted to institutional reform and in particular to an improved structure of material incentives, thus reversing the historic dependence of the sector on political

30

China and the global energy crisis Natural gas billion m3 50

Crude oil mmt 200

180

45

160

40

140

35 30

120 Crude oil production 100

25

80

20 15

60 Natural gas production 40

10

20

5

0 1971 73

Figure 1.3

75

77

79

81

83

85

87

89

91

93

95

97

0 99 2001 02 03 04 05

Crude oil and natural gas production in China, 1971–2005

incentives. The first measure to be introduced was the Crude Oil Responsibility Contract, a special version of the Responsibility System introduced into industry generally. Under this arrangement oil-field operators were allowed to dispose as they wished of any output above 100 mmt per year. Further, not only could the MPI dispose of the additional output, they could use the funds so obtained to buy foreign equipment and invest in new production. The results of this initial measure were good, and these positive effects were reinforced by further incentive measures that allowed a share of the taxes levied on oil production to be retained for social and other expenditures. As elsewhere in the economy, these funds were heavily used to improve housing, recreational and sporting facilities and even, in Daqing, to set up a stunning roller-coaster in the park. Under the impact of this mini-boom, the once desolate town of Daqing was turned into a flourishing city of more than a million people, making it one of the five largest cities of Heilongjiang Province (Photographs 1.8 and 1.9). Apart from the impact of the general institutional and incentive factors at work, understanding the movements in Chinese oil output hinges critically on the performance of the Daqing field. Daqing was the fundamental factor behind China’s oil boom, accounting in the late 1960s for nearly three-quarters of total output. The performance of Daqing has remained the key to oil output ever since. In 1976, when the field reached the 50 mmt level of output and accounted for 57.7 per cent of national output, a policy of wenchan or ‘stabilized production’ was introduced. Under normal

Origins and development of the oil and gas industry

31

Photograph 1.8 Daqing city today – a prosperous city of high rise apartments and a population of more than one million

Photograph 1.9 Oil fields in contemporary Daqing with extraction now at an advanced stage of automation

32

China and the global energy crisis

conditions, in which operators seek to maximize the output of a well, the shape of the output curve will rise to a peak and then fall away, the precise gradients depending on geological conditions, the impact of investment and other technological factors. But the peculiarity of the Daqing field, as explained earlier, is that it is made up of hundreds of small wells, each of which has its own special characteristics and profiles of potential output. In these circumstances it was possible for the planners to construct a range of scenarios from which to choose an aggregate plan that would stabilize the output of the field as a whole. This process involved assessing the recoverable reserves of each individual well and working out possible time paths for extraction. Of course there were limits to the accuracy of this procedure; also, it must be borne in mind that the sophistication of recovery techniques was rising all the time. Thus when recovery conditions proved more favourable than had been initially estimated, it was often possible to store such ‘pocket oil’ for use in a later period when other wells and the overall output plan struck unexpected obstacles. It is remarkable how successful this stabilization policy has been. Two features are particularly interesting. First, it proved possible to raise the top of the output trapezium from the 50 mmt level by several mmt per annum. Second, the stability of the trapezium itself has been maintained for an astonishing 27 years (Figure 1.4 and Table 1.2). This Daqing performance has been the core around which the rest of Chinese oil and energy policy has been constructed. Two factors explain what has happened. First, the mini-boom of the 1980s reflects the impact of institutional reform and the improved incentives that this brought. The other factor has been the impact of new technologies, several of them mmt 60

50

50.3

46.4 44.9

40 30 20 10 0 1960

Figure 1.4

65

70

75

80

85

90

95

2000 04 05

Crude oil production in the Daqing oil field, 1960–2005

Origins and development of the oil and gas industry

33

imported. We have already seen how the Chinese developed their own water injection recovery systems for use in the early stages of the Daqing wells. However, these techniques would not have been able to maintain output over the longer term. For this, new technologies to enhance recovery late in the life of the wells were needed. One important technique was the use of suction pumps that enhanced recovery rates from every well. Another was the application of the so-called ‘infill system’. This enabled the minimum initial distance between wells to be halved, i.e. reduced from 500 m to 250 m. This measure therefore implied the complete reconfiguration of the Daqing field. Improved technologies were also an important factor in raising the output at the Shengli field above the 30 mmt level. In the Sixth Five Year Plan adopted in 1979, China confirmed its intention to quadruple total output between 1980 and 2000. This policy was intended to raise the Chinese living standard to what was called the level of xiao kang – literally ‘small comfort’ or ‘a moderately comfortable life’ (see Appendix). The target for energy, however, was only to double output. This implied that the planners believed that the energy elasticity of output could be held at 0.5 – i.e. for every 1 per cent of output growth, only 0.5 per cent of energy growth would be needed. Applied to oil, this scenario implied that output was expected to grow from 100 mmt to 200 mmt by 2000. This target, however, proved totally unrealistic. We need to know, therefore, what its basis might have been. Why did the planners get it so wrong? There seem to have been two considerations that lay behind thinking at that time. One was a residual confidence in the notion dating from the era of Hua Guofeng that, somehow, it would be possible to develop ‘ten more Daqings’. The other basis for this optimistic assessment was that there would be a bonanza in the offshore sector that would plug the gap of any shortfalls in onshore output. Neither of these expectations was realized. As we have seen, neglect of prospecting and failure to identify major additions to reserves during the Daqing boom years weakened the onshore situation while, for different reasons, the offshore situation proved equally disappointing. More than one hundred foreign companies participated in offshore ventures. Between them they spent more than $3 billion on speculative exploration, constructing more than 200 test wells in the 1980s. But by the 1990s poor results discouraged almost all of them from participating further in the offshore search. The net result of these trends has been that oil output has struggled to keep pace with demand in the post-reform era of high growth. Two observations underline the reality of this problem. One is the continuing phenomenon of shortages, which cause power outages and short-time working in the industrial sector. The other indicator has been the growing role of coal and hydro as the basis for electricity generation. In fact, both coal and hydro

34

China and the global energy crisis

development seem to have been supported by more political strength in recent years. Coal, for example, has the added advantage that output is very flexible because it relies not only on a public sector that is in the process of reform, but also on a private, small-scale sector. The private coal sector has many problems, including a low technological level and an appalling safety record, but it is none the less very responsive to prices and economic opportunity. One other dimension is important if we are to understand correctly the development of the oil sector in the 1980s and 1990s. This is the changing role of exports. The export boom in the 1970s and early 1980s had been stimulated by high international oil prices. One effect of this boom was to influence not only the level of output, but also its location. The boom emphasized the importance of Daqing and led to the intensive development of a transport network that facilitated exports through the port of Dalian. However, when world prices for oil fell in 1985 and the reform and ‘Open Door’ policies began to yield results in the growing exports of manufactures, China was able to substitute such exports for oil. This change enabled the planners to switch the oil exploration and development effort away from the north and east and towards the west and southern seaboards. The shift to the west in particular was consistent not only with the known availability of oil and gas reserves in that region, but also with the more general ‘Look West’ policy adopted by the Party in the 1990s. This policy is, in fact, an echo of the policy of the 1950s, which was subsequently downgraded because the short-run costs of it were too high, but was then revived by Mao in the ‘third-front’ policy of the 1960s. The other geographical factor brought into play by the geographical reorientation of the oil and gas sector is the reality that, whereas the north and north-eastern regions of China were the ‘key point’ development regions in the era of heavy industry, under reform since 1978, industrial growth has been strongest in Guangdong and the eastern coastal regions, especially around Shanghai and down the Shanghai–Nanjing industrial corridor. This shift called for a major change in the energy distribution system. For example, Daqing and Shengli crude has had to be shipped by sea to refineries in Shanghai, Guangzhou and Chinhai from the ports of Huangdao and Qinhuangdao. This, however, was not an easy change to implement since previously most Daqing and Shengli crude was refined close to the oil fields. Competition between refining centres thus became intense – so much so, for example, that the Luning pipeline, specifically built to transfer oil from Shengli to Nanjing, has never been fully utilized. One by-product of this complicated, and for customers frustrating, situation has been a trend in recent years for Guangdong in particular to become increasingly dependent on imports of oil, much of it imported illegally.

Origins and development of the oil and gas industry

35

These problems of output shortfalls, poor coordination within the energy sector and other consequences of the poor geographical distribution of resources all serve to illustrate that fundamental institutional and administrative problems remain unresolved. For while China has moved a long way towards a market economy in many respects, energy is a sector where the public interest and public funds still play the central role. Institutional rationality and an accompanying clarity of purpose in policy are essential ingredients for a sound development of oil and gas. We shall return to this issue in the next chapter, as well as in our summing up of the longer-term issues facing the sector.

NOTES 1. 2.

3. 4. 5. 6. 7. 8. 9.

10. 11. 12. 13. 14.

15. 16.

This is described in the classical text known as the Hanshu dilizhi. Data from Sherman Cochran, Encountering Chinese Networks. Western, Japanese and Chinese Corporations in China, 1880–1937, Berkeley: University of California Press, 2000, p. 24. And for other aspects of this, see Alice Tisdale Hobart, Oil for the Lamps of China, New York: Grosset and Dunlop, 1933. Jiao Liren, Dangdai Zhongguo de shiyou gongye (Contemporary China’s Petroleum Industry), Beijing: China Social Science Publishing House, 1988. Zhang Moxin, Dangdai Zhongguo de shiyou huaxue gongye (Contemporary China’s Petrochemical Industry), Beijing: China Social Science Publishing House, 1987. Jiao Liren, Contemporary China’s Petroleum Industry. Tatsu Kambara, Chugoku no sekiyou sangyo (The petroleum industry in China), Tokyo: Institute of Developing Economies, 1991. Ibid. J.S. Lee, The Geology of China, London: Thomas Murby & Co., 1938. The Chinese divide the history of Daqing into four periods: 1960–66, expansion of known fields; 1966–76, analysis of the geological characteristics of the field; 1977–85, development of the strategy to stabilize annual output at 50 mmt. Within this framework, four different phases of water injection are identified, leading up to the post-1981 phase of very high levels of water injection. Zhang Lizhong et al., Keji jinbu yu Daqing fazhan jianshe (Technical progress and the development of Daqing), Beijing: Technology Publishing House, 1986, ch. 5. These events are described in Wenhua da geming de Zhou Enlai (Zhou Enlai during the Great Cultural Revolution), Beijing: The Central Party School Publishing House, 1997, pp. 37–45. Kambara, The Petroleum Industry in China. Zhou Enlai zhuan, 1949–1976 (Life of Zhou Enlai 1949–1976), Part Two, Beijing: The Central Documents Publishing House, 1998, p. 689. Ma Hong and Sun Shangqing, Zhongguo jingji jiegou wenti yanjiu (Research into problems of Chinese economic structure), Beijing, 1981. Kenneth Lieberthal and Michel Oksenberg, Bureaucratic Politics and Chinese Energy Development, Center for Chinese Studies, The University of Michigan (prepared for the Department of Commerce), August 1986 and the same authors, Policy Making in China: Leaders, Structures, and Processes, New Jersey: Princeton University Press, 1988. Tatsu Kambara, ‘Petroleum Industry in China’, The China Quarterly, No. 60, October– December 1974, pp. 699–719. Qin Zhongjian and Gong Zaisheng, Zhongguo youqi kantan. Jinhai youqiqu (Oil and gas prospecting in China. Offshore exploration), Beijing: Oil and Geological Publishing House, 1999, Vol. 4.

2. The geological basis of the onshore oil and gas industry In order to evaluate the past and to understand the present issues in China’s oil and gas industry, we need to consider in more depth the resources nature has given China on which to base this industry. As China moves from an oil surplus to oil deficit economy, with all the economic and strategic implications of this change, this issue becomes pressing. It is important to know whether present problems reflect short-term difficulties or whether they reflect a fundamental shortfall in the raw energy resources available for Chinese development.

THE NATURE OF OIL AND GAS RESERVES Estimation of oil and gas reserves is a complicated matter. Such reserves are a complex of hydrocarbons which may manifest themselves in a variety of forms and mixtures. Typical crude oil fields are a mixture of oil, gas and water, often held within porous rocks. If structures with permeable or porous rock extend to the surface, then leakage and loss will occur, and the reserves will not be contained. The best oil fields are, therefore, hydrocarbon-bearing formations that are themselves contained in nonpermeable rock formations. Such oil fields are thousands of metres deep, at which point there is the ideal combination of oil- and gas-impregnated materials bounded in caverns of impermeable materials. Since gas is lighter than oil, and oil lighter than water, on drilling one typically finds first gas, followed by oil and then water. Initial prospecting therefore usually begins with the identification of places where the desired geological conditions seem likely. This will be followed by test drilling and other basic procedures. After any initial discovery, the first step is to estimate the volume of the oil-bearing material. However, if the form of the field is one in which there are large numbers of relatively small independent reservoirs (as at Daqing), this can be a difficult process. Once the volume figure is obtained, analysis can indicate the porosity of the rock and hence the likely amounts of oil and water held within it. Data obtained must be standardized for pressure and temperature. Clearly 36

The geological basis of the industry

37

this process of estimation is technically very complicated in some formations, and the scope for error quite wide. Further, while most oil in place will flow unaided into a well once extraction begins, ‘secondary’ and even ‘tertiary’ recovery using water injection and other pressure techniques may raise the ultimate recovery well beyond what seems likely with primary methods. Once a figure for ‘oil in place’ has been established, it is necessary to develop an estimate for proven, recoverable reserves. This figure will in turn depend on what is feasible using current technologies and what is economic at current prices for transportation and the sale of the final products in various forms. ‘Proven reserves’ are typically much lower than those for ‘oil in place’. In the USA, for example, only one-third of oil in place has historically been reckoned as proven. On this basis, the key data for any oil field is an estimate of oil in place and proven reserves, and the history of production. For a country as a whole, the key ratio is often thought to be that of current production to proven reserves, since this gives some notion of how long proven reserves will last before exhaustion. In policy terms, unless reserves are exceptionally abundant, it is usually regarded as prudent to ensure that investment in prospecting and development enable annual additions to proven reserves to keep up with current production. This ensures that the production/reserves ratio remains constant. Much but not all natural gas is associated with reserves of oil. Where it is associated, gas may be either dissolved or free. Alternatively some gas fields are not associated with oil at all. Since, as we noted above, where oil and gas are associated, the gas typically rises above the oil and water, it was in the past often not commercially feasible to use oil-field gas, which was simply burnt off. This has now largely changed, partly because of the rise in the value of energy and partly because of the development of gas liquefaction techniques and the use of long-distance pipelines. Gas in place is normally estimated in volume, with standardization for pressure and temperature. Estimates of proven reserves again have always to be made by taking into account technical and economic factors that limit the significance of gas in place.1

CHINA’S MAJOR OIL- AND GAS-BEARING SEDIMENTARY BASINS China is estimated to have 30 distinct sedimentary basins within which significant amounts of oil and gas are held. In total these cover 4.33 million km2 of space out of a total of 9.6 million km2 of land mass and 1 million km2 of sea area. Extensive exploration has already been undertaken in

38

China and the global energy crisis

35

38

25 1 24

34

23

22

Bohai

21

28

Lanzhou 30

32 31

2

33 5

Xi’an

3

20

19

Bengal Bay

6 10 12 14 17 21 25 30 36

Figure 2.1

Yellow Sea 6

7

Shanghai East China 8 Sea

4

Guangzhou 17

18

0

Shenyang

Beijing

27 29

1

37

36

26

500 1,000 km 13 12

9 10

16 15 14

Pacific Hong Kong Ocean

11

South China Sea

3 Nanxiang 4 Jiangnan 5 Subei Songliao 2 Huabei South Yellow Sea 7 Hefei 8 East China Sea 9 Taiwan 11 Zhujiangkou Taiwangiantan Taiwan Bank 13 Beibuwan Beibu Gulf Yinggehai Yingge Sea 15 Maoming 16 Sanmu Guangzhouwan Guangzhou Gulf 18 Lanpingsiya 19 Chuxiong 20 Sichuan Baise Pase 22 Chaoshui 23 Jiuchuan 24 Turfan Shaanganning 28 Qaidam 29 Kumukuli Junngar 26 Tarim 27 Dunhuang Runpola 31 Heihe 32 Minhe 33 Fenwei 34 Erlian 35 Hailaer Fuxin 37 Fushun 38 Sanjiang

The main sedimentary basins in China

these fields, often probing hydrocarbon formations thousands of metres deep (see Figure 2.1) Among these basins, the largest hydrocarbon resources are thought to be in the Bohai Bay Basin, also known as the Huabei (North China) Basin. This huge basin covers 144 500 km2. It extends through the provinces of Hebei and Shandong and Tianjin City, and includes a vast swathe of land in the southern part of Liaoning Province, extending ultimately to the Bohai Bay. This basin includes the major fields of Shengli, Liaohe, Dagang, Huabei and Zhongyuan. Oil in place in this basin is estimated to be 18.8 billion tonnes. The second largest basin is the Songliao Basin in north-east China. This basin (which is distinct from the Songliao Plain – a geographical region) includes part of Heilongjiang and Jilin Provinces. Although larger in extent than the Huabei Basin, the Songliao Basin has smaller reserves, estimated

The geological basis of the industry

39

at 12.9 billion tonnes. The Songliao Basin includes China’s largest field, the Daqing field, which is made up of 40 independent fields, all now discovered and fully developed. The third largest region in terms of reserves in place is the Tarim Basin in the Xinjiang Uygur Autonomous Region. This basin, formed several thousand metres below the Taklamakan Desert, covers a vast 540 000 km2. In 1994 it was estimated that total reserves in this basin were 10.7 billion tonnes. We believe, however, that the huge programme of exploration and surveying in this region will eventually identify a much higher figure. Also in Xinjiang is the Junngar Basin located north of the Tianshan Mountain Range and now thought to be China’s fourth largest region of reserves. This basin covers 130 000 km2 and at present is estimated to hold 7 billion tonnes of oil reserves in place, mainly in what are known as the Karamai oil fields. Finally, two other smaller basins are located to the east of the Junngar Basin. These are the Turfan–Hami Basin and the Qaidam Basin. Together, these two basins, with the Tarim and Junngar Basins, make up what has now become known as the Western Basins. There are two other onshore basins of importance in China: the Ordos Basin, which spans territory in the north-western provinces of Shanxi, Gansu and Ningxia; and the Sichuan Basin in Sichuan Province. Both the Ordos and Sichuan Basins are particularly noted for the richness of their gas reserves. Turning now to the offshore basins, we have already mentioned the Bohai. In addition to this, important basins include the Nan Huang Hai (South Yellow Sea Basin), The Dong Hai (East China Sea Basin) and the Nan Hai (South China Sea Basin). Other southern basins include those in the Yinge Hai Sea and the Beibu Gulf. The South China Sea Basin is particularly large, embracing as it does the whole of the Pearl River Delta. According to a report made in 1994, total reserves in these offshore basins were 24.6 billion tons.2

CHINESE ASSESSMENTS OF THEIR OVERALL RESERVES OF OIL AND GAS The question of the country’s oil and gas reserves has been much debated inside China. In 2000, for example, there was a major nationwide teleconference to which local specialists from all over China contributed. As an overall benchmark, this conference sought to estimate what may be called the total ‘geological resources’ of petroleum and natural gas in China. This measure is the sum of what we have called ‘oil in place’, to which is added oil already extracted plus an estimate of the results of future

40

China and the global energy crisis

Table 2.1 China’s major sedimentary basins: size, geological resources, proven oil reserves, 1994 Sedimentary basin

Area (km2)

Songliao Bohai Gulf Tarim Junngar

255 400 144 500 560 000 130 000

Total China

4 330 000

Geological Proven Production resources reserves (1994) (billion tonnes) (billion tonnes) (mmt) 12.888 18.841 10.760 6.937 94

Cumulative production (mmt)

5.784 3.969 0.214 1.999

59.30 60.11 1.95 7.90

1348 1065 5 124

16.987

146.07

2686

Source: CNPC and others.

surveying efforts. It therefore represents the total natural endowment of hydrocarbons in all the Chinese sedimentary basins, known and expected to be known. The detailed results of the teleconference were kept confidential, but it has been reported that the figure for this measure was 106.8 billion tons of petroleum and 52 trillion (million million) m3 of gas. A more detailed assessment of these resources was that made by the Second Resources Assessment Conference in 1994. According to this, total geological resources were 94 billion tonnes, of which 73.8 per cent was onshore and 26.2 per cent offshore. The natural gas total given at that time was 38.04 trillion m3, of which the on and offshore shares were 78.6 per cent and 21.4 per cent respectively. The geological resources of petroleum were concentrated in the six main basins (the Bohai Bay, Songliao, Tarim, Junngar, Pearl River Delta and East China Sea Basins), which between them accounted for 70 per cent of the 94 billion tons. At the time (1994) this implied that the three largest basins (Bohai, Songliao and Tarim) each had more than 10 billion tons, while the others had 4 billion. However, the more recent assessment of 2000 suggests that this judgement has now changed somewhat (see Table 2.1). Turning to the gas estimates, the Tarim and Sichuan fields are still thought to be by far the biggest holders of reserves, estimated in excess of 8 and 7 trillion m3 each, but the Ordos and other basins are still very large (see Table 2.2). If we wish to think in terms of China’s geographical regions, we find that the west and central regions account for 28 per cent and 30 per cent of the total respectively, while 21 per cent of the total is offshore. These gas figures, however, are probably now all on the low side. Surveying and exploration work for gas has been relatively slow over the long run, but the more recent efforts – particularly in the west – are expected to produce much higher figures. By the year 2000, after intensive efforts in

41

The geological basis of the industry

Table 2.2 China’s major sedimentary basins: geological resources of natural gas, 1994 Sedimentary basins Tarim Sichuan Ordos Tsaidam East China Sea Yinggehai Bohai Gulf Total China

Geological resources (trillion m3)

Share of total (%)

8.389 7.357 4.179 1.05 2.48 2.239 2.118

21.9 19.4 11.0 2.7 6.5 5.9 5.5

38.04

100

Source: CNPC and others.

Table 2.3

The relation between the different measures of resources

1

2

3

4

5

6

‘Geological resources’ (oil in place plus estimates of future discovery)

Original oil in place

Estimated ultimate recovery from ‘proven’ reserves (oil in place adjusted for current technology and economic conditions)

Cumulative production

Proven (current) reserves* (col. 3 minus col. 4)

Ultimate recovery as % of oil in place or geological resources: col. 3 divided by col. 1 or col. 2

Note: * In China, this reserves category is known as the shengyu kecai chuliang (remaining recoverable reserves).

the Tarim Basin, official estimates of China’s total gas resources were raised from the 38.04 trillion m3 quoted above to a new figure of 52 trillion m3, and even this is likely to be raised again soon. As can be seen from the earlier discussion, these figures refer to resources that are theoretical and rather remote in operational terms. Not only do they include estimates of future discoveries but, unlike the ‘proven reserves’ concept, they do not take into account the state of technology and economic considerations. The relation between the different measures is shown in Table 2.3. Reading reports of oil and gas reserves in the Chinese press can be highly misleading. There are several reasons for this. First, Chinese press sources

42

China and the global energy crisis

confuse these categories. For example, the measure in column 1 of Table 2.3 is preferred to the more common international use of column 2. Also, columns 2 and 5 are confused, so that the much higher figure of oil in place is quoted as proven current reserves, which should be the key figure. Second, a much-used measure in Western and Japanese oil literature is the ratio of current production to proven reserves. This enables one to estimate the number of years for which output can be maintained at current levels before exhaustion. In addition, inappropriate base data can invalidate the comparative meaning of Chinese examples of these ratios.3 We can now approach the Chinese data. In 2000 the figure for ‘geological resources’ was 106.8 billion tons. However, half of this is a very heavy type of crude, unsuitable for extraction, and of the remainder a recovery rate of 40 per cent may be possible. Of the 21.3 billion tons that remain, cumulative production and proven reserves account for 18 billion tons. Thus only 3.3 billion tons remain to be discovered (see Figure 2.2). Further, in fields already developed, the Chinese data for the reserves: production ratio imply that proven current reserves are only 1.5 billion tons. This means that less than ten years’ production at the 2004 level of output are possible. However, while this figure may have some validity in terms of current Chinese technologies, if the most advanced technologies already available internationally were applied, it seems likely that proven current reserves would be very much higher. Further, in the course of time we may anticipate that even more advanced recovery systems will be developed and these will raise the figure even higher. Similar considerations apply to reserves in the USA and elsewhere. None the less, these factors do not provide an adequate reason for the weaknesses in China’s surveying and exploration efforts, or for allowing any further deterioration in the reserves: production ratio. The gas situation appears to be considerably stronger. Output of gas is

mmt 200 150

Bell-shaped curve

Actual production cumulated up to the end 2004: 4.3 billion tonnes

100 50 0 1900

Figure 2.2

Ultimate recoverable reserves 21.3 billion tonnes. 106.8 billion tonnes 50 40

1950

2000

2050

2100

Crude oil production in China, actual and projection

The geological basis of the industry

43

still relatively modest at 40.7 billion m3 in 2004, and on this basis, proven current reserves are sufficient to support 45 years of output. On the other hand, gas output is highly dependent on pipeline and transportation infrastructure, and as these improve, output could grow very rapidly, which would pull the estimated lifetime of reserves downwards. What all this implies is that there are probably substantial opportunities for further petroleum exploration in China. However, the pace of Chinese exploration progress in recent decades has been very slow. For example, the ratio of exploration wells established per unit of space in sedimentary basins is considerably lower than that found, for example, in the USA. Clearly important systemic factors are at work here. In the USA, the free market encourages large numbers of companies to compete in exploration activity, while in China, in spite of reforms, exploration is still very much a state-controlled activity, limited by the financial and bureaucratic constraints that this implies. We see again, therefore, that China’s oil and gas future is far more than a matter of geological speculation. It is a future that will also depend on the evolution of China’s economic and financial system and on the role of foreign participation.

NOTES 1. For a basic discussion of these issues, see H. Stephen Stoker et al., Energy. From Source to Use, Dallas, TX: Scott, Foresman and Company, 1975. For an example of an exhaustive national analysis and discussion of methodologies, see US House of Representatives, Joint Committee on Interstate and Foreign Commerce, Project Interdependence: US and World Energy Outlook through 1990, Washington, DC November 1977. 2. An important recent study of the Chinese sedimentary basins is Zhao Wenzhi et al., Zhongguo hanyouqi xitong (The Chinese system of oil and gas basins), Beijing: Science Publishing House, 2003. 3. Chinese oil and gas reserve classifications are the subject of a report prepared by the Institute for Energy Economics, Japan, Chugoku no tobu yuden chiiki ni okeru seisan yosoku (Production forecasts for the oil fields in Eastern China), Tokyo, 1997.

3. Oil and gas administration and the evolution of exploration and development THE EVOLUTION OF STRUCTURES AND RESPONSIBILITIES In our overview of the pre-reform industry we emphasized the highly politicized nature of administration and management in China’s oil and gas sector. At the local level, the ‘Daqing’ method was widely relied upon. At the national level, allocations of investment and other resources reflected the political and bureaucratic strengths of the powerful factions supporting these industries. On the basis of these forces, not only did the oil sector do well in terms of initial allocations of resources but, of equal significance, the industry’s priority status meant that the severe coordination problems typical of the planned economy – and especially of the Chinese system during the Cultural Revolution – were usually resolved in its favour. This political basis was an important element in the sector’s strong growth record before reform began in 1978. Economic reform, however, was accompanied by a significant political transition from Mao to Deng Xiaoping, and in this shift the factions supporting oil and heavy industry turned out to be losers. This political change had important implications for China’s economic development strategies generally, but especially for the performance of the oil and gas sector. The impact of political change worked through both the mechanisms of investment allocation and resolution of coordination conflicts. It is important here to bear in mind that the industry, in all its forms, is by Chinese standards typically intensive in its use of modern physical capital. There is, for example, no oil equivalent of the ‘handicraft’ form of coal mining where in many parts of China enterprising individuals can add to coal output with the aid of a shovel and bucket. This means that the volume of capital investment is crucial to oil and gas performance. Further, and perhaps even more important, coordination problems in oil and gas are particularly complex and critical to performance. The sector requires the coordination of four different groupings of activity. These are shown in Table 3.1. 44

Administration and evolution of exploration

Table 3.1

45

Activities in oil and gas performance

Onshore oil and gas

Offshore oil and gas

‘Upstream’ activities: exploration development production

The same

‘Downstream’ activities: refining chemicals Transportation and distribution to customers involving road, rail, water or pipeline connections

Similar but the main emphasis is on expensive, dedicated pipeline systems

Coordination with the electricity supply industry and other energy sectors such as coal and nuclear

Similar

Of particular importance within the array of activities shown is the coordination between the upstream and downstream groups and, within the upstream, the balance between exploration and development on the one hand and current production on the other. This last is important because over the long run failure to invest in exploration and development will leave policy makers without the basic information needed either for investment plans or for overall national energy policies. The wider issue of coordination is important because, without it, the huge capital requirements of the oil and gas sector, and the long lead times needed to implement investment intentions, can lead to bottlenecks and huge consequent waste. In the early years of reform, energy policies generally and oil and gas policies in particular were indeed plagued with difficulties arising from lack of viable and internally consistent investment plans. The most glaring evidence of these shortcomings was acute difficulties in electrical supply, leading to frequent factory shutdowns and short-time working. One consequence of these shortfalls in electricity supply was a new emphasis on the role of coal as a short-term solution to shortage of primary energy output. The share of coal in China’s total primary energy supply had declined during the rapid phase of petroleum development from the mid-1960s through the 1980s, and this trend had been expected to continue. In the reform years, however, the trend was reversed. Coal is the primary energy form that is geographically widely spread and can respond quickly to economic demand. One reason for this is that much new coal output comes from small-scale locally managed and often private mines. These are

46

China and the global energy crisis

responsive to price and can expand with little additional capital equipment. But the private/quasi private sector, although dynamic and increasingly politically acceptable, has not represented a satisfactory solution to the problem, since it is beset with safety, environmental and other management difficulties that are huge embarrassments for the authorities. In addition, the long-term potential of this ‘handicraft’ coal sector is limited. In order to explore these issues and to explain why their management was so unsatisfactory, we must return to the question of the responsibility for these administrative and management tasks since reform.1 Given the scale and strategic significance of oil and gas projects, decisions on major projects and their financing are invariably to be taken at very high levels. That is, they are taken principally by the State Council, the former State Planning Commission and its successor the State Development and Reform Commission, and the highest political authorities. Before reform this factor worked in favour of the industry, but after the political balance shifted in the early reform period the oil and gas sector could not win national budgetary support of the order of magnitude that the industry knew was necessary. This was in spite of the fact that the oil and gas sector contributed 117 billion yuan to the Chinese budget revenue in the decade 1975–85. At the lower level of planning and management, in the 1980s responsibility for the ‘up-’ and ‘downstream sectors’ was divided. Upstream was the responsibility of the China Petroleum Corporation (CPC) operating under the Ministry of the Petroleum Industry (MPI). This arrangement changed in 1988 when the CPC was replaced by the China National Petroleum Corporation (CNPC), still under the MPI. There was always another ministry for petroleum and natural gas exploration in China, the Ministry of Geology. Through a subsidiary, this ministry profited from sales of oil and gas but had no rights to issue exploration or production permits in onshore China. Downstream, the key entity was the China National Petrochemical Corporation, known as SINOPEC. This had its own ministry – the Ministry for Chemical Industries. Interestingly, none of these organizations had clearly assigned rights to issue blocks of offshore prospecting areas to foreign companies. This power was largely reserved by the State Council, operating through the directly owned CNOOC. During the 1990s a major transformation in the planning and administration of the oil and gas sector got under way. This reflected the wider trend to convert an economy based on central planning and non-competitive administration into one in which independent units improved their efficiency and utility by cost reduction, innovation, and ever-rising capabilities to conform to market needs. Indeed, the oil and gas sector proved to be a model that was

Administration and evolution of exploration

47

followed by other large-scale, capital-intensive industries. The turning point in this successful process was the reform of 1998 in which the State Council laid down the principle that ministries be converted to bureaux – which in turn could establish below them commercial entities operating on the governance and competitive principles of modern corporations. In the oil and gas sector this led to the establishment of the State Bureau of the Petroleum and Chemical Industries (PCI) responsible to the State Economic and Trade Commission. At the same time, two huge commercial entities were created. These were the China National Petroleum Corporation (the ‘new’ CNPC) and the China National Petrochemical Corporation (the ‘new’ SINOPEC). However, whereas the old CNPC and SINOPEC divided upstream and downstream responsibilities, this was fundamentally changed under the new arrangements. Had the old functional division of labour remained, competition would not have been possible. Under the new dispensation, therefore, both corporations were empowered to engage in the whole spectrum of activities from exploration through to refining and domestic and export sales. At the same time, however, each was assigned a primary geographical region – north China for the CNPC and the south for SINOPEC. The intention of this reform was to give China two national oil companies, both of which would develop the capabilities needed to compete within China and worldwide with the international oil majors. Subsequently the CNPC, SINOPEC and a reformed CNOOC (the organization responsible for offshore activity) were all converted into holding companies known as PetroChina, SINOPEC Corp. and CNOOC Ltd. These were encouraged to establish further operating company subsidiaries. The CNOOC Ltd was actually incorporated in Hong Kong, while all three companies were listed on stock exchanges in Hong Kong, London and New York. The three corporations now have many subsidiaries, some of which specialize in a particular branch of the industry while others have a regional responsibility – as for example the Daqing Oilfields Operating Company. This model of reorganization, which drastically reduced the old bureaucracies and redefined operational tasks, was subsequently followed in other industries, including electrical power generation and airlines (see Figure 3.1).

EXPLORATION AND DEVELOPMENT ONSHORE AND OFFSHORE Under this new structure, exploration and development fall within the responsibilities of the three main corporations: PetroChina, SINOPEC Corp. and CNOOC Ltd. Overall, however, PetroChina is the largest

48

China and the global energy crisis NDRC National Development and Reform Commission

SINOPEC

CNPC

CNOOC

China National Petrochemical Corp.

China National Petroleum Corp.

China National Offshore Oil Corp.

SINOPEC Corp.

PetroChina

CNOOC Ltd

SINOPEC Star Petroleum Oil, gas Oil refineries Oil, gas Oil refineries Oil, gas fields Petrochemical fields Petrochemical fields Oil, gas fields

Figure 3.1

Oil refineries

LNG receiving centre

Organization chart of China’s petroleum companies

corporation, accounting for 65 per cent of crude oil production and taking a leading role in China’s upstream exploration and development effort. The major regions in which PetroChina is engaged in petroleum exploration are in north-east China and to some extent in Xinjiang. We now examine these developments in turn. Daqing and the Oil Fields of Heilongjiang Survey work began at Daqing in 1955 and the first field was discovered in 1959. In total the Daqing field now accounts for 40 individual fields all located in the Songliao Basin, and covering an area 160 km long (north to south) and an east-to-west width that fluctuates between 6 km and 30 km. The seven main fields are situated in a large anticlinal basin called the Changyuan structural formation. Still within this broad geological structure are a further ten oil fields located in Jilin Province.2 These fields are shown in Figure 3.2. In 1995 the estimated geological reserves of the field totalled 4.67 billion tonnes, which was later increased to something in excess of 5 billion tonnes. If the ultimate recovery rate can be raised to 50 per cent, then estimated ultimate recovery would be 2.5 billion tonnes. However, by the end of 2005, 1.9 billion tonnes had already been taken, leaving only 610 mmt in place. If a more conservative ultimate recovery rate of 40 per cent is adopted, it seems likely that the remaining recoverable reserves as of 2005 were only 100 mmt. As well as oil, Daqing produces significant volumes of natural gas. To date, this gas has only been ‘associated’ gas – i.e. it is produced only in conjunction with crude oil. The volume of gas per tonne of oil has been stable

Administration and evolution of exploration

49

Lamadian Saer tu Saertu 3 Xingshugang Xinshugang 4 Taipingtun 5 Gaotaizi 6 Putaohua 7 Aobaota 8 Songfangtun 9 Xujiaweizi 10 Wangjiatun 11 Shengping 12 Yushulin 13 Chaoyanggou 14 Changchunling 1

Qiqihaer City

44

2

45 46

1

48

Daqing City

27

ang Nenji

43

40

33 32

3

38 41

8 11

9

6

30

16

29

17

19

24

28

22

25

20 21

26

37

12

18

7

29

Figure 3.2

10

4

42

Daan

Honggang 30 Gaoxi 31 Yingtai 32 Longhupao 33 Jiaogula 34 Sifangtuozi 35 Sijiazi 36 Songzhan 37 Shangjia 38 Xingxi 39 Haerwen 40 Jinteng 41 Longnan 42 Puxi 43 Saxi 44 Fulaerji 45 Alaxin 46 Erzhan 47 Yangcao 48 Xindian

47 36

5

31

28

2

39

23

34

13

Haerbin

g City jian ua er gh li Riv n 15 So ga 15 Fuyu II n Su 16 Zhaozhou 17 Zhaozhouxi 18 Mofantun 19 Toutai 20 Xinmin Songhuajiang Sungali River 21 Fuyu 22 Xinlang 23 Mutou 24 Xinbei 25 Xinli 26 Qianan 27 Xindian 14

Oil Field 35

Changchun City

Gas Field

Daqing and Jilin oil fields

for many years at 40–50 m3. So far, over 84 billion m3 of gas have been produced (see Table 3.2.). More recent exploration work, however, suggests that in the southern Daqing fields there may be significant reserves of ‘non-associated’ gas trapped at much deeper levels than that found associated in the existing oil fields. If this is the case, it is possible that the Daqing field may produce significant amounts of gas long after it has ceased to produce any oil at all. As we discussed earlier, the character of the Daqing fields requires that water injection methods be used to raise pressures for recovery from the outset. As a result, as time has passed there has been a seepage of water into the oil reserves. In 1980 the water ratio reached 60 per cent. By 1995 the

50

China and the global energy crisis

Table 3.2 Oil and natural gas output in Daqing and their share of China’s total output, 1991–2005

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Daqing oil production (mmt)

National oil production (mmt)

Daqing share of national production (%)

Natural gas output (billion m3)

55.623 55.658 55.902 56.005 56.007 56.008 56.009 55.704 54.502 53.00 51.50 50.13 48.40 46.40 44.95

140.99 142.10 144.00 146.07 149.06 157.29 159.42 160.25 158.78 162.30 164.83 170.28 170.44 179.72 180.86

39.4 39.1 38.8 38.3 37.3 35.6 35.1 34.7 34.3 32.6 31.2 29.4 28.4 26.5 24.8

2.27 2.29 2.23 2.32 2.29 2.33 2.34 2.33 2.23 2.30 2.39 2.02 2.03 2.03 2.44

Source: Various.

ratio was 80 per cent and in 2000 it was reported to be 85 per cent. Thus while the water injection method has been inescapable, the technical implications of this procedure have escalated. During the 1990s the main recovery methods changed fundamentally. Not only have pumping systems been installed, but ‘infill’ wells have been drilled, reducing the space between wells from around 500 metres to as little as 100 metres in some cases. The total number of oil-producing and water-servicing wells in Daqing now exceeds 50 000. Another technological innovation of importance has been the use of the ‘polymer flooding method’. This is a tertiary recovery procedure that involves injecting water-displacing polymers into the wells. The procedure was invented in America, and the Daqing field represents the first application of this technique on a large scale, made possible by the construction (with Japanese industrial assistance) of a polymer manufacturing plant on site at Daqing. Up to 17 per cent of the total oil recovered from Daqing is estimated to have been produced by this system. These technologically innovative systems have been responsible for maintaining the output of the field. Output that reached 50 mmt in 1976 was maintained at that level, with modest increases of production for 27 years under the ‘stable production’ (wenchan) policy discussed earlier.

Administration and evolution of exploration

51

However, production in 2003 was less than 50 mmt and showed a declining tendency in 2004 of 46 mmt and in 2005 of 44.9 mmt. This represents a huge and little-known engineering achievement, although it has had considerable costs. In commercial terms, these policies have been important since some of the main customers for Daqing oil have been Japanese companies. Throughout the 1990s these companies were increasingly doubtful about the ability of the field to maintain, let alone enhance, its output, but in the event their fears were not realized.3 Looking to the future, at one time it was estimated that it would be possible to keep output at the 55 mmt level as far ahead as 2010. However, current projections suggest a figure of 45 mmt for 2005 and 37 to 40 mmt for 2010 according to the CNPC vice president’s press release. These figures indicate that the natural factors limiting output are now coming into play, and also imply that the costs of maintaining high levels of output at Daqing must be substantial. The Jilin and Liaoning Province Fields The oil fields in Jilin and Liaoning have also been the subject of prolonged exploration and development efforts. The ten chief fields in Jilin are located mainly in the Songliao Basin, while some are actually adjacent to the Daqing fields. The largest of the Jilin fields is at Fuyu. Discovered in 1959 and situated on the right bank of the Second Sungari River, the field’s location is an area of complex swamps and wetlands. The development of production at Fuyu depended on the establishment of pipeline and rail facilities which, by 1972, had enabled the field to become a significant producer with an output of 1.26 mmt. Some of the crude was refined for local use and the balance sent to refineries in Liaoning. During the 1970s, a succession of seven further fields was developed. As at Daqing, the recovery methods used in these fields were novel and very complicated. They involve water injection and the so-called ‘fracturing method’. The latter enables oil to be extracted from rock formations by application of exceptional pressures. By the late 1980s intensive development had raised output to 2 mmt and by 2004 it had risen to 4.29 mmt. In an effort to extract a still higher proportion of the oil in place, with the support of the Japan National Oil Corporation, new innovations including microbiological enhanced recovery were being pioneered. Another substantial group of oil fields is that located in the delta of the Liao River in Liaoning Province. Known as the Liaohe fields, these are based on sedimentary structures known as ‘block fault’ formations. This particular example is known as the Lower Liaohe subsidence, and it is situated to the north-east of the major offshore field in the Bohai Bay.

52

China and the global energy crisis

This region was intensively explored from 1964 by the Ministry of Geology and later by teams experienced in the Daqing fields who were under the control of the Ministry of Petroleum. From 1967 (the height of the Cultural Revolution), the latter engaged in exploration methods of the ‘battle-front’ variety. Hundreds of experienced oil men were brought in for exploration work and thousands of workers and People’s Liberation Army soldiers were engaged in infrastructure projects, including the construction of a 200 km road across the Liaohe swamps. In 1973 a special Liaohe Petroleum Exploration Bureau was established to coordinate the exploration effort in this region. During the 1970s a number of new fields were discovered in this region and preliminary development begun. Notable among these were fields at Xinglongtai, Damintong, Gaosheng, Shuguang and Hoangxilin. However, these efforts were seriously hampered by major floods and by a devastating earthquake in 1974. From a technical viewpoint, the reservoir formations associated with ‘block fault’ structures tend to be complex. Seismic analysis was needed to map these formations as clearly as possible and large numbers of trial wells were drilled. Typically, the block faults created groups of reservoirs each in a range of 1000–3000 metres deep. From the late 1970s the analysis of survey results was enhanced by new computer-assisted applications. The three-dimensional seismic surveys developed later had significant results, including the discovery of a huge ‘buried hill’ type reservoir at Damintong. A particular difficulty in the Liaohe field region is that its oil tends to be very heavy, with probably 30 per cent of the entire reserve falling into this category. The best method for extracting this kind of crude is the steam injection method developed in the USA. This involves injecting steam into wells that are close to but separate from the oil-producing wells. Chinese engineers learned of this method in the 1970s through study of the technical literature and, although they lacked all access to experience and tacit knowledge, they none the less attempted to employ it at Liaohe. A pilot steam extraction plant was built at Gaosheng in 1979 and after several years of experimentation the method began to yield results. By 1985 the method was producing 1.7 mmt annually – nearly 20 per cent of the entire Liaohe output. In addition, the Chinese also began to employ the steam soak process, popularly known as ‘huff and puff’. This is another steam injection technique, but one that injects the steam directly into the producing well, thereby both lowering the viscosity of oil and easing its extraction. During the 1990s exploration and development of the Liaohe field have continued, with intensified recovery techniques adapted to the different types of oil found in the region. Overall, the effect of these has been to raise

53

Administration and evolution of exploration

Table 3.3

Oil and natural gas output in the Liaohe field, 1978–2005 Crude oil production (000 tonnes)

1978 1980 1981 1982 1983 1984 1985

3 550 5 000 5 020 5 340 6 110 7 610 9 002

Cumulative

47 596

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995

9 840 11 350 12 670 13 350 13 600 13 700 13 851 14 201 15 023 15 523

Cumulative 1996 1997 1998 1999 Cumulative 2000 2001 2002 2003 2004 2005

Natural gas production (billion m3)

1.5

1.77 1.76 1.75 1.75

190 920 15 043 15 041 14 521 14 304

1.59 1.55 1.20 1.10

250 015 14 010 13 850 13 510 13 220 12 830 12 254

1.15 1.27 1.13 1.05 1.00 0.92

Source: Various.

the water content of these fields, which by 1999 had reached an average level of 72 per cent. As a result of these efforts over many years, output in the Liaohe fields as a whole reached 11.35 mmt in 1987 and peaked at 15.52 mmt in 1995. Thereafter output began to decline (see Table 3.3). This was hastened by the impact of widespread flooding in 1996, when over 1000 wells were

54

China and the global energy crisis

damaged. By 2005 annual output was down to 11.6 mmt and was declining at a faster rate than had ever been anticipated. At the same time, the technical conditions of the field must have been raising costs per tonne of oil produced. Thus when foreign investors were invited to bid for 17 exploration lots in 2001, there was little interest.

FIELDS IN THE XINJIANG UYGUR AUTONOMOUS REGION The Xinjiang oil fields have not in the past been grouped together; however, the term is increasingly being used to describe all fields in the Junngar Basin. The Tarim Basin itself is such an important issue for the future of China’s oil and gas that we devote an entire chapter to it. Here, therefore we look at the other fields in Xinjiang. Let us start with consideration of the Karamai field, located in the northwest of the Junngar Basin. This huge area in the north-west of China is triangular in shape and bounded by the Tianshan Mountains to the south, the Altai range to the north-east, and the Talbagatai Mountains to the north-west. The basin as a whole is 750 km from east to west and 450 km from north to south, occupying 330 000 km2 of land space. The area is mostly desert and mountainous steppe. As a whole, the Xinjiang Uygur Autonomous Region has a population of 17 million, of whom half are Uygur or Mongolian minority peoples. The Karamai oil field was first developed in the 1950s. Subsequently several other fields were discovered immediately adjacent to the Karamai, while to the east of Karamai, major deposits were located at Huoshaoshan. There are still considerable exploration possibilities in the region, notably at Maqiao. In total, the geological reserves in place are probably as high as 1.37 billion tonnes of oil; further successful exploitation of this can be anticipated in the next few years. Exploration in the Karamai and other Xinjiang fields is controlled by the Xinjiang Petroleum Administration. A major obstacle to development in this region is that local demand for crude oil and downstream products is limited, as is the infrastructure for transport outside Xinjiang. In its early stages, the exploration of the Xinjiang fields relied on camel transport for movement not only of materials, but also even for water. Today, transport is undertaken by a combination of road, pipeline and rail. For example pipelines are used to move crude to refineries and petrochemical plants in Dushanzi and Urumqi, and surplus crude is transferred to refineries in the city of Lanzhou in Gansu Province. Of crucial recent importance is the doubling of the rail track between Lanzhou and Xinjiang.

55

Administration and evolution of exploration

Table 3.4 Crude oil and natural gas output in the Xinjiang field, 1956–2005 Crude oil production (000 tonnes) 1956 1957 1959 1960 1961 1964 1966 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

16 72 961 1 636 1 050 879 1 147 3 068 3 805 3 838 4 270 4 994 5 750 6 404 7 020 7 602 7 903 8 301 8 702 8 710 8 985 9 200 9 683 10 050 10 600 11 110 11 663

Natural gas production (billion m3)

0.18

0.54 0.44 0.50 0.55 0.84 0.88 1.05 1.24 1.34 1.50 1.62 1.90 2.02 2.15 2.55 2.89

Source: Various.

Although costly to move, in other respects Xinjiang oil is highly desirable, being of light variety. Xinjiang output has grown from 5 mmt in 1985 to over 11.6 mmt in 2005. Total output in the Autonomous Region was reported to be 20 mmt in 2005. This included 6 mmt produced by PetroChina from the Tarim, 2 mmt from fields in the small Turfan–Hami Basins, and an unknown level of output produced by the SINOPEC–Star Company, also from the Tarim field (see Table 3.4). Of crucial importance to the future of the Xinjiang fields are the economics of the proposed Xinjiang–Lanzhou crude oil pipeline, which would replace the present system of rail transportation. However, it is reported

56

China and the global energy crisis

that an oil-only product pipeline with an annual transportation capacity of 5.8 mmt is now under way. There is as yet no clear information on the proposed crude oil pipeline with a capacity of 50 mmt per year. Exploration and Development in Regions now Controlled by SINOPEC: Shengli The first major group of fields to consider here are those known as the Shengli oil fields in Shandong Province. Some 70 major fields are located close to and under the Huang He (Yellow River), running down to and under the sea in the Bohai region. Geologically the region is a series of four major depressions that make up the quasi sedimentary basin of the Bohai Basin as a whole. Work on these began in the 1960s and more than half of the Shengli fields are associated with the largest of these, the Dongyin depression. Work in the region has continued steadily with many more positive results, most recently the confirmation of an important field at Jiangjiaden in January 2002 (see Figure 3.3). According to the Shengli Oilfields Administration, original oil in place at Shengli amounts to 3.6 billion tonnes (1997 estimate). However, there is some confusion in official data on this field as it is not always clear whether reference is exclusively to onshore reserves, or whether the offshore Bohai Bay reserves are included. For example, a 1994 estimate of 3.969 billion tonnes was given for the inclusive figure, but this is clearly inconsistent with the 1997 figure for onshore only, quoted above. It is clear from the record of production that exploration in the Shengli fields has been very successful. Output began in 1962 and reached an early peak of 19.46 mmt annually in 1978. Subsequently output began to decline until the Gudao field came on stream in 1983. Output then rose to 31.6 mmt in 1987 and peaked again in 1991 at 33.55 mmt. Although it did not recover the peak, output was maintained at above the 30 mmt level until 1995, after which output began to decline, but maintained a level of 26 mmt, reaching 26.9 mmt in 2005. Cumulative output at Shengli amounted to 883 mmt by 2005 (see Table 3.5). Looking to the future, it is estimated that the field will continue to produce above 20 mmt annually using the tertiary recovery method of injecting sulfonate (SO3) into the oil formation. However, the precise performance of the field will depend critically on economic rather than the purely technological factors. This is particularly the case for production in the shallow waters of the Bohai Gulf. There are, for example, reserves known to exist in the Chengdao field that is just offshore, but with present technology and costs, further exploration and development work is not justifiable.

57

Figure 3.3

1

67

lo Yel

r ive wR

Rosi uplift

59

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63

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38

57

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52

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6

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32

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45

58

dep.

43

61

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33

21

27

48

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ep. a d

hu Zan

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de

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gb

56

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5 12

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28

Yellow river mouth dep.

Chengdao 2 Yingxiongtan 3 Feiyantan 4 Laohekou 5 Zhuangxi 6 Dawangbei 7 Dawangzhuang 8 Chengdong 9 Yibei Yihezhuang 11 Wuhaozhuang 12 Changdiyudien Dawangzhuang 13 Taoerhe 14 Bonan 15 Gudao 16 Gudong 17 Dongfenggang 18 Taiping Yidong 20 Shaojia 21 Luojia 22 Hetan 23 Gunan 24 Hongliu 25 Kenxi 26 Kenli 27 Chenjiazhuang 28 Xintan 29 Wangzhuang 30 Yanjia Zhengjia 32 Shentuo 33 Ninghai 34 Yonganzhen 35 Haojia 36 Dongxin 37 Danjiasi 38 Lijin 39 Xinlicun 40 Linfanjia 41 Shangdian Binnan 43 Xianhezhuang 44 Guangli 45 Shinan 46 Pingfangwang 47 Qiaozhuang 48 Niuzhuang 49 Wangjiagang 50 Yangjiaogou Pingnan 52 Xiaoying 53 Liangjiaying 54 Gaoqing 55 Zhunhua 56 Bamianhe 57 Boxing 58 Lean 59 Huagou 60 Fanjia 61 Guangjian Zhenglizhuang 63 Jinjia 64 Weibei 65 Shanghe 66 Linpan 67 Yuhuangmiao 68 Linnan 71 Jiangjiadian

68

65

Shengli oil fields

62

51

42

31

19

10

66

lift

ion ress dep in Huim

in gn en h C

20 km

0

p gu

Gas field

Oil field

en

Ch

ep. gd don n i Q

58

Table 3.5

China and the global energy crisis

Oil and natural gas output in the Shengli field, 1978–2005

1978 1979 1980 1983 1984 1985 Cumulative 1986 1987 1988 1989 Cumulative 1990 1991 1992 1993 1994 1995 1996 Cumulative up to August 1966 1997 1998 1999 2000 2001 2002 2003 2004 2005

Crude oil production (mmt)

Natural gas production (billion m3)

19.46 18.65 17.59 18.55 23.01 27.03

1.43 1.42

1.14

259.39 28.66 31.60 33.30 33.35

1.40 1.48 1.42 1.54

387.14 33.50 33.552 33.461 32.702 30.902 30.063 29.116

1.44 1.44 1.44 1.37 1.31 1.28 1.19

600.00 28.012 27.310 26.652 26.75 26.68 26.71 26.58 26.74 26.945

1.00 0.92 0.73 0.69 0.91 0.75 0.81 0.89 0.88

Source: Various.

Shengli is the main field under the control of SINOPEC Corp. Other fields controlled by the Corporation include those known as the Zhongyuan fields in Henan Province. Not large in terms of oil, these fields do have considerable gas reserves. Some of these reserves are ‘associated’, but others are independent and at much deeper levels than the oil. In total, reserves of gas are estimated at 100 billion m3. Gas can be transported by

Administration and evolution of exploration

59

pipeline to fertilizer plants in Kaifeng and is used for electrical power generation in the city of Puyang. Conclusions Three conclusions emerge from this survey of Chinese onshore oil and gas exploration and their results. First, the intensity of the efforts to develop oil and gas resources in the aftermath of the Sino-Soviet dispute was extraordinary. These efforts can be judged not only by the high priority given to them, seen as a crucial economic and strategic task for both government and Party, but also by the huge human effort made by thousands of Chinese people, working typically in appalling physical conditions. The second dimension of this account is the remarkable technological accomplishment that it represented. When the Soviet experts left China in 1960–61, they must have believed that Chinese oil and gas development would be stalled for many years. This, however, proved not to be the case. Although cut off from direct contact with most Western sources of expertise, Chinese engineers and technicians studied the literature intensively and then applied this knowledge, by trial and error, to find solutions for their own problems. Oil and gas extraction problems always vary according to the local geological, geographical and infrastructural conditions. Ready-made solutions are rarely available, and in the varied and often unique circumstances of Chinese natural endowments, many intractable problems had to be solved. While Chinese conditions for innovation were obviously far from ideal, their success in developing ways of prospecting and developing their resources and, in particular, finding new approaches to water injection and to secondary and tertiary recovery techniques consistently astonished foreign specialists who had access to the Chinese oil and gas fields. The effect of this has been to enable the Chinese to maintain oil output from key fields in north-east China for far longer than once seemed likely. Third, however, we must note that even the strongest and most innovative efforts will eventually run into diminishing returns unless they can be applied to major new finds of natural resources. This has been the growing problem of the 1990s. In Table 3.6 we see the performance of the major fields in the last three years. Under conditions of reform, adequate funds for exploration have not been available from central government and its corporations and, as the Chinese economy shifts towards Western-style market institutions, further oil exploration has been a growing problem since the 1990s. By its nature, exploration is a risky and expensive business which fledgling capitalist corporations will not willingly undertake. Advanced market economies have developed specialized institutions that find solutions to these problems, but China is far

60

China and the global energy crisis

Table 3.6

Crude oil and natural gas production by major fields, 2003–2005

Name of oil or gas field

Crude oil production Natural gas production 2003 2004 2005 (10 000 (10 000 (10 000 2003 2004 2005 tonnes) tonnes) tonnes) (100 mmm3) (100 mmm3) (100 mmm3)

Daqing Liaohe Huabei Dagang Jilin Xinjiang Changqing Yumen Qinghai Sichuan gas Yanchang Jidong Tarim Turfan–Hami PetroChina Shengli Zhongyuan Henan Jianghan Jiangsu Anhui New Star Co., SINOPEC CNOOC

4 840 1 322 435 421 427 1 060 701 70 220 13 453 75 525 235 10 799 2 658 361 186 93 158 342 3 814 2 430

4 640 1 283 432 488 427 1 111 811 74 222 13 652 100 537 225 11 020 2 674 335 189 96 161 392 3 860 2 592

4 495 1 225 435 499 458 1 166 939 77 221 13 812 125 600 810 11 279 2 694 320 187 95 164 456 3 928 2 878

20.3 10.5 5.7 3.5 2.3 22.1 51.8 0.2 15.4 91.9 – 0.4 10.9 12.3 247.6 8.1 17.0 0.9 0.9 0.3 23.5 53.4 42.2

20.3 10.0 5.8 3.4 2.4 25.5 74.5 0.2 17.9 97.7 – 0.5 13.5 13.3 285.6 8.9 17.5 1.0 1.0 0.4 26.6 58.3 63.8

24.4 9.2 5.7 3.3 2.7 28.9 75.3 0.7 21.2 116.3 – 0.7 56.7 15.3 360.8 8.7 16.6 1.0 1.2 0.6 31.9 62.8 81.2

Total China

17 044

17 472

18 086

343.2

407.8

504.0

Source:

China OGP (China oil, gas and petrochemical), various issues.

from this state at present. Further, the fact that promising possibilities for oil and gas are in the west and far west of China, regions with poor communications, small local markets, and potentially unstable political situations, adds to the complexity of the problems facing the sector in the twenty-first century.

EXPLORATION AND DEVELOPMENT OFFSHORE: THE FOREIGN CONTRIBUTION We saw earlier that offshore development was critically dependent on an infusion of Western and Japanese technological expertise and hence was

Administration and evolution of exploration

61

inconceivable on a serious scale before the tectonic shifts of Chinese economic thinking began in the late 1970s. As the ‘Open Door’ thinking developed, however, China could begin the serious exploration of its potential for offshore oil and gas. This was inevitably a slow process, first, because in the early days the planners and bureaucrats responsible for developing this activity did not have the experience to handle the practicalities and problems of Sinoforeign cooperation in this industry. Nothing in their earlier relations with the Soviet Union (or with Japanese and Western countries in the brief ‘openings’ of 1964–65 and 1973–75) had prepared Chinese officials for what was involved in this new activity – an activity marked not only by its technological sophistication but also by the unusually high element of risk that was involved. Further, in the early days of reform thinking, the notions of reform were imprecise. Thus no one could, for example, envisage that eventually foreign companies would be able to collaborate with Chinese organizations now described as ‘modern corporations’, organizations with share ownership and detailed governance arrangements to bring them into a new relationship with government. Further, there was the added anxiety that, like earlier economic liberalizations, the reform might reverse itself. If this happened, officials involved with any form of joint foreign ventures could find themselves under heavy criticism for ‘selling out’ Chinese resources to foreigners, a criticism that in the 1970s had been one of the most serious political crimes in the thinking of the radical left wing of the Party. The first organizations to negotiate foreign contracts were the Ministry of Geology and Mining (MGM) and the Offshore Petroleum Bureau under the Ministry of Petroleum Industry (MPI). In February 1982, however, the China National Offshore Oil Corporation was established (CNOOC) and given responsibility for offshore joint ventures with foreign companies. Under the CNOOC a further four corporations were established. These were to provide specialized services (including base camps) for foreign companies. The companies each had a specific geographical remit. These were the Bohai Petroleum Corporation (based in Tianjin); the South Yellow Sea Petroleum Corporation (Shanghai); the South China Sea East Petroleum Corporation, based in Guangzhou and responsible in particular for the Pearl River Delta; and the South China Sea West Petroleum Corporation, based at Maoming and in charge of the Yinge Sea, the Beibu Gulf and all offshore activity to the west of the Pearl River Delta. The first three companies to sign offshore contracts were Total and Elf Aquitaine from France, and the Japan–China Oil Development Company. These contracts were signed in 1980. Elf Aquitaine’s contract was for the central Bohai Sea; Total’s for the Beibu Gulf; and the Japanese company

62

China and the global energy crisis

took the southern and western Bohai region. In 1982, Arco signed up to undertake exploration in the Yinge Sea. The contracts signed by this first group of companies were each ‘individually negotiated’. That is, the companies were negotiated with separately and terms could be varied to suit each case. In 1982, 1984 and 1989 China also conducted a series of rounds of international bidding. For each of these a six-month period of notice was given before closing dates and a further six months was required for the Chinese to reach their decisions. During the early period, the Chinese were very active in creating the legal and regulatory framework to support international contracts of this kind. The results of the bidding rounds were strong at first, but had fallen away by the third round. In the 1982 round, 19 contracts were agreed covering the South Yellow Sea (3), the Pearl River Delta (13) and the Beibu Gulf (3). In the 1984 round a further 12 contracts were agreed covering the South Yellow Sea, the East Yinge Sea and the Pearl River Delta. In 1989, however, only two further contracts were agreed, both for the Pearl River Delta. To these 33 contracts, a further round in 1992 added a further 18. The first four companies engaged under the ‘individual contract’ system began work on test wells and geophysical surveying immediately, but had relatively modest results. Elf drilled test wells in the Bohai without success and eventually returned the contracted blocks to China. Total found small and unviable wells in the Beibu Gulf and also eventually returned their blocks. The Japanese (two companies) did find small fields in their sections of the Bohai and began production of crude oil. Arco, however, suffered a tragic setback when a gas blow-out at the exploration well in the Yinge Sea (south of Hainan Island) capsized their drilling vessel Java Sea with a loss of 81 lives. Subsequently the company did make substantial gas finds close by in the Yacheng regions and established a major pipeline to the thermal electricity generating plant in Hong Kong. The companies operating under the contracts arising from the 1982 round of bidding were very active. Altogether these contracts involved 28 companies from nine countries. They drilled 83 test wells and undertook seismic surveys covering the length of 118 000 km. Five major structures were found to hold significant oil and gas reserves, including four oil fields in the Pearl River Delta (Huizhou 21-1 and 21-6, Xijiang 24-3 and Lufeng 22-1). These all came on stream between 1991 and 1997. Oil from these fields is not piped, but is stored in floating tanks and then off-loaded into tankers. No finds were made in the other areas covered by this round of contracts. Results of the 1984 round were also modest. This time 15 foreign companies were involved, including three Japanese companies that combined into a consortium known as the JHN Group. This consortium found another Pearl River Delta field (Lufeng 13-1), and two American

Administration and evolution of exploration

63

companies, Phillips Petroleum (now called ConocoPhillips) and Amoco, developed fields known as Xijiang 30-2 and Liuhua 11-1 respectively. Altogether the participants in these two rounds invested $600 million and drilled 190 test wells. The success rate on these wells was in fact high (55 were found to have oil and gas), but the scale of the finds was too small to be commercially useful. This problem became acute when the oil price fell in 1986 to $15 per barrel (from a peak of $30). As a result, many fields had to be put in storage until the oil price rose again in the 1990s. During the 1990s the dream of an offshore oil and gas bonanza faded and foreign companies became generally pessimistic about the China scene. Throughout the 1990s, with the exception of 1996, the number of contracts annually dwindled to single figures. None the less, a total of 87 contracts were signed in the 1990s compared to 53 in the 1980s. Most of the 1990s contracts were of the ‘individually negotiated’ type, with provision for profit sharing and cost sharing with the Chinese partners. The reason for this was that, like other countries in a similar position (Indonesia for example), in order to keep up the momentum of exploration during a period of weak prices in the oil market, the Chinese had to offer all kinds of tailored incentives to foreign partners who would otherwise have been unwilling to sign. These special offers included: 1. 2. 3. 4. 5.

Extending contractual periods until all planned drilling was completed. Offers of alternative blocks should contracted blocks prove valueless. Extending an option to allow final decisions on exploration wells to be made after geophysical surveys had been completed. Special terms for royalties, profit taxes and import taxes on imported equipment for small fields with annual outputs of less than 1 mmt. Approval that failed exploration investment could be recovered as cost from contracts where a company made profits from successful finds.

EXPLORATION AND DEVELOPMENT OFFSHORE: CHINA’S CONTRIBUTION Between 1987 and 1998 offshore exploration efforts resulted in total seismic surveys exceeding 100 000 km in length and the drilling of 377 test wells. In total, as a result, some 88 geological structures with oil and gas were identified. Within these totals, it is a striking fact that over half of the seismic survey coverage and 224 of the test wells were completed by Chinese enterprises (see Table 3.7).

64

China and the global energy crisis

Table 3.7

The results of offshore exploration, 1984–98 Seismic survey line length (1000 km)

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

Number of drilled exploration wells

Chinese oil company

Foreign oil company

Total

Chinese oil company

Foreign oil company

Total

4 5 25 22 26 15 15 15 22 36 27 35 52 81 –

36 20 26 5 2 7 9 2 19 7 13 40 112 121 –

40 25 51 27 28 22 24 17 41 43 40 75 164 202 406

2 12 9 15 21 16 10 12 18 13 21 16 40 22 20

33 28 25 21 21 13 9 9 9 6 3 22 8 15 17

35 40 34 36 42 29 19 21 27 19 24 38 48 37 37

Number of discovered structures

12 6 8 8 9 7 5 4 4 7 10 5 10 13 6

Source: Larry C.H. Chow and Wing-yin Lo, ‘Chinese Offshore Oil Production: Hopes and Reality’, Journal of International Development and Cooperation, IDEC, Hiroshima University, Vol. 7, No. 2, 2001, p. 85, Table 3.

China’s interest in offshore work did in fact go a long way back. In 1966 the government established the Offshore Exploration Supervision Department in the Dagang oil field. This later became the Bohai Petroleum Corporation (the BPC). In 1971 a test well was successful, which led to the establishment of the Haisu oil field. In the late 1970s, China purchased mobile jack-up-type drilling rigs from Japan and, using these, discovered several oil fields. Further rigs were constructed at docks in Dalian and semisubmersibles were purchased from abroad for work in the Bohai. Meanwhile, the Chinese effort was also supported by the Ministry of Geology and Mining, which was drilling in the Yellow Sea, and by activities in the southern zones undertaken by the South Sea Petroleum and Exploration and Supervision Department working under the Maoming Petroleum Corporation. These companies were later restructured into the South Sea West Petroleum Corporation. Using survey ships bought from France, China also began its own gradual programme of geophysical survey work. During the 1980s and 1990s the Chinese government invested an annual sum of 100 million yuan in the form of capital injections into the China National Offshore Oil Corporation. CNOOC and its affiliates drilled 15 to

Administration and evolution of exploration

65

20 wells per year, with its engineers absorbing skills from working with joint foreign ventures of various kinds. From the outset, the CNOOC was structured to make foreign joint ventures the natural way for its business development. Unlike the typical state-owned enterprise, the CNOOC had strict personnel policies that ensured tight controls on numbers hired and high levels of professional competence among those hired. The Bohai Petroleum Corporation (BPC) was another large contributor to the Chinese offshore effort. Major finds that were developed included the Jinzhou and Suizhong fields. The latter (SZ 36-1) now produces over 5 mmt per annum, transported by way of pipeline to the refineries at Jinxi. In conjunction with Texaco and BP, the BPC has also developed Qinhuandao 32-6, which, when on stream, will produce a further 4.5 mmt per annum together with 5 mmt oil from Penglai oil field, which was discovered and developed by Phillips/Conoco oil company. Japanese joint ventures with the BPC have been less successful, although the scale of their efforts in the Bohai means that the Japanese have to be regarded as the pioneers in the Bohai sector. Considerable activity has also taken place in the East China Sea. The importance of this sector stems from its proximity to Shanghai, with its huge and growing energy needs. Here exploration and development are mainly under the East Sea Petroleum Corporation, the local CNOOC subsidiary. To date, important fields include the Pinghu gas field, a Chinese consortium already supplying natural gas to Shanghai. More recently the Chungxiao gas field is under development, with gas to serve Ningbo City. Finally, one other recent development of great interest is the agreement between China and Taiwan for joint exploration in the Taiwan Straits. This agreement, the first of its kind, was signed in Taibei by CNOOC and the Chinese Petroleum Company of China (Taiwan), on 16 May 2002. The area covered by the joint venture contract for surveying, exploration and development is 15 400 km2. The key elements of this agreement are: 1. 2. 3.

Both parties agree to invest $25 million for four years. The joint venture will be responsible for seismic surveying and exploration drilling expenses. In the event of successful finds, crude oil output will be shared on a 50:50 basis.

OFFSHORE RESOURCES AND INVESTMENT: HAS THE EFFORT BEEN WORTHWHILE? During the period from 1982 to 2001, it is estimated that discoveries totalling 2 billion tonnes of ‘proven reserves in place’ have been identified

66

China and the global energy crisis Jinzhou 20-2 Gas F. Suizhong 36-1 Oil F. Qinhuangdao 32-6 Oil F. Beijing Tianjin

Jinzhou 9-3 Oil F.

Liaodong Gulf Bohai

Caofeidian Oil F. Bozhong 26/2, 28/1 Oil F.

Penglai Oil F.

Bozhong 34-2/4 Oil F.

South Yellow Sea

Shanghai Ningbo

Pinghu Gas F. Chungxiao Gas F. East China Sea

Xijiang 30-2 Oil F. Xijiang 24-3 Oil F. Weizhou Oil F. Wenchang Guangzhou Hong Kong Oil F.

Taiwan

Pip

elin

e

Lufeng 13-1 Oil F. Lufeng 22-1 Oil F. Maoming Huizhou 21-1 Oil F. Liuhua 11-1 Oil F. Beibu Huizhou 26-1 Oil F. Zhujiangkou Hainan Gulf Island Pearl River mouth Huizhou 32-2/32-3 Oil F. Dongfang South Yingehai Gas F. Yacheng 13-1 Gas F. China Sea

Figure 3.4

Oil and gas fields and pipelines in offshore China

in offshore fields. Of this, 870 mmt are ‘proven recoverable’ reserves. While the 2 billion figure may seem large, it is in fact less than 10 per cent of the 24.6 billion tonnes that are estimated to constitute the ‘geological resources’ of petroleum in the Chinese sea area. There remains, therefore, vast scope for further survey and exploration work. To date, offshore oil production has risen from 1.27 mmt in 1990 to 28 mmt in 2005. Natural gas volumes have risen from 375 million m3 in 1995 to 8 124 million m3 in 2005. The main contributor to the expansion of oil production has been the oil from the Pearl River Delta, while the tenfold increase in gas has come mainly from the Yacheng field in the Yinge Sea and the Pinghu gas field in the East China Sea. These results have been the fruit of considerable investments. Total investment by foreign oil companies between 1984 and 2001 amounts to an

Administration and evolution of exploration

67

estimated $7 billion. This has been divided 60:40 between exploration and surveying on the one hand, and development on the other. China’s investment by CNOOC is estimated to have been an additional $4 billion. On a short-term judgement, the returns to investment on this scale cannot be said to be large. However, survey and exploration work is a risky form of investment and no guarantees could ever be made to foreign investors. On the Chinese side, however, the gains have been considerable. This takes the form not simply of oil and gas output, now increasingly valuable as world energy prices rise, but in the form of technological learning. Further, exploration continues unabated at the present time, with foreign firms focusing on the most promising sectors and Chinese firms test drilling in a variety of locations. These efforts still produce some excellent results, notably the Penglai 19-3. This field was identified in 1999 by the Bohai Petroleum Corporation working with Philips Petroleum. Proven reserves are already estimated at 500 to 600 mmt. The viscous quality of the oil indicates that development and production costs are going to very high; none the less output is expected to reach 8.5 mmt by 2005 and there is little doubt that this will prove to be a large, commercially successful field (see Figure 3.4).

NOTES 1. Material for an outline of oil and gas planning and management is contained in Zhongguo nengyuan fazhan baogao 2003 (China’s Energy Development Report 2003), Beijing: China Econometric Publishing House, December 2003. See especially the chapters on pricing and policy, energy management, and corporate organizations, chs. 3, 4, 12–14. 2. The petroleum geology of China’s oil fields is described in a series of volumes, Zhongguo shiyou dizhi zhi (The petroleum geology of China). Volume 2(A) is for Daqing, 2(B) for Jilin, 3 for Liaohe, 6 for Shengli, 10 for Sichuan, 12 for Changqing and 15 for the Tarim and other fields. 3. The key figure in developing Daqing and explaining its development policy has been Mr Wang Qinmin. Mr Wang, a former president of the Daqing Petroleum Research Institute, has been described by The People’s Daily as ‘An Iron Man of Daqing for the modern age’, thus making him a successor in spirit to Wang Jinxi, the original Daqing labour hero of the 1960s. In 1996, at a meeting of the Japan Petroleum Institute, Mr Wang outlined to Japanese petroleum engineers plans for infill wells and polymer flooding that would enable the policy of ‘stable production’ to continue. The output estimates he presented on that occasion proved completely accurate.

4. Natural gas: China’s new energy source THE BACKGROUND TO NATURAL GAS DEVELOPMENT IN CHINA China’s principal gas-rich sedimentary structures have been in Sichuan Province and the Ordos, Qaidam and Tarim Basins. Of these, the Sichuan Basin is by far the longest established, the other basins being the results of relatively recent exploration and development. In Sichuan, gas resources have been used by the local population, employing primitive technologies, for most of recorded history. The Sichuan Basin is approximately 180 000 km2; it stands 500 metres above sea level, yet is itself enclosed by mountains. The surface of the basin is the famous ‘red soil’ of Sichuan, which, geologically, is Jurassic period sandstone and shale. This soil combines with favourable climatic conditions to support an intensive agriculture. The basin region itself currently supports a population of approximately 100 million people. In the pre-PRC era, these conditions supported both a large population and food exports. In the 1960s, however, conditions deteriorated, food exports gave way to deficits, shortages and serious rural poverty, which were major factors explaining why it was in Sichuan that the Party leadership pioneered agricultural and economic reform experiments in the 1970s. Today, the population of the basin is concentrated on the cities of Chengdu, Zigong and Dukou, while to the south of the province there is also the large city of Chongqing, which, like Shanghai and Beijing, is now administered as an independent entity. There are four main gas-producing areas in the Sichuan Basin: Chuan Nan, Chuan Dong, Chuan Xinan and Chuan Xibei. These lie to the south, east, south-west and north-west of the basin respectively. In addition to these gas fields, located in the centre of the basin is a cluster of small-scale oil fields that make up the Chuan Zhong oil field. Crude oil production from this field has been as high as 1.3 mmt, but has now (2005) fallen to 138 000 t per annum. Several small gas fields were discovered in this region in the 1950s, and the Ziliujing field, also in this region, is reputedly the world’s oldest natural gas field (see Figure 4.1). 68

Natural gas: China’s new energy source

Sichuan

Province Yanze River

Nanchong Oil Field

Chengdu City

69

Nanchong

Wanxian

Sichuan Basin Ziliuchin Gas Field Hechuan Neijiang

Weiyuan Zigong Gas Field

Wanshunchang East Sichuan Gas Field

South Sichuan

Yibin South-west Sichuan

0

Figure 4.1

100 km

Boundary of the Basin Trunk Pipeline Chongqing City

Yungui Highland

Gas fields and pipelines in the Sichuan Basin

In the 1970s gas exploration efforts moved east of Chongqing, where they were concentrated on the northern (left) bank of the Chang Jiang River. In this, the so-called Chuan Dong region, many new fields were developed, including the important Xiangguosi field. In its early stages, gas exploration and development in Sichuan were jointly controlled by the Ministry of Geology and the Sichuan Petroleum Administration Bureau of the Ministry of Petroleum and, under this arrangement, a number of small finds were developed. In the 1990s, however, it was decided that there were grounds for a major investment push in gas exploration in Sichuan. As a result, nearly one hundred new fields were discovered. To cope with this huge expansion, new administrative arrangements were put in place. The work of the two ministries was taken over by Star Petroleum and by a subsidiary of the China National Petroleum Corporation – the South West Oil and Gas Fields Operating Corporation (SWOGFOC). These two bodies were responsible not only for exploration and development, but also for the production, transportation and marketing of gas from the Sichuan Basin as a whole. By the year 2000, the basin was producing 9.5 billion m3 of gas, of which Star produced 1.166 billion and SWOGFOC 8 billion. In 2005, SWOGFOC’s gas production recorded 11.63 billion m3. The current reserves situation of natural gas is as follows. Geological reserves in the whole of China are approximately 35 trillion m3. Of these,

70

China and the global energy crisis

more than 20 per cent are in the Sichuan Basin. As we saw earlier, however, this is a very speculative type of measurement. More practically, proven ‘reserves in place’ for all Sichuan fields as at the end of 2000 amounted to 600 billion m3 of which 200 billion m3 have already been extracted. Thus ‘proven current reserves’ are estimated to be 280 billion m3. Production is likely to rise in the near future to 12–15 billion m3 per annum and a target of 16.5 billion has been suggested for 2010. At these rates of extraction, considerable further investment in survey and exploration work will be needed if the reserves:output ratio is to be held at comfortable levels. Transportation of natural gas in the Sichuan Basin relies heavily on a trunk pipeline some 1000 km in length. This major pipeline forms a ring circuit that connects the major fields with the centres of consumption and processing in the cities. This circuit in turn supports a maze of smaller distributive pipelines totalling 10 000 km in length. Approximately 60 per cent of the gas is used as feed for chemical fertilizer production. The balance is available for further processing in the chemical and other industries, for transport, and for use by private households. In transport, natural gas takes the form of compressed natural gas (CNG) and is used to power buses, cars and lorries. In the household sector, approximately 2.8 million households rely on this form of fuel. To date, most of the output of the Sichuan Basin has been consumed in Changgang City and other locations inside the province. However, this will change dramatically if current plans for the expansion of the Chuangdong field are implemented. Under these, a new trunk pipeline of 738 km will transport gas to Hubei Province. This pipeline, known as the Zhong-Wu line, is planned to go from Zhong Xian in Sichuan to the city of Wuhan. Three further lines will branch off the main artery to serve other towns and cities along the Yangzi River. Although this project has completed its full feasibility stage and had financing arrangements in place, it has been held up by the collapse of the American energy company, Enron, a significant participant in the project. However, unfortunate as this delay undoubtedly is, the project is likely to go forward eventually and achieve its original target. Development in the Ordos Basin The Ordos Plain lies within a semi-quadrangular shape formed by midstream patterns in the Huang He (Yellow) River. Within this plain lies the Ordos Basin. If we look at this formation in terms of the administrative structure, we find that the basin extends over the provinces of Gansu and Shanxi, the Ningxia Autonomous Region and borders on the Inner Mongolian Autonomous Region as well. Locally this region is known

Natural gas: China’s new energy source

71

as the Shan Gan Ning Region. The scale of the basin is enormous. It is approximately 370 000 km2, making it almost as large as the entire land area of Japan, and it is bisected east to west by the Great Wall of China. This basin is the location of some of China’s oldest oil fields, at Yanchang. At another Ordos location is the Changqing oil field, which was developed in the 1970s. Both fields are made up of 40 small fields and are still important producers. Both were also rejuvenated when redeveloped as part of natural gas exploration and development, and in 2005 the Yanchang and Changqing fields were producing 8.12 and 9.39 mmt of crude respectively. In 1988, a large complex of gas fields was discovered in the vicinity of Jingbian, Hengshan and Yulin respectively, and during the 1990s these were comprehensively explored and developed. Proven reserves in place were estimated to exceed 200 billion m3. These huge fields have been connected to consumers in Beijing, Xi’an and Tianjin. As a result, production has increased from 1.2 billion m3 in 1999 to 7.53 billion in 2005. The 918 km trunk pipeline connecting the Jingbian fields with Beijing is known as the Shanjing pipeline and has a diameter of 660 mm. Construction was completed in 1997 with an initial throughput of 2 billion m3 per annum. The line to Xi’an, completed in the same year, is 488 km long and has a smaller diameter of 426 mm and an initial throughput of 600 million m3. A third pipeline of 313 km, completed in the same year, supplies 600 million m3 of gas for chemical fertilizer manufacture at a plant in Yinchuan City. The second pipeline to Beijing has been completed recently by the Shell oil company in China (see Figure 4.2).1 Impressive as these achievements are, utilization of these supplies and potential supplies remains unsatisfactory in many respects. In particular, facilities to redistribute gas for commercial and domestic purposes in Beijing and Xi’an are incomplete and below standard. In Beijing, measures to forbid the use of coal within the city’s central zone are now in place (i.e. within the third ring road). However, these measures require that generators of thermal electricity substitute coal for gas but they are in fact still reluctant to do so. Further, the natural gas price is so high that the Beijing municipal government has been forced to subsidize large-scale gas users. The prospecting and development of the reserves in the Ordos Basin have stimulated considerable foreign interest. The Japan National Oil Corporation conducted a free geophysical survey in the 1990s and at the time of writing (2006) there is a joint exploration and production agreement between the China National Petroleum Corporation and Shell China Exploration and Production Ltd. This agreement is concerned with exploration, production and transportation and, under it, Shell is developing blocks in the Changbei gas field. These cover an area of 1588 km2 stretching from north Jingbian prefecture to Yulin prefecture in Shanxi Province.

72

China and the global energy crisis Huhehaote Baotou

Yellow River

Inner Mongol Autonomous Region Suligu Gas F. Yinchuan

Changbei Gas F. Ordos Plateau 300

Majiatan Oil F.

km

Beijing

87

0

km

Shansi Province

Shaanganning Gas F. Hongjingzi Jingbian Gas F. Oil F. Yongping Oil F. Yongping Wuqi Oil F. Xiataozi Oil F. Yan-an Oil F. Changqing Oil F. Yanchuan Chenghua Ningxia Maling Oil F. Yan-an Yanchang Hui Tribe Oil F. Yanchang Oil F. Lanzhou Autonomous Qingyang Zhiluo Oil F. Region City Huangtu 490 km Shaanxi Province Plateau Changxun

Gansu Province

Baoji 0

Figure 4.2

Tongchuan

100

Xi’an City 200 km

Oil and gas fields and pipelines in the Ordos Basin

From the 30 test and appraisal wells drilled so far, proven gas in place is estimated to be 73 billion m3. A new pipeline from the Changbei gas field to Beijing is already laid and the production and transmission of gas has begun. The target for production is 3 billion m3 of gas to be delivered by pipeline to Beijing and adjacent cities and provinces by 2008, and then over a further 20-year period. Shell’s investment in the project is US$ 3 billion, with a commitment to investment of a further US$ 10 billion in naturalgas-related businesses in China. Development in the Qaidam and Tarim Basins The Qaidam Basin is 120 000 km2 and its geological gas reserves have been estimated at 1050 billion m3. Proven reserves in place at the eight known fields are 158 billion m3 and, of this total, 134 billion m3 are located in the northern Sebei area. During 1995–1996, a pipeline connecting the field to the oil refinery at Gormut was completed and this enabled large-scale production to begin. Total gas output then rose from 390 million m3 in 1999 to 640 million in 2001. To distribute this output, four additional pipelines were constructed by 1998, each connected to an individual field. By May 2001, an

73

Natural gas: China’s new energy source Al ta

Railway Road City

Karamai Oil F.

s

Junngar Basin

in

Karamai City

iM ou n ta

Oil Field Oil Refinery Pipeline

Huoshaoshan Oil F. Qitai

Tianshan

Dushanzi Urumuqi City Mountains

Shanshan Oil F.

Kela Gas F. Pipeline

Turfan

Luntai

Kucha

Korla

Akesu

Lunnan Oil F.

Turfan Basin

Nanjiang Railway

Lanxin Railway

Yingmaili Oil F. Yakela Kashi

Kashgar

Tarim Basin

Zepu

Kekeya Oil F. Hetian Hotan

Figure 4.3

Tazhong Oil F.

Yutian

ti Ar

M agu nT

ains ount

0

300 km

Kunlun Mountains

Oil- and gas-related map of north-west China

investment of 2.5 billion yuan (US$ 300 million) enabled completion of a major trunk line from the Sebei field to Lanzhou City via Xining, a total distance of 963 km. The initial capacity of this line was 2 billion m3 per annum but, eventually, a flow of 4 billion is envisaged. All of this huge future output is to be absorbed in the provinces of Qinghai and Gansu. Demand from Xining (capital of Qinghai) is estimated to be 1.7 billion m3 and that from Lanzhou (capital of Gansu) is put at 2.8 billion. In 2005, gas production was 2.12 billion m3 associated with a crude oil output of 2.2 mmt. The Tarim Basin is by repute China’s most promising source of natural gas. It is the key to China’s most ambitious energy project known as Xiqi Dongyun – ‘The Transfer of Gas from West to East’. This envisages completion of a 4200 km pipeline from Tarim to Shanghai (see oil and gas map of China at the front of the book). The gas for this plan cannot come from the Qaidam field, all of which is already committed to supply Xining, Lanzhou and adjacent neighbourhoods. In 2005, the output of the Tarim field was 5.67 billion m3, an amount larger than could be consumed by its local market. In the same year the Junngar and Turfan–Hami Basins produced 2.89 and 1.53 billion m3 respectively. Both of these fields also had output in excess of local demand. The area is shown in Figure 4.3. The major issues posed by Tarim’s gas development are discussed in the next chapter.

74

China and the global energy crisis

Conclusion At the present time the main producers of natural gas in China are in the Sichuan and Ordos Basins. The third largest source is gas associated with oil output in the Daqing field in Heilongjiang. The problem with Daqing gas is that it is basically ‘associated output’ and hence depends on oil production. As seen in our earlier analysis, crude oil output in Daqing peaked at 56 mmt in 1997 and fell to 44.9 mmt in 2005, while associated gas output slightly increased to 2.44 billion m3 in the same year. However, although it is technically possible for gas production to continue after oil output ceases, as Daqing oil output falls this must eventually have a strongly negative effect on the supply of gas. Aware of this, the Daqing authorities are attempting to stave off this decline by intensifying their search for gas and there have been reports of some discoveries in the southern part of the Daqing field. However, these finds remain unconfirmed and cannot yet be said to alter our judgement about the future of the field as a whole. There is some associated gas production in the neighbouring province of Liaoning, but this is also reported to be declining, and output in 2005 was reported at 921 million m3. A more significant onshore field is that at Zhongyuan in Henan Province. Although this is also an associated gas source, in 2005 the field produced nearly 3.2 mmt of crude oil and 1.66 billion m3 of gas, and with output holding up, the field remains a major onshore resource. Looking to the future, the one major field that appears to hold significant promise is the Suligu gas field in Ordos Basin in the Inner Mongolian Autonomous Region. Although no plans to develop this have yet been published, geological resources and proven reserves in place are now estimated to be 2 trillion and 700 billion m3 respectively, making this the largest gas find ever made in China.

OFFSHORE GAS DEVELOPMENT At present (2006) there is one large and two smaller offshore natural gas fields under production. The large field is the Yacheng No. 13-1 field, located about 100 km south of Hainan Island in the South China Sea. This field is connected to the mainland by two major pipelines. The largest is a submarine line of nearly 800 km that supplies Hong Kong. Completed in 1994, this currently supplies Hong Kong with 3 billion m3 of fuel, where it is used for thermal power generation. The smaller line, completed in the same year, supplies Sanya City on Hainan Island with 500 million m3, which is used as feedstock for chemical fertilizer plants. The Yacheng field has an expected life of 20 years (see Figure 3.4 in the previous chapter).

Natural gas: China’s new energy source

75

At one stage it was envisaged that the Yacheng field would supply Guangzhou City, but this plan foundered on the failure to resolve disputes between the Chinese side and its American partner, Arco (later merged with BP–Amoco). This experience brought to light an important problem that arises under joint venture agreements. For whereas production-sharing arrangements in oil are relatively straightforward to implement, because gas supply requires specific and inflexible pipeline and storage infrastructure, it presents quite different problems. In this case, in order for Arco to be paid in foreign currency for its share of the gas off-take, the supply had to be redirected to Hong Kong. BP has now surrendered this gas production contract to the Chinese and withdrawn from the whole project. Another offshore field of considerable interest is the Pinghu gas field in the East China Sea. But here the problem is political, because the field is located close to the Senkaku/Diaoyutai Islands, to which China, Taiwan and Japan all lay claim. While these disputes are unresolved, full exploration and development remain problematic. Further, at the present time (2006) we still do not have a firm preliminary idea of what the ultimate potential of the field might be. The extreme cyclonic weather experienced in this region presents serious obstacles to the exploration and development of its resources. None the less, in 2000 China established a number of surveying and exploration blocks. These were drawn up on the basis of China’s claim to the entire extended continental shelf. Japan regards this procedure and claim as illegitimate and is seeking a solution based on a ‘median line’ partition of rights. In spite of these objections, with Norwegian help, the Chinese have attempted a geophysical survey and Japan continues to monitor the Chinese moves and to alert international shipping to the situation. Given the potential of this field, further activity in this region, however politically difficult, is likely to continue. At present the Pinghu field is supplying the city of Shanghai by means of a submarine pipeline with a capacity of 440 million m3 of gas annually. As energy demand in Pudong rises, the capacity of this pipeline route is planned to rise to 700 million m3. In 2003 actual supply had already reached 657 million m3. Administration of this venture is the joint responsibility of CNOOC, SINOPEC and the Shanghai municipal government. Shanghai’s gas is, in fact, quite diversified, with additional supply coming from the Tianwaitian and other small fields connected by pipeline to Pinghu. The Chungxiao field is also expected to supply the city of Ningbo with 800 million m3 through a new pipeline laid down by CNOOC in what was a joint venture with Shell and Unocal, both of which subsequently withdrew. In April 2005, the Japanese government protested to China about their oil and gas development activity and issued a test-drilling permit for this area to a Japanese oil company, Teikoku Oil. Teikoku is at present (2006)

76

China and the global energy crisis Chart 13 East China Sea Conflict 120°

125°

130°

200 nautical mile from Japan

Japan 32° Shanghai

200 nautical mile from China

Ningbo Pip

Rongchin

elin

e

30°

China Pinghu gas field

Danqiao Tianwaitian

28°

Chungxiao gas f.

Senkaku/ Diaoyutai Islands

Taiwan

Okinawa 26° Chinese claim boundary based on Okinawa trough

Median line

Note: This chart is based on a map that appeared in the Tokyo Shinbun in 2005. The Japanese government has not published any map of the median line of the Exclusive Economic Zone in the East China Sea and the exact whereabouts of the Chinese gas fields are unknown. Hence this is an entirely unofficial outline sketch.

Figure 4.4

East China Sea conflict

preparing for exploration work in Japan. Part of the Japanese concerns in this area relate to the possibility that Chinese activity could siphon gas from the Japanese EEZ (Exclusive Economic Zone). At joint meetings of both parties organized in Beijing and in Tokyo, the Japanese proposed joint development of those gas fields that lie on either side of the EEZ median line. But this has not been agreed because China insisted that the gas fields are all on the Chinese side of EEZ. We show an unofficial sketch of the region in Figure 4.4.

THE ENERGY PROBLEMS OF THE SOUTHERN SEABOARD China’s geographical extent is so large that, irrespective of the scale of domestic energy resources, pursuit of a rational energy policy requires that policy makers ask themselves whether, because of transportation costs, some major consuming regions should not import from well-placed foreign sources of supply. At one time this question could not be asked in China, since ‘self-sufficiency’ in natural resource sectors was a basic political

Natural gas: China’s new energy source

77

dogma. Now, however, the question is a respectable one again, so much so that China has become extremely active as a partner in international exploration and as an investor acquiring and developing known foreign resources. The success of the enormous Baoshan steel plant at Shanghai was a turning point in this respect, since it was based from the outset on a plan to use imported fuels (Australian coal) and raw materials – especially iron ore. This approach marked a fundamental shift in steel policy, away from one previously based on domestic, generally low-quality raw materials, to one that emulated the policies that led to Japan becoming the world’s leading steel producer in the 1970s, in spite of having inadequate raw materials. In the energy case, the basic problem is the growing imbalance between the location of energy supplies and industrial development. This imbalance is very much a product of the reform era. Before 1978, China’s main industrial energy requirements were in the north-east and Shanghai. Both these regions could be served by China’s coal and oil resources located in the north-west and north-eastern regions. The accelerated growth of an export-oriented economy in Guangdong, Fujian, and the eastern seaboard generally, destroyed this symmetry. Providing energy for the southern seaboard has been a major problem since the 1990s. This problem is not one that the planned development of oil and gas, as outlined so far, will do anything to alleviate directly. Energy imports, therefore, will become increasingly important.

PLANNING FOR ENHANCED GAS IMPORTS Gas, in the form of liquified natural gas (LNG) is an obvious candidate for a programme of importation, since the southern seaboard is within easy reach of major suppliers of LNG in South-East Asia. In April 1999 the State Development Planning Commission officially authorized new plans for the construction of LNG terminals in Guangdong. These terminals are to be the responsibility of a consortium formed by CNOOC and incorporating gas and electricity corporations from Guangzhou and the nearby towns of Foshan and Dongguan. This project has two phases. In phase one, a terminal with a capacity of 3 mmt of LNG per annum is to be built at Chengtoujiao, a suburb of Shenzhen. This was to be completed by 2005. This terminal would be served by a trunk pipeline of some 215 km, with two shorter branch lines of 33 km and 56 km respectively. These installations were expected to deliver 4 billion m3 a year of gas to electricity-generating plants at Huizhou

78

China and the global energy crisis

Guangdong Province

Qianwan

Guangzhou City

Dongguan

Zhaoqing

Huizhou City

Foshan Shenzhen City Jiangmen Zhongshan

Chengtoujiao Zhuhai Hong Kong

LNG Receiving Terminal City Gate

Phase 1 Trunk Pipeline Phase 2 Trunk Pipeline

Figure 4.5 LNG receiving terminal and planned gas pipelines in Guangdong Province and Shenzhen by 2006. Thus the project will considerably enhance the electricity supply throughout the Pearl River Delta, as well as supplying gas to the three major cities of Guangzhou, Dongguan and Foshan. In phase two, the LNG import capacity will be raised to 5 mmt by 2010 and the total length of the trunk pipelines will increase to 396 km. The volume of gas will grow to 7.75 billion m3 and direct gas supply will then be available in the cities of Zhuhai, Jiangmen, Zhongshan and Zhaoqing. Also included in this plan is a scheme to produce indigenous natural gas in the mouth of the Pearl River, as well as the construction of a 1000 MW gas-fired thermal electricity plant at Huizhou, and an oil-to-gas conversion plant to generate 1050 MW in Shenzhen City (see Figure 4.5). From its early stages, this project seemed to the Chinese authorities to be ideal for foreign participation, and many foreign interests did indeed participate in discussions and negotiations. In 2001 the Chinese reached agreement with BP, which obtained 30 per cent of the acquisition rights and agreed to participate in the Guangdong LNG project. Australia is the most likely source of LNG for this scheme. Gas fields situated along Australia’s north-western shelf already have an international consortium of LNG producers that is established and fully capable of supplying the 5 mmt of LNG per year needed under the Chinese proposals. The first phase of this LNG project was completed in early 2006.

Natural gas: China’s new energy source

79

In addition to these urgently required schemes around the Pearl River Delta, several other LNG import plans have been put in place. One of these is to supply the city of Fuzhou in Fujian Province with 2.6 mmt of LNG in 2007. This scheme is conducted by CNOOC and Fujian local companies and is still under construction. LNG will be supplied from the Indonesian Tannguh project operated by BP. In addition to these two projects, there are several LNG reception bases under construction, including those in Shanghai City (6 mmt annual capacity) and at Ningbo in Zhejiang Province. On the north-eastern coast, the cities of Tianjin, Qingdao and Dalian are also reported to have ten projects ordered by former Premier Zhu Rongji and designed to be capable of delivering at least 10 mmt per year in ten projects by 2010.

THE PROBLEM OF HANDLING OIL IMPORTS It is already abundantly clear that the Chinese energy gap will have to be filled in part by imports of crude oil. The problem is how to handle the physical quantities involved at reasonable cost. The reason why this is such an issue is that the natural conditions of China’s harbours are unsuited to the construction of facilities for unloading the so-called very large crude oil carriers (VLCCs) (i.e. carriers of up to 200 000 tonnes). Both the Yangzi and Yellow rivers carry enormous volumes of sediment down to the sea, making natural deep-water ports an impossibility along them and at their outlets. Further, although facilities for the smaller VLCCs have now been constructed at various locations, there is not a single location on China’s coastline capable of facilities for the handling of the ultra large crude oil carriers (ULCCs), whose sizes range up to 500 000 tonnes. Most of the tankers serving Chinese ports have been in the 100 000 tonne class. Ports currently capable of accepting the 200 000 tonne tankers are Qinghuangdao, Ningbo, Zhoshan (Zhejiang Province) and Maoming in Guangdong. Other cities with ports currently undergoing expansion programmes for VLCCs include Tianjin, Huizhou and Dalian. At Dalian substantial storage facilities are in place from the time when China was a major exporter of oil to Japan. However, for this and other ports it will be important to ensure that crude imports are transported to appropriate refining facilities and to customers, and this will typically mean further investment in a network of smaller tanker routes. China’s largest terminal for receiving imported oil is Aoshan in Zhejiang Province. Aoshan can receive 200 000 tonne tankers without difficulty and in 1993 successfully berthed a Shell tanker of 330 000 tonnes. Total storage capacity at Aoshan by 1997 was one million m3 of oil, and further

80

China and the global energy crisis

investment will raise handling capacity of Aoshan to 30 mmt per annum, with total storage capacity of 2.3 million m3 of crude oil and 0.2 million m3 of petroleum products.

NOTE 1. Valuable work in English on this subject is the study by Dr Keun-Wook Paik and Quan Lan, China Natural Gas Report, London: Royal Institute of International Affairs and Xinhua New Agency Beijing, 1998.

5. The Tarim Basin: solution or problem? HOW BIG AN ASSET ARE THE TARIM OIL AND GAS RESERVES? The huge size of China’s potential oil and gas reserves has not been in question since the 1950s. However, the enormous scale and variety of China’s terrain and the intrinsic difficulties of precise estimation are so great that serious uncertainties about the extent and character of reserves have remained, long after early big discoveries were being exploited. Geophysical surveys and preliminary testing still have far to go before they can be regarded as anywhere near complete. Further, indispensable as these tools are, only when full development and production get under way will the full picture of China’s reserves be understood. Exploration for oil and gas started in China’s western regions as early as the 1950s, at which time the Karamai fields were discovered. In the ensuing decades, the main focus was on the search for on- and offshore resources in the Songliao and Bohai Basins of eastern China. Indeed, the 1950s to the 1980s might well be called the golden age of petroleum development in the east. During these years, the exploration of the west, hindered as it was by logistical and other difficulties, remained a lower priority. The Tarim is a sedimentary basin located in the Xinjiang Uygur Autonomous Region. Its scale is enormous. It extends over 560 000 km2 and has a maximum length (east to west) of 1820 km and a depth (north to south) of 510 km. Looked at from the geographical perspective, the basin is bounded by the Tianshan Mountains in the north, the Kunlun range in the south, and the Karakorums in the west. Its height above sea level is of the order of 1000 to 1500 metres and its central area is occupied by the Taklamakan Desert, which alone occupies 330 000 km2. The basic surface structure of the Taklamakan is one of swathes of unbroken sand dunes. On its fringes, however, easily visible from commercial aeroplanes, are oases fed by the run-offs from snow melting on the surrounding mountains, themselves over 20 000 feet (6096 m) high. These oases are extensive and support a varied and intensive agriculture, and populations of thousands of people living in the nearby towns 81

82

China and the global energy crisis

and villages. So substantial and self-sufficient have some of these settlements been in the past that in the Tang dynasty (eighth century AD) they were known as ‘countries’. In the Uygur language, ‘Tarim’ means the ‘place where the waters gather’; ‘Taklamakan’ means the ‘land of no return’. At an early stage in the prospecting and development of the Tarim, the Chinese, relying as so often in business on the old proverb: ‘he who drinks always remembers who first dug the well’, invited a delegation of Japanese oil specialists almost identical in composition with the group that, in 1978, had negotiated the first offshore oil development agreements between the two countries. This group included one of the authors, Kambara. The itinerary prepared for the group included inspection of newly developing oil fields in the Tarim and in the Karamai and this involved passing through some of the most spectacular desert landscapes in the world at Fencheng. This landscape includes the soaring, sphinx-like formations near Korla which is the central base for all western oil and gas development, and Kucha and Shasan, where early test wells had been drilled and initial blowouts were occurring. When the group returned to Beijing, the Chinese asked for observations. The argument expressed by the Japanese side on this occasion was that whereas the key to development of the eastern oil fields had been the ‘battle-front’ method, characterized by small-scale, indigenous, experimental technologies, the successful opening up of the Tarim and the far western resources would require something very different, namely, an unprecedented combination of large-scale western-based technologies and new, competitive institutional structures. To a considerable extent this prediction has been borne out by events. During the 1990s, the Ministries of Geology and Mining and of the Petroleum Industry organized a full-scale petroleum and gas survey of the Tarim Basin. This survey was undertaken by drilling teams from the Petroleum Administration Bureaux, which were required to compete with each other for contracts. The desert terrain, with its virtually complete lack of infrastructure, presents problems of extraordinary difficulty. In Siberia, the Russians undertake similar types of prospecting with the aid of enormous helicopters. In the Tarim, land vehicles were the only option. In order to make the survey, the teams worked in three-month shifts and had to ‘commute’ between remote desert sites and the base town of Korla. At the same time, several hundred thousand labourers were drafted in to begin construction of a trans-desert motorway of 219 km, running between the northerly starting point of Xiaotang (a materials storage base) and a southern terminal at the Tazhong oil fields in the middle of the desert. These oil

The Tarim Basin: solution or problem?

83

fields are then within reach, across the Tarim River, of the base town of Korla (see Photographs 5.1–5.4). Located to the north of the Tarim are two important oil wells discovered by the Ministries of Geology and Mining and the Ministry of the Petroleum Industry. These are Shasan 2, first successfully drilled in 1984, and the Lunnan fields, discovered in 1988. While access to these sites is relatively straightforward, the problem is that the oil reservoirs are extremely deep, many being more than 5000 metres below ground level. Since 1989 the Tarim Petroleum Exploration and Development Command has been the lead institution in surveying and testing, and their first big success was discovery of the Tazhong field. This lies along the huge ridge in the centre of the Tarim Basin. The drilling of test wells over 3000 metres deep in this remote location was an extraordinary feat, involving the construction of short air strips for planes to transport workers, who were then responsible for moving the heavy equipment and materials. So important was this field considered that in 1994 a high-speed motorway was constructed through the dunes. This now extends to the desert township of Yutian, where it meets the east–west highway skirting the northern Kunlun mountain range. This road is itself a unique engineering achievement: in order to enable the road to withstand the impact of the sandstorms that sweep across the desert and could easily bury the road overnight, on each side of the road the engineers constructed strips of reeds, each 4 to 5 metres wide, that protect

Photograph 5.1 Dynamiting in the Taklamakan desert in the Tarim for seismic information

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China and the global energy crisis

Photograph 5.2 Well head assemblies in close proximity to the Karamai oil field the core construction. From the air, the road gives the appearance of being two long straw mats laid either side of a modern motorway. At Tazhong, the first field (known as No. 4) has been in production since 1996. At the present time (2006) 40 developmental wells are producing 2.6 mmt of oil per year. This output is transported north to the Lunnan field by a pipeline whose capacity is now 6 mmt. This field is still the scene of a great deal of exploration and surveying work, and this combination of a rolling programme of exploration and production is called by the Chinese the gundong tancha system. To date, no really large discoveries have been made at Tazhong, in spite of the fact that exploration of the region is shared between the Chinese and various Japanese and other international oil companies working under production-sharing agreements. It seems clear that the geology of the Tarim is turning out to be as complex as that of the other major oil-producing regions of China. Like them, it may lack the huge reservoirs created by anticlinal traps. These are the upward folds in the earth’s strata where oil and gas reservoirs are

The Tarim Basin: solution or problem?

85

Photograph 5.3 The huge monument is the ‘Black Oil Mountain’ built on the natural bitumen deposits on the Karamai field. (‘Karamai’ means black oil in the Uygur language)

Photograph 5.4

Exploratory and extension wells in Karamai

trapped in domes of porous material, bounded above and below by impervious layers (and often salt water) that stop dispersion of the oil and gas. It is the favourable prevalence of these types of structure that give rise to the huge and cheaply accessible deposits of oil and gas in the Middle East.

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China and the global energy crisis

The situation at present, therefore, is that although the Tarim has been surveyed quite intensively, it is still not clear exactly what the geophysical structure of the basin is. None the less, it is certain that the basin contains oil and gas fields that, by any international standards, are very large indeed. Some of these are already discovered and producing. For example, the Lunnan fields in the northern Tarim have been sending output by pipeline to Korla since 1992. At Korla the new refinery can process 2.5 mmt a year, and some of the oil delivered through the same pipeline has also been diverted to Turfan. At first this used the South Xinjiang (Nanjiang) railway line, but it now goes through the new pipeline with an annual capacity of 9 mmt and can be further transported to refineries at Lanzhou by the Lanzhou–Xinjiang railway. Although the railway has recently been doubletracked, its annual capacity is limited to 15 mmt. Because of these limitations, yet another oil product pipeline with a capacity of 5.8 mmt tons is planned for Turfan to Lanzhou. This transport system also serves a number of other oil and gas fields in the vicinity of Lunnan. These include fields at Donghetang, Jiefangjudong, Yaha, Sangtamu,Yingmaili and Jilake. Also, to the west of the Lunnan fields are the Yakela and Tahe fields that include the large Shasan No. 2 well. PetroChina produced 6 mmt of crude oil here in 2005; Star Petroleum Co. also produced some, but the amount is unknown. One of the features of the Tarim to date has been the discovery not only of oil, but also of fields with joint oil and gas reserves and, in some cases, even of non-associated gas. Indeed it appears to be the case that reserves of natural gas may ultimately prove to be larger than those of oil. The largest single find to date is that at Kela 2, where 250 billion m3 of proven gas reserves in place have been found. This gas is not associated with oil. Other fields where combined reserves already exceed 100 billion m3 are Yaha, Yingmaili and Yangtake. This group of fields is now known as the Kucha–Tabei gas zone. The total natural gas reserves in place in this region are thought to be 370 m3, and this gas is expected to be the main source for the project to ‘Transfer Gas from West to East’. This huge project is essentially simple in the sense that reserves of gas in the Tarim are far in excess of any possible local use. Xinjiang, while developing rapidly, still has quite a modest industrial sector. In particular it lacks the large-scale chemical and fertilizer plants that would be appropriate outlets for this resource. Even demand derived from local electricity-generating plants at Korla is relatively small. Thus without the ‘West to East’ project, there would be no point in developing these gas reserves (see Table 5.1 and Figure 5.1). In the south-west of the Tarim another large group of gas fields, now called the Bachu–Taxinan zone, has been located. This field was first identified in 1977 and much crude oil has already been extracted and

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The Tarim Basin: solution or problem?

Table 5.1

Oil and gas fields in the Tarim Basin

Oil field, gas field, oil/gas field

Area (km2)

Kela 2 gas f. Tazhong 4 oil f. Yaha oil/gas f. Kekeya oil/gas f. Hotanhe gas f. Lunnan oil f. Yingmaili oil/gas f. Donghetang oil f. Hade 4 oil f. Yangtake oil/gas f. Jilake oil/gas f. Jiefangjudong oil f. Sangtamu oil f. Tazhong 16 oil f. Tazhong 6 gas f. Yudong 2 gas f.

47.1 35.7 48.9 27.5 145.0 36.6 48.3 16.5 66.6 18.3 52.5 14.0 18.6 24.2 58.0 10.2

Proven reserves (in place) Crude oil (000 tonnes)

Natural gas (100 mmm3)

– 8137.0 4442.9 3065.5 – 5113.0 1950.1 3292.7 3068.0 567.5 782.0 1532.2 1501.0 976.0 73.4 142.5

2506.10 119.27 405.37 313.55 616.94 40.33 309.75 13.70 7.94 274.29 136.80 34.39 18.49 1.32 85.26 73.32

Total (oil equivalent) (000 tonnes) 20 457.8 9 110.6 7 752.0 387.0 5 036.2 5 442.2 4 478.7 3 404.5 3 132.9 2 806.6 1 898.7 1 812.9 1 651.9 986.8 769.4 741.0

Source: CNPC and others.

Yinan No. 2 Gas Field Tuzi No. 1 Gas Field

Kela No. 3 0

20

40 km

Kela No. 2 Gas Field Diergen

Baicheng Erbatai Dabei No. 1 Gas Field

Yangtake Gas Field

Kucha

Yaha Gas Field

Yakela Gas Field

Xinhe Yingmaili Hongqi Gas Field Shaya

Akesu Yudong No. 2 Gas Field

Figure 5.1

Luntai

The Kucha–Tabei gas area in the Tarim Basin

Lunnan Oil Field

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China and the global energy crisis

Baicheng

Kuche–Tabei gas area

Yinan 2 Gas F.

Kula 2 Gas F.

Luntai

Kucha

Korla

Dawan 1

Akesu

Donghe 1 Yudong 2

Kashi Kashgar

Tabei uplift

Manjiaer West Oil & Gas area

North depression

Bachu

Tazhong 10 Tazhong 4

Maigaiti

Ruoqiang

Centr uplift Tazhong 6 Central Yecheng

Keshen 1

ift upl ssion re nan

Hetian Hotan

Ta

So

Bachu–Taxinan South-west gas area

Figure 5.2

Qiemo

South-west depression

Yutian

uth

de

p

Oil field

Minfeng

Gas field

Oil and gas fields in the Tarim Basin

refined at Zepu, which is reached by means of a 100 km pipeline. Proven oil and gas reserves at Zepu are reported to be 30.65 mmt and 31.3 billion m3 respectively. Exploration of this region is, however, continuing. New reserves have been located at Keshen, while in the Kashgar depression a gas reserve of more than 10 billion m3 has been found. The prospect is that the Bachu–Taxinan gas region will become the second major source for the ‘West to East’ project. The current estimate of the China National Petroleum Corporation is that Bachu–Taxinan could, in the long run, deliver 2–3 trillion m3 of natural gas (see Figure 5.2). In the eastern Tarim there is one other significant location for oil and gas reserves. This is the Manjar West Oil and Gas Zone. Here, Japanese and other foreign companies have been allocated blocks for survey and exploration work on the basis of production-sharing agreements. But although these contracts have been running since 1993, no major discoveries have yet been reported. All the foreign oil companies in this zone have already withdrawn from their contracted blocks. It has been reported that planners of the ‘West to East’ project are basing their projections on the assumption that proven gas reserves in place will amount to 720 billion m3. By 2000, reported reserves had already reached 505 billion m3, and since exploration continues unabated, it is highly probable that this figure has already been significantly enhanced, and that the target reserve is already close to being met.

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THE PROJECT TO ‘TRANSFER GAS FROM WEST TO EAST’: THE CONCEPT AND EARLY STAGES OF IMPLEMENTATION China’s reform and ‘Open Door’ policy has had the result of strengthening the economy of the eastern and coastal regions relative to the interior and the west. This result has been to some extent welcome, as it has rebalanced an economy distorted by Mao’s ‘third front’, a strategy that placed many industrial enterprises in unviable locations in China’s interior, far from markets, high-quality human resources and often even far from raw materials. However, the main determinant of the new configuration has been the operation of ‘market-like’ development and the emergence of export-oriented growth poles on the eastern seaboard. The coastal provinces had both the human and physical infrastructures needed to enhance the productivity of new, post-reform investment, as well as the locational advantage of relatively easy access by sea to export markets, especially those in the Pacific region. The eastern seaboard also had easy access to Hong Kong, Taiwan and Japan, all of which were both markets for China and important sources of the foreign investment and expertise needed to make the development process work. There was no serious concern about the disadvantages of this rebalancing process until the late 1990s, by which time a growing inland–coastal cleavage had become apparent. This geographical inequality was part of a wider problem of inequality which, increasingly, the Party has seen as a threat to its fundamental strategy of basing its power and legitimacy on reform and successful economic development. The concept of the drive to the west was thrust to prominence by Chairman Jiang Zemin during a visit to Xi’an in June 1999. Xi’an is the capital of Shanxi Province and has traditionally been a key city linking central and north China, through the silk route, to India and the west. In recent years it has become an important regional and industrial centre, with particular strength in aeronautics and aerospace. Speaking in Xi’an in March 2000, Jiang announced: ‘The time is ripe for developing the midwest of China, and in particular, the far west’. Following the guidance of this speech, Premier Zhu Rongji announced his plan for the ‘Grand Development of Western China’ at the National People’s Congress in 2000. Various large-scale projects to advance the strategy were subsequently announced, but the upgrading of the ‘West to East’ gas pipeline project has clearly become the centrepiece of the entire policy. In financial terms the overall cost of the project was preliminarily estimated at 120 billion yuan (US$14.5 billion). In real terms, the proposals embrace the development of the Tarim Basin’s oil and gas resources and

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the construction of a pipeline from the Lunnan terminal in the Tarim to Shanghai. This pipeline is 4200 km in length. In addition to this trunk line, in order to utilize its flow, further large investments have been needed for storage and distribution facilities around Shanghai and other cities. The project has two proposed phases. The first covers the years 2001–2005 and the second extends to 2010. One major pipeline system is proposed for each stage. In the first, the pipeline capacity will be 12 billion m3 of gas per year. In the second, capacity of a further 20 billion m3 will be added, making a total capacity of 32 billion m3. Phase one is well under way and initial completion was achieved in 2005. This line starts at Lunnan, the main pipeline base, travels across the Tarim to the Turfan Basin, finally reaching the Ordos Basin at Jingbian. The length of this section is 2586 km. In its second major section, the pipeline runs via Zhengzhou and Nanjing to Shanghai, a further 1581 km. The total pipeline is thus 4167 km long and its diameter is in places as wide as 1118 mm. This latter part of the project from the Ordos fields was completed in 2004, with some experimental gas flows put through it to Shanghai. The flow through this pipeline is planned to rise gradually to an annual capacity of 12 billion m3. The second pipeline is planned to be similar to the first over the initial stage, but then to deviate through Lanzhou, Xi’an and Xinyang, and bend towards Shanghai. The total distance of this second pipeline is to be 4212 km with a diameter of 914 mm. Although this plan is the core of the ‘Gas from West to East’ project, a broader definition of the project would also include the development of the Qaidam, Ordos, and Sichuan basins described earlier. Although the pipelines for these fields are separate from the Lunnan-based pipelines, their development and the plans associated with them are also enormous undertakings and contingency measures are already in place to connect, at two points, the Lunnan–Shanghai lines with those serving the Qaidam and Ordos Basins. The Qaidam–Lanzhou pipeline is to be connected to the second phase of the Lunnan–Shanghai trunk line at Lanzhou. In addition, a further line is to be constructed from Lanzhou to Gantang, which is on the line of the first phase of the Lunnan–Shanghai trunk pipeline. The resources of the Ordos Basin will also be linked to this network because the existing line from Jingbian to Xi’an City can be connected to the second phase of the Lunnan–Shanghai trunk line. Finally, around all the major gas-using cities such as Shanghai, Beijing, Xinyang and Wuhan, further pipeline networks and distribution terminals will be built and, as needed, subterranean storage tanks will have to be constructed (see the oil and gas map of China at the front of the book; see also Photographs 5.5–5.7).

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Photograph 5.5 Pipeline construction work in the Qaidam Basin, near Xining City. The pipeline technology in this case was probably supplied by the Italian firm Saipem

Photograph 5.6 Road construction for oil field development in the Junngar Basin

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Photograph 5.7 Crude oil production at Tazhong 4 in the Tarim. A ‘Christmas Tree’ well head assembly and a lookout platform The scale of these future and potential future supplies is now being balanced against estimates of demand. The most important estimate to date is that by PetroChina, which has investigated the requirements of all major industrial and governmental consumers. Its survey covers the whole of China, excepting Fujian and Guangdong provinces, which are not within PetroChina’s terms of reference. Estimates for 2005 and 2010 were that aggregate demand will reach 56.9 and 115.1 billion m3 respectively. By 2010 the ranking of major consumers is expected to be the electricity-generating stations, various industrial sectors, urban commercial and household consumers, and the chemical industry (see Table 5.2). Forecasts for major gas consumers by region are shown in Table 5.3. The 120 billion yuan cost referred to above is the cost of phase one of the project only. The breakdown of this figure is as follows. Exploration and development 20 billion; pipeline construction 40 billion; and construction of the supply and distribution facilities a further 60 billion. In recent years the Chinese government has been making huge bond issues to cover the budget deficit. Out of these issues, it has been suggested that 150 billion yuan are in support of the ‘Grand Development of Western China’. However, this figure includes provision for a number of major projects, not simply the ‘Gas from West to East’ plan. Among these other projects are some that are also extraordinarily ambitious, including the plan to transfer ‘Electricity

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Table 5.2 Natural gas demand estimates and share by principal users (100 mmm3) 2005

2010

Electricity generation Chemical industry Other industry Town gas

174 120 168 106

484 180 257 230

Total

569

1151

Source: CNPC and others.

Table 5.3 Natural gas demand forecasts by China’s major geographical regions (100 mmm3) Area

2005

2010

North-east (Liaoning Jilin, Heilongjiang) Pan Bohai (Beijing, Tianjin, Hebei, Shandong) Yangtze Delta (Shanghai, Jiangsu, Zhejiang) Central South (Hubei, Hunan, Anhui, Henan) Central (Inner Mongolia, Gansu, Shanxi, Ningxia) West (Xinjiang, Gansu, Qinghai) Total South (Guangdong, Fujian) Total China

118 128 119 76 110 28 569 – –

189 266 310 173 161 52 1151 214 1365

Source: CNPC and others.

from West to East’ and the Tibetan railway project whose line was opened in July 2006. What this means is that although some state funding through bond issues is available, a huge financing task remains. The approach to financing taken by PetroChina is by no means clear. For example, PetroChina now has a listing on the Hong Kong and New York Stock Exchanges. This, however, was not for the purpose of raising funds on the scale needed for the ‘West to East’ project. The corporation must also have considered putting together a syndicate of international bank loans, but has not pursued this route either. In the event, it appears to have decided to try to raise money by seeking the participation in the project of international oil majors and other companies with direct interests of various kinds in its outcome. These interests have included Japanese trading companies, long familiar with

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complex and long-term financing arrangements in the energy sector. These companies, however, dropped out when PetroChina excluded Japanese and other foreign companies from participating in the market to supply the large-diameter steel pipes needed for the project. The supply of steel products had been one of the main ways in which Japanese companies had envisaged benefiting from the whole project. Another international participant that dropped out was British Petroleum. This was surprising at the time, bearing in mind that BP had taken a 20 per cent share in the PetroChina stock market offering. It emerged that the terms offered by PetroChina to participate in the ‘West to East’ project were simply not acceptable. In January 2004, BP sold its share while stating that it none the less retained an active interest in the project. In December 2001 PetroChina finally concluded a provisional agreement for a joint venture with Shell. The terms of this agreement are confidential, but it is reported that, under it, PetroChina and Shell will share 55 per cent:45 per cent. The agreement also appears to stipulate that it covers not only pipeline construction, but also development of the gas fields in the northern Tarim Basin. Another pair of companies reportedly involved with the project are Gazprom of Russia and Exxon–Mobil. Given the financial and technical scale of the project and the long time horizons involved, it seems likely that these are simply the early moves in what may prove to be a complex story. However, later, this Shell-led group of companies withdrew from the project. The reasons for this were not disclosed, but the final contract terms with Chinese oil companies may have been very difficult. A further complication in the Tarim development is the political complexity of the region. The Tarim is located in an area ruled by the Xinjiang Uygur Autonomous Government. This form of local government is allowed where national minorities are predominant and where a form of self-government, even if nominal, seems politically wise. However, as is well known, there has been an active Uygur independence movement seeking to establish a state of ‘East Turkestan’ in a political tradition that goes back to the decades before the establishment of the People’s Republic. The Chinese handling of this movement has fluctuated somewhat. In the early stages the ‘Grand Development of Western China’ was seen as a tool to consolidate and develop the region economically with beneficial political results. But the worldwide sharpening of ethnic and religious political tensions since 11 September has made Xinjiang’s political uncertainties that much greater. China has (with the USA and Russia) strengthened antiterrorist campaigns in regions where terrorism is seen as a tool of Muslimbased independence movements. In spite of the impact of 11 September, however, the Chinese are attempting to retain and use the economic factor by developing the Shanghai Organization for Economic Cooperation

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among Central Asian states. Both the Chinese and Russian states see localized economic cooperation as desirable and the intention is to create a framework to develop the regional economy in ways that benefit the local populations, but do not undermine the Beijing- and Moscow-centred political systems. The prospect of large revenues from the development of the Tarim fields and the pipeline raises major political issues for Beijing. An interesting parallel to the situation has been the development of the Prudoe Bay reserves in Alaska. Here, the Alaskan State government actually succeeded in obtaining an increase in the local oil royalty rate, which has made it the richest of all American states measured in terms of local fiscal revenue. At present, the Xinjiang government benefits from oil and gas development only through the local tax on production-sharing agreements involving foreign companies. There is no parallel to the Alaskan royalty payments, which would of course greatly increase the capacity of the local administration to stimulate economic development. Moreover, under the State Council regulations for the protection of petroleum and natural gas pipelines, the Chinese central government has draconian powers to stop local interference with the flow of resources from Xinjiang. Thus our conclusions so far on the Tarim development and the ‘Gas from West to East’ project are as follows. This is an enormous project based on the reality of very large gas and oil reserves in China’s far western territories. The project has far-reaching potential implications both for the energy supplies to the eastern seaboard and for the development of western China. However, the technical, financial and political aspects all remain problematic. Setting aside the political issues, it is essential that the Chinese planners develop comprehensive plans for the Tarim in terms of technical, financial and other practical issues. Realistic and transparent financial plans consistent with the technical ‘real’ plans are particularly important. All these scenarios need to take into account not only the Tarim reserves, and other geological and pipeline issues, but also the role of gas supplies in Siberian Russia and in Central Asian states such as Kazakhstan and Turkmenistan: although these regions are not part of China, their scale, location and potential role in the Chinese oil and gas supply are considerable.1

NOTE 1. Keun-Wook Paik, Gas and Oil in North East Asia. Projects, Policies and Prospects, London: The Royal Institute of International Affairs, 1995.

6.

Refining and distribution

REFINERY RESOURCES AND PROSPECTS China’s oil refinery capacity in 2005 had reached 270 mmt of crude oil per annum. This is a large figure, exceeded only by the refining capacity of the USA and Japan. In the same year China’s production of crude oil and consumption of petroleum products were 181 mmt and 317 mmt respectively. We see, therefore, that not only was China’s refinery capacity significantly below that needed for domestic self-sufficiency, but much capacity was also being used to refine crude oil imports. As we have seen, on present estimates of domestic output it is likely that China’s imports of crude oil and oil products will need to rise to 138 mmt and 48 mmt respectively by 2010, lowering the oil self-sufficiency rate to 46 per cent as compared to 71 per cent in 2000. The sources of these imports will have an important bearing on plans for the refinery sector. In the year 2000, the first and second largest sources of imports to China were Oman and Angola. These supplied 22.2 per cent and 12.3 per cent of total imports respectively. Iran and Saudi Arabia took the next two places with shares of 10 per cent and 8.2 per cent. Of these sources, crude oil from the first two are low in sulphur content, while the latter are high-sulphur oils. If we consider also the contributions of Indonesia, Vietnam and the North Sea, we find that as of 2000, low-sulphur crude accounted for about 75 per cent of total imports. However, this scenario is already changing rapidly as Middle Eastern sources grow rapidly in importance. In 2003, for example, Saudi Arabia and Iran emerged as the two most important sources of imports into China. This shift is going to constitute a serious technical challenge to the industry. The reason for this is that the refineries will have to raise sharply their capacity to desulphurize and develop other technologies to make these crude oils suitable for commercial use. A further consideration here is the growing need to provide petroleum to satisfy China’s rapidly expanding population of cars. At current levels, China’s per capita consumption of petroleum is low. At 170 kg per person it is only approximately 10 per cent of the level in advanced economies. By 2010, petroleum demand alone is expected to reach 350 mmt of crude oil equivalent and by 2020, the figure will be 450 mmt. 96

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Taking these factors into account, we estimate that the refinery capacity for crude oil will have to be increased by some 50 mmt within the next few years. The problem is that the starting point for such an expansion is not strong. Much existing refinery capacity dates back to the Soviet period of the 1950s. As the Daqing field came on stream in the 1960s, the first steps were taken towards the modernization of the refinery sector, but these efforts were hampered by the Cultural Revolution and the consequent lack of access to more modern refining technologies. Steps to reform and enlarge the refining sector began again in the reform era, particularly after the establishment of SINOPEC in 1983. The problems now faced by the industry are a complicated combination of organizational, technical and commercial ones. Let us look at some key aspects of the industry at the present time. The organizational structure of the industry is as follows. SINOPEC is the largest refinery owner, with 33 refineries with a total annual capacity of 140 mmt of crude oil. SINOPEC’s refineries are mainly located in Beijing, Tianjin and in the eastern coastal areas. By contrast, the 34 refineries controlled by PetroChina are largely located in the north-eastern provinces of Heilongjiang, Jilin, Liaoning and, in the west, in Xinjiang. These refineries have a capacity of 110 mmt. China’s total capacity of 270 mmt of crude oil refining is thus the sum of these networks together with the capacity of a small number of other plants. A full list of China’s capacity is shown in Table 6.1.1 While this capacity is substantial, the appearance is misleading in that many of these refineries are small, technically deficient, and inefficient in other ways. The international industry standard for capacity of a single refinery is of the order of 10 mmt per annum. Only four Chinese refineries currently meet this standard. These four refineries are those at Jinling, Chinhai, Qilu and Maoming. They are all SINOPEC refineries. A further 20 refineries are in the 5 mmt to 10 mmt class. These include plant at Dalian, Daqing, Beijing, Shanghai, Guangzhou and Urumqi. The combined capacities of these two groups of relatively large refineries are 52 mmt and 135 mmt respectively. Together they therefore account for 65 per cent of the national total. At the bottom of the pyramid are some 100 refineries with capacities of less than 1 mmt per year. To understand other important technical problems in the industry we need to recall the fundamentals of the refining process. Crude oil/petroleum is a complex of many hundreds of chemical compounds. Refining is the means whereby this complex bundle of compounds is reduced to specific, commercially valuable products. There are three distinct processes that can be involved. These are:

98

Province/ cities Heilongjiang P. ditto ditto Jilin P. Liaoning P. ditto ditto ditto ditto ditto Beijing city Tianjin city Hebei P. Shandong P. ditto Henan P. Shanghai city ditto Jiangsu P. ditto Zhejiang P. Anhui P.

Daqing, PetroChina Daqing (2), PetroChina Harbin, PetroChina Jilin, PetroChina Fushun, PetroChina Liaoyang, PetroChina Dalian, PetroChina Dalian, West Pacific Jinxi, PetroChina Jinzhou, PetroChina Beijing Yanshan, PetroChina Tianjin, SINOPEC Cangzhou, SINOPEC Qilu, Shengli, SINOPEC Jinan, SINOPEC Luoyang, SINOPEC Shanghai Gaoqiao, SINOPEC Shanghai, SINOPEC Jinling, SINOPEC Yangzi, SINOPEC Zhenhai, SINOPEC Anqing, SINOPEC

Oil refineries in China

Name of refinery: companies

Table 6.1

3000 5600 10 000 5000 11 000 8000 5500 5500 9500 6000 4000 10 000 5000 5000 11 300 8800 10 500 7500 14 000 4500

6000

Refining capacities (1000 tonne/year) Refining/petrochemical complex ditto Medium-size refining Refining/petrochemical complex Refining/petrochemical complex Petrochemical complex Refining/petrochemical complex Refining/petrochemicals Refining/petrochemicals Refining/petrochemicals Refining/petrochemical complex Refining/petrochemical complex Medium-size refining Refining/petrochemical complex Medium-size refining Refining/petrochemicals Refining/petrochemical complex Petrochemical complex Refining/petrochemical complex Petrochemical complex Refining/petrochemicals Medium-size refining/petrochemicals

Type of refineries

6200 5661 2701 6817 9000 3726 11 067 8611 6380 6490 7968 4670 2488 10 030 4080 4166 10 065 9492 10 743 7815 17 101 4214

Crude runs (2005, 1000 tonnes)

99

ditto

Karamai, SINOPEC

Source: Various.

Jianxi P. Hunan P. Hubei P. ditto Fijian P. Guangdong P. ditto Gansu P. Shaanxi P. Xinjiang Uygur ditto ditto

Jiujiang, SINOPEC Changling, SINOPEC Wuhan, SINOPEC Jingmen, SINOPEC Fujian, SINOPEC Guangzhou, SINOPEC Maoming, Sinopec Lanzhou, PetroChina Yanchang Group Urumqi, PetroChina Dushanzi, SINOPEC Yumen, SINOPEC 2500

5000 6000 4000 5000 4000 7700 13 500 7500 4000 5000 7000 4000

Medium-size refining/petrochemicals Refining/petrochemicals Medium-size refining/petrochemicals Medium-size refining/petrochemicals Medium-size refining/petrochemicals Refining/petrochemical complex Refining/petrochemical complex Refining/petrochemical complex Medium-size refining Refining/petrochemicals Refining/petrochemical complex Medium-size refining/petrochemical complex Medium-size refining 4582

3648 4144 3945 4021 3344 6690 12 678 7968 3961 4169 4188 2400

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(a) physical separation, (b) chemical conversion of initially separated products into other products, and (c) purification. Physical separation is basically made possible by taking advantage of the differing volatilities of compounds. Thus, if crude oil is first heated to the point of vaporization, it can then be passed into towers where different products are drawn off at their appropriate temperatures. In this way a given crude oil can produce quantities of gasolene, kerosene, fuel oil, petrochemical feedstocks, lubricating oils, paraffin etc. Precise refining possibilities in any case will thus depend in the first instance on the chemical composition of the original crude. By subsequent processes of conversion and purification, refiners then adapt the structure of initially refined products to reflect market factors. A particularly significant aspect of refining arises from the fact that only small volumes of gasoline can be physically separated from crude oil. By chemical conversion, however (known as ‘cracking’ processes), this fraction can be greatly increased. The structure of demand facing refiners will of course change over time. For example, over the short run there are seasonal factors requiring refiners to adjust output to reflect peak demands for fuels needed for heating and air conditioning respectively. Over the longer run, of course, the industry must accommodate to the requirements generated by rising incomes and changing technology. Thus we normally find that in advanced, high-income economies (where motor and aviation transport are major sources of demand) the structure of refined output will be very different from that found in less developed economies where paraffin, fuel, and basic lubricating compounds are much more important. One other challenge that arises over time is that refiners have to meet rising quality standards. These are particularly demanding for the fuels and lubricating substances used in sophisticated types of machinery – notably combustion engines of all kinds. Refining is, therefore, a complex business in which both commercial factors and technical capabilities play important roles. Refiners have to work in ways that reflect not only the types of crude oils being fed in from domestic wells (or from imported imports), but also the varying economic landscapes of national economies. Through time, all these influences will change, and the refinery sector must adapt and expand accordingly. Turning now to the Chinese situation, we find that refineries fall into five main categories. These are:

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1. Refineries primarily for manufacturing fuel oil. These are typically equipped with facilities for distillation, fluidized catalytic cracking, and delayed coking units. These refineries are thus capable of producing a range of products including high-octane and high-quality gasoline and many other products derived from the initial separation processes. 2. Refineries capable of producing fuel and lubricating oils. 3. Medium-scale refineries, usually of less than 4 mmt capacity, mostly located at or near oil fields. These are capable of basic distillation and cracking processes only. 4. Large-scale comprehensive refineries that produce feedstock for the production of ethylene and other petrochemical products, including propylene and aromatics. 5. Refineries that, while not comprehensive in the sense of those in group 4, are designed to produce petrochemical feedstock suitable for the production of man-made fibres and synthetic resins. We may see already, therefore, that in terms of scale, modernity and technical range, the refining sector at present offers only a weak base for meeting China’s needs and there are a number of other pressing technical and commercial issues that have to be considered in developing a strategy for the sector. First, in spite of recent refinery construction, there remains a major imbalance in the geographical distribution of refining and consumption. Basically, in the regions where consumption is high and growing, refinery capacity is inadequate, while in areas of low consumption, it is in surplus. This reflects an earlier policy of locating refineries close to the point of production of crude oil supplies since, at the time, these were also the regions in which demand from China’s old generation of heavy industries was important. Second, the output structure of the refining sector is increasingly at odds with the structure of product demand. In general terms the situation is as follows. The facilities typically found in existing refineries are those for simple atmospheric distillation, vacuum distillation, and fluidized catalytic cracking (FCC). These facilities were appropriate for the types of domestic crude typically refined and the range of products needed in the 1960s and 1970s (i.e. low-sulphur, heavy, hydrocarbon-rich crude oils being refined for simple lubricants, kerosene, fuel oils etc.). These refineries are, however, inappropriate now and the structure of China’s refinery output is completely at odds with those found in the refining sector worldwide. For the future, the growing demand for petroleum products requires much more capacity in the higher-end cracking and

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purification processes and a general convergence of Chinese with worldwide refining patterns. There is the added problem of quality. The whole range of gasoil, gasoline and lubricants produced by current refineries is often poor in quality, so much so that they fail not only to match minimum environmental standards but fail even to reach the specifications called for by modern transport and other industrial equipment.

THE GASOIL (DIESEL) PROBLEM The results of existing imbalances in the refining structure are already evident in the ‘marketplace’. Gasoline products tend to be consistently in surplus, while gasoil is in chronic short supply. As a result of these imbalances, refineries frequently operate below capacity in terms of their intakes of crude oil. This is because without the more sophisticated refining and processing facilities needed for marketable hydrocarbons, there is simply no use for the volume of crude oil that can be handled in the basic separation processes. The gasoil problem is a particularly intractable one. This product is one for which growth of demand is rapid. The main uses of gasoil include a wide range of transport machinery as well as machinery for agriculture, fisheries, and electrical power generation. As road transport grows, not only does the demand for gasoil grow but the question of quality becomes increasingly urgent. Modern diesel engines require fuel that is low in sulphur, high in cetane value, and is chemically stable. By 2002–2003 the consumption of gasoil was estimated to be 66.25 mmt, with the coastal provinces of Jiangsu, Zhejiang and Guangdong accounting for 60 per cent of the national total. The government has adopted a policy of keeping gasoil prices low, and this has led to a rise in consumption of gasoil relative to gasoline. The problem is that gasoil and gasoline are only produced jointly. Thus if gasoil output is increased, then relatively large amounts of gasoline are also produced. In the circumstances, the sensible policy would be to meet some of the increased demand for gasoil by imports, thereby ensuring that the balance of domestic production was more satisfactory. At present, surplus gasoline is being exported. There are signs that the government is addressing this problem and imports of gasoil in 2002 were 2–3 mmt. However, with domestic demand for gasoil expected to be 85 mmt by 2005 and 108 mmt by 2010, significant changes in current policy will be called for. On the quality side, before July 1999 the government implemented a system of three grades, namely: ‘basic’, ‘first class’ and ‘premium’. Under

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new regulations there is now to be only a ‘premium’ grade. This will have with a low sulphur (0.2 per cent) and cetane value 49. This represents quite a modest standard and further tightening was announced for 2004.

DEMAND FOR GASOLINE, KEROSENE AND LPG PRODUCTS In 2000 the consumption of gasoline was 35.55 mmt – little more than half the demand for gasoil. However, current plans for the expansion of the automobile industry and the growth of the road and infrastructure network to support automobile use suggest that demand for this product will grow explosively. This will occur not only in urban, but also in rural areas, where demand for small, rugged vehicles will be strong. Gasoline demand is estimated to be 43 mmt in 2005 and at least 52 mmt by 2010 (see Table 7.2 in the next chapter). These figures are actually lower than the growth of vehicles might lead one to expect because, for environmental reasons, the government is encouraging the use of LPG (liquified petroleum gas) and CNG (compressed natural gas) for vehicles in major cities including Beijing, Shanghai and Guangzhou. In 2000 there were already 100 000 vehicles using these fuels in major cities. Again, quality and type of gasoline are important. Leaded gasoline, which accounted for 45 per cent of all gasoline in 2000, is now outlawed and new types of unleaded fuels are being introduced. This was planned to lead by 2005 to a ‘Clean Gasoline Standard’ available at 90, 93, 95 levels of octane strength. At present kerosene is produced in quite small quantities. In 2004 consumption was only 10.4 mmt. However, the major form of kerosene is aviation fuel, for which demand is now growing rapidly. If growth continues at present rates – 10 per cent per annum – the demand for aviation fuel by 2010 will rise to over 15 mmt per annum. Demand for LPG is also expected to grow rapidly. Consumption of LPG rose from 13.53 to 18.77 mmt between 2000 and 2004. Much of this is used for domestic heating, and demand in the coastal areas is particularly strong, reflecting the real-estate boom. Of the 18.77 mmt in 2004, 12.42 mmt was produced domestically and much of this was refinery gas. Imports of LPG are basically left to market forces with little interference by government. Thus imports from Saudi Arabia, the United Arab Emirates and Thailand are shipped to the coastal areas, which also receive LPG from north-east China, where the product is basically in surplus. Under these free market conditions, foreign participation in the industry, notably by BP and Arco, is becoming marked.

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PLANS TO RESTRUCTURE, EXPAND AND MODERNIZE REFINING CAPACITY By the end of 2000, the authorities had ordered a drastic pruning and restructuring of China’s refining facilities. Of the 193 refineries in the system, only 82 were allowed to remain in operation. Of the 111 closures, 13 were designated as refineries incapable of reaching minimum environmental standards. In addition, all refineries with less than 1 mmt capacity were classified as hopelessly suboptimal. The total loss of capacity involved in these closures was 11 mmt, which will have to be made up in the programme of new construction. Under the Tenth Five Year Plan (2001–2005) it was proposed that China’s total refinery capacity be increased to 270 mmt. Taking into account the loss of capacity implied by the closures noted above, this means that additional capacity of 80 to 90 mmt will have to be put in place. The government has further ordered that, within this total, there must be enough capacity suitable for the high-sulphur imports of crude to enable total capacity for these oils to reach at least 75 mmt. These targets are to be met by the construction of eight or nine refineries, each with a capacity of 10 mmt or more. If these plans are fulfilled, then China’s refining capacity in terms of crude oil intake was planned to rise to 270 mmt by 2005, and to 300 mmt by 2010. Within this aggregate picture the two major corporate actors continue to be PetroChina and SINOPEC. Both have ambitious programmes to modernize and upgrade their refinery systems in ways that will enable them to process ever-rising volumes of imported oil. As we have seen, imported crude will require facilities capable of handling crude oils with highsulphur content, and in the process of restructuring, both companies plan to modernize in ways that will enable them to make much fuller use of their underlying refining capacity (see Photographs 6.1 and 6.2). In the case of SINOPEC, the plan was to expand capacity to 160–179 mmt by 2005. This would include expansion at Maoming and Chinhai, where capacity is to rise to 20 mmt a year, and expansion at Jinling, Guangzhou, Shanghai, Fujian and Yangzi in Jiangsu Province to enable them to upgrade their ability to handle the high-sulphur crudes. These changes were planned to give SINOPEC a total capacity for refining sulphur-rich crudes of 62 mmt by 2005. Another major objective of the SINOPEC plan was to configure its refining capacity in ways that would reduce transport costs as well as reducing refining cost. It planned to do this by adapting the system so that it conformed more to the changing geography of the market and also to secure a significant improvement in utilization rates.

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Photograph 6.1

A modern refinery at Maoming, Guangdong Province

Photograph 6.2

Most retail petroleum outlets belong to either SINOPEC Corp. or PetroChina. The station shown here, however, is an independent

PetroChina has more modest ambitions. To begin with, it is planning to close small and badly located refineries with a total capacity of 16 mmt per annum. None the less, by 2005 the company planned to have a capacity of 117.8 mmt, which will supply 42 per cent of domestic requirements

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for refined petroleum products. Located mainly at inland sites, PetroChina’s facilities have in the past mainly been employed to refine low-sulphur indigenous crudes. Among these refineries, there is a major plan to enlarge and upgrade the refinery at Daqing. This will expand almost threefold to achieve a total annual capacity of 20 mmt, including up to 5 mmt per annum of highsulphur crudes. Lanzhou is another major project planned by PetroChina. In partnership with Total Oil of France, the Dalian West Pacific refinery will expand by 50 per cent to a total capacity of 8 mmt. It will be observed that all these investments are enlargements and restructuring based on existing facilities. Neither company is planning to build new refineries. However, the shortfall in refining capacity as of 2005 is estimated to be as much as 50 mmt per year. To bridge this gap will require two or three modern refineries. These could be joint ventures. For example, the suppliers of China’s oil imports clearly have a large potential interest in such facilities and PetroChina has been in talks with Saudi Aramco and Exxon Mobil about a new refinery in Fujian Province. Clearly joint ventures of this kind would bring huge benefits to the Chinese refining network. In addition, for reasons explained above, there is a pressing need also for a whole range of improved and enlarged secondary processing facilities. The conclusion is, therefore, that while current plans are impressive and are moving the refinery sector in the right direction, they cannot yet be regarded as complete and adequate. More expansion with an enhanced role for foreign participation to bring both new capacity and contemporary technologies will be called for within the next five to ten years.

NOTE 1. China Refinery Industry Editorial Committee, Zhongguo lianyou gongye (China’s refinery industry), Beijing: Oil Industry Publishing House, 1989.

7.

Summing up and looking ahead

China is now the world’s second largest consumer of petroleum and will soon surpass Japan as the second largest importer of crude oil and petroleum products. Oil consumption in 2004 is estimated to have been 320 mmt, which represents a daily consumption of 6.4 million barrels. In 2005, it was estimated that China consumed about the same amount of oil as in the previous year. China’s total consumption of oil and LPG in 2004 and 2005 was supplied from the sources shown in Table 7.1.

FORECASTING CHINA’S INDIGENOUS CRUDE OIL OUTPUT The statistics available for the study of the Chinese energy sector are in many respects still quite opaque. There are, for example, at least four official Table 7.1

China’s oil balance in 2004 and in 2005 (mmt) 2004

2005

174.72 122.81 5.49 117.32 37.86 11.45 26.41 318.45

180.86 129.08 8.06 121.02 31.46 14.00 17.46 319.34

Imports of LPG Domestic LPG supply

6.38 12.39

6.14 12.48

Total LPG supply

18.77

18.62

Domestic crude oil production Imports of crude oil Exports of crude oil Net imports of crude oil* Imports of petroleum products* Exports of petroleum products Net imports of petroleum products* Total oil supply

Note: * No allowance has been made in these data for illegal imports of crude oil, petroleum products or LPG although these are known to be significant, especially in southern China. Source:

China Oil, Gas and Petrochemicals, various issues.

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series for crude oil output that appear in different publications. These series have varying degrees of coordination and the differences between central and local data, for example, are notorious. As we saw earlier, Chinese statements about their oil reserves present the foreign analyst with a particularly serious problem. One unusually complete set of official data was, however, incorporated in a graphical representation of China’s annual additions to proven oil reserves since 1950. These data seem broadly credible and are consistent with other partial information. The data are shown in Figure 7.1. It is interesting to note that the figure shows that additions to reserves were being accumulated even during the Cultural Revolution. Looking to the future, we observe that estimates of reserves to 2050 take the form of a parabola whose highest point is 2013, in which year the addition to reserves is 800 mmt.1 The shape of the future supply curve for crude oil will depend on the rate at which these reserves can be exploited. We must bear in mind that the characteristics of the many fields included here are varied, but we may say in general that if exploitation is rapid, the bell-shaped curve for each field will be pronounced. In China’s case, however, exploitation is likely to be slow; hence the bell-shaped curve may be expected to take the form of a relatively gentle hill. The other element required to estimate future potential output is the extent to which recovery of theoretically available reserves will actually take place. For China, a recovery rate of 40 per cent of one half of its resources would seem to be a reasonable estimate. Thus if geological resources are 106.8 billion tonnes, we may expect that 21.3 billion tonnes will ultimately be recovered. Cumulative production up to 2004 has been approximately mmt 1200 1000 800 600 400 200 0 1950 60

70

80

90 2000 2010 2020 2030 2040 2050

Figure 7.1 Annual discoveries of crude oil proven reserves in place in China

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4.3 billion tonnes, implying that only 20 per cent of recoverable reserves have been extracted. It is therefore likely that future output will rise on an upward trend with a peak in about 15 years. Thereafter output will be on a plateau followed by a decline. This forecast is made on the assumption – now increasingly realistic – that no huge fields will be found in locations such as the Tarim Basin, and hence that China’s domestic oil output will depend on the systematic exploitation of large numbers of small and medium-sized fields (see Figure 2.2 in Chapter 2). Let us now turn to the medium-term future, i.e. the next 10 to 20 years. A simple extension of the recent trend of output would suggest that by 2020 output might reach 225 mmt. Many in the industry now think that this is too optimistic – a view we share. The likely output for 2020 is 200 mmt, in which case output is likely to be 185 mmt in 2010 and 190 mmt in 2015.2 Underlying this forecast are a number of assumptions that need to be borne carefully in mind. The most important assumption is that adequate investment in oil and gas exploration and development is undertaken by Chinese oil companies. Second, we assume that at least 50 mmt of crude oil per annum will be moved from western China by pipelines constructed along the Lanxing railway line. The third assumption is that output in the large, older oil fields in eastern China are now at their peak or already in decline, as is certainly the case at Daqing, Shengli and Liaohe. A very detailed Japanese report published in 1997 has suggested that production in these three fields would reach 76 mmt in 2005 and then decline to 55 mmt by 2010. The same source estimates that output from the other eastern fields will stabilize at about 25 mmt in 2010.3 The outlook for offshore oil appears to be more promising. In 2004 output was 26 mmt and rose to 29 mmt in 2005. By 2010 an output of 40 mmt should be reached. Thereafter offshore output from existing fields is expected to stabilize, but there are realistic prospects for further offshore discoveries that will eventually enhance supply. It is clear, therefore, that overall it is the performance of the western oilfields that will be critical to China’s oil future. Output from these fields is projected to increase to 40 mmt by 2010 which is entirely feasible. This view of the future based on detailed analysis is consistent with official policy lines.4 However, two major problems lie ahead in this strategy. One is the serious nature of transportation bottlenecks. The Lanxing rail connection is currently shipping 15 mmt per annum, and as this is already a double-tracked line, its capacity cannot be increased. A second technical problem relates to oil from the Tarim. In this field substantial quantities of gas are associated with the output of oil. Thus if the oil is to flow, this gas has to be transported for use elsewhere. The alternative possibility of re-injecting associated gas into the field is a technical possibility, but a very expensive procedure.

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At the present time construction of a new petroleum product pipeline along the Lanxing railway is in progress, and this should add 5.8 mmt to capacity. Valuable as this amount may be in terms of the energy needs of eastern and central China, it is clear that planned transportation capacity is still far too small to handle the problem of the overall east–west demand and supply imbalance. In thinking about China’s future energy balances there is a strong temptation to focus on factors that can be quantified relatively easily. Thus on the demand side one can look at projected growth rates for the economy and the energy elasticity of output (i.e. the ratio of energy demand growth to growth in the economy). On the supply side there are the many physical factors of the kind we have been discussing above. However, purely qualitative factors and factors to which it is hard to assign clear numbers are in reality just as important. China’s energy future will be influenced by a variety of policy choices, by the evolution of all relevant institutions and markets, and by the accumulation of technical skills. The financial system, particularly through its impact on exploration and development, will also be critical. Finally, we need always to bear in mind that from time to time China experiences both natural and socio-political upheavals, and these too can affect the progress of the industry.

THE OUTLOOK FOR PRODUCTION OF NATURAL GAS Future production of natural gas will depend on the development of supply and transportation facilities as well as demand factors. The demand factors seem likely to be more important in the gas sector than they are in oil. In terms of supply, a key field will that at Jingbian in the Shaanxi– Gansu–Ningxia field. This supply will be connected to the major consuming cities of Beijing and Xi’an by means of the Ordos Basin pipeline. The amounts to be supplied will depend not only on the pipeline capacity, but also on the installation of local facilities to receive and use the gas. It is expected that Beijing will use 3 billion m3 per annum, Xi’an a further 1 billion m3, while 600 million m3 will be shipped to Yinchuan as fertilizer feed. When the Beijing pipeline is double-tracked, a further 3 billion m3 could be supplied from the new Shell field at Changbei in the Ordos Basin. In 2005 the total supply of gas from the Ordos Basin had already reached 7.53 billion m3, which means the above-stated demand-side construction work was already completed. Other important natural gas fields are those located in the Qaidam, Junngar, Turfan–Hami and Sichuan Basins. In Qaidam, 2.1 billion m3 is

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already flowing to Lanzhou and Xining, and the future capacity of this field is expected to rise to 4 billion m3. In 2005, output from the Junngar and Turfan–Hami fields was 2.9 and 1.5 billion m3 respectively, and these figures are expected to double. In Sichuan, at present the largest gas field in China, output in 2005 was 11.6 billion m3 (PetroChina only), and current plans will raise this to 12–15 billion m3. A major beneficiary of this expansion will be the industrial city of Wuhan. Wuhan and its immediate region will receive an annual supply of 3 billion m3. Looking to the future, the Tarim Basin will become the largest source of China’s natural gas supply. According to the plan for the first phase of the ‘West to East’ pipeline project, it was planned that Shanghai should be receiving 12 billion m3 annually. Under phase two, to be completed in 2010, this should rise to 20 billion m3. There are also substantial prospects for gas output from offshore fields, notably the Dongfang field off Hainan Island. Gas ‘associated’ with oil output may also be quite significant. If we sum all these possibilities, we can expect that gas output, which was 40.7 billion m3 in 2004 and 50 billion m3 in 2005, may exceed 70 billion m3 in 2010. However, this last figure must be subject to the many qualifications that we have discussed above.

CHINA’S FUTURE IMPORT NEED FOR PETROLEUM AND NATURAL GAS Projecting China’s future import needs is a hazardous undertaking but in spite of the uncertainties, it is essential to obtain some idea of the parameters of future consumption and likely import dependence. One of the present authors (Kambara) has been engaged in several attempts to do this. These projections were usually based on data reported in the official China energy statistical yearbook.5 However, it is worth noting that none of the known forecasts, made by either Chinese or foreign specialists, correctly predicted the low consumption of the late 1990s (see Appendix). Part of the problem is that a key to accurate forecasting is a correct understanding of the energy consumption characteristics of the major industrial energy users. Unhappily the data required for understanding past consumption are not accurately reported. Further, because of rapid modernization and structural change in the economy, Chinese energy-using patterns are shifting in quite radical ways – mostly in the direction of becoming more energy intensive. In addition to problems with official data, there has been the persistent problem of energy imports and consumption that are ‘unofficial’ – smuggled by any other name. Unofficial oil imports are thought to have been

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as high as 20 mmt per annum in recent years, and failure to take account of these distorts our understanding of energy use, especially in south China. For quite different reasons, coal is also a difficult area. Much of the Chinese coal supply comes from small-scale private mines and these do not keep proper records, are often illegal, and details of their output are estimated (probably using rather crude methods) by the Chinese authorities. In spite of all these problems we have to use every source of data. Energy consumption in China has undoubtedly grown rapidly in the recent past and understanding this is of critical importance to both our understanding of the future growth rate of the economy and its many international consequences. The transport sector is a good place to start when looking for some firm figures on demand and forms a building block for the wider long-term picture. Table 7.2 gives some figures for the growth of gasoline, diesel, kerosene and heavy oils. The gasoline data are based on the growth of cars and gasoline-powered lorries from 24.5 million in 2003 to 40 million in 2010. Other sectors are based on current consumption and predicted growth rates for each sector. In order to come to a total figure for oil and petroleum products we need to add in petroleum-grade naphtha as materials for the petrochemical industry. If demand in 2005 and 2010 is as proposed in Table 7.2, net imports are likely to be 120 mmt and 145 mmt respectively. However, it remains a major question whether refinery capacity will be adequate to meet these levels of demands and imports. Let us now look forward to the year 2020. Various estimates of demand for Chinese oil and petroleum products for 2020 have been made in recent years. These vary significantly. At the high end, for example, are estimates Table 7.2

Demand for crude oil and oil products, 2004–10 (mmt)

Type of demand Automobile demand for gasoline Transportation demand for diesel (gasoil) Kerosene (total) Kerosene (jet fuel) Heavy fuels (power generation) Predicted total crude oil demand

2004 (actual)

2005 (estimated)

2010 (estimated)

46

48

77

102

110

140

10.4 (9.9) 49

11.4 (10) 52

18.3 (15) 66

290

300

350

Note: Figures in parentheses are a subtotal of the total figure above.

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published by the US Energy Information Administration and a recent study by the Japanese Institute of Energy Economics. These put demand and required imports in 2020 at 525 mmt and 350 mmt, and at 512 mmt and 312 mmt respectively. These figures imply domestic outputs of 175 mmt and 200 mmt respectively.6 Then, what is described as a ‘conservative’, ‘ideal’ scenario is that proposed by a group of official Chinese energy think-tanks. This has demand at 370 mmt and required imports at 205 mmt, while another Chinese institute argues for 380 mmt and imports of only 173 mmt.7 Between these two positions we argue for a middle way, estimating demand at 450 mmt, domestic output of 200 mmt, and an import requirement of 250 mmt (5 million barrels per day). The conversion of China into a net importer of oil began in 1993. Up to that year, while some level of imports was normal, these were exceeded by exports. Trade was a matter of specialization and convenience, and the main customer for Chinese oil exports was Japan. By 2005 gross imports had reached 160.5 mmt and net imports 146.4 mmt. Of gross imports, 129.0 mmt were in the form of crude oil and 31.5 mmt were oil products. By 2005, then, China was already dependent on imports for approximately half of its consumption. As we have seen, China’s early imports were mainly Sumatran light crude and similar low-sulphur-content oils from Malaysia, Vietnam, Oman and Angora. These imports were readily refinable in Chinese refineries since these were designed for Chinese oils – especially those from Daqing – that had similar characteristics. Without adaptation, these refineries could be seriously damaged by the corrosion caused by the high sulphur content of oils typical of the Middle East. As these refineries have been reinforced by anti-corrosion protection devices, large-scale imports from the Middle East have become feasible. In 2005 China imported a total of 59.9 mmt from Middle Eastern suppliers. The largest contributions were from Saudi Arabia (22.1 mmt), Iran (14 mmt) and Oman (10.8 mmt) (see Table 7.3). It has been suggested that China’s expanding appetite for imports of oil might destabilize world oil markets. It is of course impossible to predict world oil balances in the distant future because so much depends on a variety of demand factors and on political circumstances that cannot be foreseen at present. However, on present evidence the quantities predicted (at least in the low to medium forecasts) cannot be thought of as unmanageable. If we start with the quantifiable, we note that world oil reserves and production capacity are growing each year. According to the BP Statistical Review of World Energy June 2006 world proven reserves at the end of 2005 were 163.6 billion tonnes (1200.7 billion barrels), which gives a reserves: production ratio of approximately 40. Although comfortable, there is nothing binding about this ratio and, as new technologies and new

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Table 7.3

China’s crude oil imports by country (000 tonnes)

Country/region

2003

2004

2005

Saudi Arabia Iran Oman Middle East

15 176 12 389 9 277 (46 365)

17 244 13 237 16 347 (55 788)

22 179 14 273 10 834 (59 992)

Angola Sudan Congo Africa

10 101 6 258 3 389 (22 182)

16 208 5 770 4 773 (35 300)

17 463 6 621 5 535 (38 470)

5 254 931 123 (8 725)

10 776 2 008 1 576 (17 565)

12 776 517 13 432 (18 937)

Russia Norway Brazil Europe/W. Hemisphere Vietnam Indonesia Malaysia Asia Pasific Total

Source:

3 505 3 333 2 031 (13 853)

5 348 3 428 1 691 (14 161)

3 195 4 085 348 (9 684)

91 126

122 815 (+34.7%)

127 083 (+3.5%)

China OGP, 1 Feb. 2005, p. 18; 1 Feb. 2006, p. 13.

investments in prospecting take place, proven reserves are expected to improve significantly. Also, the recent rises in oil prices make known but previously uneconomic reserves such as the Canadian oil sands and deep continental shelf reservoirs much more promising and eligible for inclusion in the reserves figure. In market terms, we need first to bear in mind that current global demand for oil is 82.46 million barrels per day (b/d) and that of this, 50 million b/d are traded internationally. China’s current import requirement of 3 million b/d (150 mmt per annum) is thus only just over 6 per cent of the world traded volume. It is true that the sharp jump in demand for imports by China in 2003 and 2004 sent a message to the international market, but these increases were only one factor in the oil price rise. Of greater importance was the seasonal winter demand in the USA and supply problems in Venezuela, Nigeria and the Middle East. These real events were then magnified in price movements by speculation that bore little relationship to underlying trends of demand and supply. One problem here is that most of the world’s traded oil takes the form of ‘direct deals’, i.e. deals between

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national companies belonging to the major exporting countries and private companies selling in the major importers. Thus the ‘free oil’ traded on spot markets is relatively limited and hence liable to big fluctuations and strong speculative trends. China does most of its oil transactions through the direct deal route, but is of course also involved in and affected by the spot market. From the Chinese perspective, we may observe that the sharp increase in Chinese demand was itself a product of special circumstances that seem unlikely to be repeated, and it is worth bearing in mind also that China’s oil traders are known to be highly experienced and in possession of a full and sophisticated understanding of world energy markets. Looking to the future, it is clear that China will be able to diversify imports of crude oil still further as supplies from Russia and Kazakhstan expand. At present 10 mmt per year come by rail from the Siberian field to China, and a similar amount comes from the Kazakhstan field. The Russian Yurubchenskoye field in the eastern Siberian oil field and other fields in Kazakhstan have the potential for considerably enlarged supplies in the future. All this will be facilitated by the imminent replacement of rail by pipeline transmission. In the short run the outlook for natural gas imports will be determined by the progress made in the construction of two new LNG terminals, one at Shenzhen (Guangdong Province) and the other at the city of Fuzhou. If these proceed as planned, then by 2010 these facilities will be capable of handling 10 mmt (13.8 billion m3) per annum. In addition to this, a further ten LNG terminals are planned, which would add a further 30 mmt to capacity. These facilities are to be located in Shanghai, Ningbo, Qingdao, Tianjin, Dalian and other cities. If all these projects are completed, then total LNG capacity by the year 2010 will be approximately 40 mmt (55.2 billion m3). We see that all these terminals are located on the Chinese eastern seaboard and, with the exception of deliveries to Shanghai, the LNG will not be distributed further inland. In the case of Shanghai, as noted earlier, an important aspect of the LNG supply is that it is a competitor to gas coming through the ‘West to East’ pipeline. The market conditions under which Chinese buyers have been negotiating for LNG were at first generally favourable to them. The main Chinese buyer has been CNOOC, but PetroChina and SINOPEC have also been active. CNOOC is in partnership with BP in contracts to supply Shenzhen, and one of its major sources of supply has been the north-west shelf development in Australia, where it is now a partner in the development consortium. In conjunction with BP, CNOOC has also entered agreements with Pertamina to take supplies from the Tangguh field in West Irian

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(Indonesia). It continues to be active in the market for further agreements for other Chinese LNG terminals. However, market conditions in 2005 became difficult for the Chinese. Proposed long-term commitments increased sharply in price, and domestic consumers, especially powergenerating plants, found coal to be the cheaper and possibly more reliable fuel. Given the scale of the investments needed to import, distribute and use natural gas, this experience of international market volatility has not been a happy one for the Chinese. Some of the biggest issues in natural gas supply relate to plans involving Siberia and the former Soviet Union. For example, 30 billion m3 will be imported through an international pipeline from the huge Koviktinskoye gas field in eastern Siberia. This pipeline would be jointly constructed by Russian, Chinese and Korean companies. Although the Russians originally sought a route for this massive project that went through Mongolia and involved Mongolian participation, the Chinese preferred a route that by-passes Mongolia and follows the route of the Trans-Siberian railway. This would enter China at the old frontier station at Manzhouli, pass through the three north-eastern Chinese provinces, and then proceed to Beijing. The Korean interest in this consortium will be supplied by a pipeline routed to Korea under the Bohai Gulf. A major role in natural gas supply is also planned for the central Asian Republics of Turkmenistan, Kazakhstan and Uzbekistan. These supplies, together with those from western Siberia, will make use of the ‘West to East’ pipeline system originating in Xinjiang. According to estimates by PetroChina, China’s total demand for natural gas by 2010 will be 136.5 billion m3. Domestic supply is projected to be 70 billion m3, leaving a shortfall of 66.5 billion m3. Within this total the situation for southern China (which can be supplied by coastal facilities) looks fairly good, providing the seaboard terminals are completed to plan. However, if southern China is excluded, demand will still be 115.1 billion m3 in 2010 against domestic supply of only 65 billion m3. For this shortfall to be met, a vast and complex inland pipeline will need to be completed. Overall, then, the challenge of natural gas supply is an enormous one and for success three conditions will need to be fulfilled. First, there must be a clear national strategy for the amounts and regional distribution of the gas supply as a whole. Second, the companies must devise effective commercial strategies to secure the required contracts for imported supplies. And, finally, the investment must be made to construct the extensive receiving terminals and pipeline networks necessary to receive and then distribute gas from all sources to the main points of consumption.

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THE EVOLVING INSTITUTIONS In thinking about the future and how these underlying trends will work out, we need think further about the complicated and changing institutional problems that the Chinese are having to face. The fundamental point is that the Chinese economy remains one in which central government leadership and power remain unusually omnipresent. This is especially the case in industries such as energy, which are central to future economic performance, to strategic considerations, and to international economic and political relations. At the same time the oil and gas sector is part and parcel of China’s economic reform. In most market economies we find that governments use special arrangements, fiscal policy and other devices to retain powers of guidance in the energy sphere of a kind not usual in the economy as a whole. Further, the oil and gas price rises of 2005–2006 are promoting much new thinking about the nature of state, regional and international responsibilities in energy matters – so much so that the world institutional framework cannot be regarded as in a stable phase at the present time. The problem for China, therefore, is a double one. On the one hand it has to implement a domestic reform that ensures efficient use and development of energy resources, while on the other it maintains an appropriate role for the state at home and, at the same time, develops an active role on a world energy stage that is itself being transformed. The basic domestic organizational change of the late reform period is that since 1998 the old state monopoly has been replaced by a group of joint stock companies. These act under the umbrella of the State Oil Corporation and have been entrusted with a key role in the development of the Chinese energy sector. The three companies that replaced the State Oil Corporation – PetroChina, SINOPEC and CNOOC – are all engaged in various forms of exploration, production and distribution. The new structure has thus been designed to introduce a new element of competition between the companies and to encourage them to seek profits in all three activities. The competitive dimension of the energy sector has also been intensified by agreements entered into with China’s accession to the WTO in 2001. However, in some respects China still has the worst of all systems. This is because the central guidance and control functions have been weakened by a reform that has transferred power to industries, firms and local governments. These now compete ferociously with each other for supplies of energy. This is particularly serious in the case of cities and regions, which now seek to offer local ‘energy security’ as a key incentive in the package offered to potential foreign investors. This rough competitiveness has

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made energy sharing – notably in the form of electricity grid operation of the kind common to developed market economies – very difficult.8 At the same time, this new competitiveness is far from reflecting the arrival of a true market culture, and the energy sector still lacks the flexibility and responsiveness of a properly marketized system. Thus Chinese analysts, for example, much admire the way in which the Japanese economy responded to international market forces both in the changing composition of its energy supply and in developing conservation and other responses to the energy price rises of the 1970s and 1980s.9 Pricing is a particularly instructive example of the limits of the reform process. In the 1950s China adopted the Soviet practice of low energy prices and administrative control. Thus even within the limits of the planned system, there was little incentive to economize on energy. After the Great Leap Forward in the early 1960s, energy pricing was one element of the economy reserved to the centre. However, in the Cultural Revolution powers were given to local pricing committees and central direction was lost again. Under reform, the general trend has been to raise and unify prices in a move towards the creation of markets. However, there has been much ad hoc and inconsistent behaviour. Since 1998 there have been more serious efforts to address the problems, but they remain enormous. Price rationalization involves the relations between wholesale and retail prices and between coal, oil and natural gas prices. There are also big problems in the electricity pricing structures and those arising from regional variations in energy prices. At present these structures are described as ‘confusing’ and ‘chaotic’, and fail to provide appropriate signals to producers and consumers.10 Another difficulty with the new industry structure is that it does not by itself solve the problem of finance. Oil exploration and most other aspects of the oil business are, particularly in a partially marketized developing economy such as China’s, hugely expensive and unusually risky. In the Western economies and Japan, the industry structure and its financial arrangements have evolved over many decades. China has hardly begun the process of restructuring, financial deepening and integration into the world energy economy that will be necessary, but must do so urgently. Without effective institutional and financial structures, exploration and development failures could be a major factor pushing China towards an unacceptable and unpredictable reliance on imported forms of fuel. All these matters are under urgent consideration by government and especially its key think-tank, the National Development and Reform Commission. The events of 2004–2005 clearly provided the stimulus to new institutional arrangements strengthening the role of the centre in

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coordinating the domestic energy economy. Also there is new thinking about the foreign role in oil and gas. Further consideration is being given to some of the oil industry’s traditional devices (including productionsharing agreements) with foreign companies in the upstream activities of exploration and production, and there appears to be an increased willingness to grant oil exploration licences to foreign oil companies interested in both on- and offshore oil and gas ventures. These trends are supported by China’s WTO accession. Another critical area where new thinking and foreign participation are potentially important is the refining problem discussed in the last chapter. As we have seen, China’s refineries are old, small, and by international standards technologically inadequate. Also, even when in use, they are incapable of meeting the demand for refined products. There has been much talk about this issue, and policies and plans to reform and modernize the refinery sector have been adopted. But implementation of many of these promised measures seems still to be awaited. Plans to invest in large modern refineries have, to date, borne only modest results. Further, important policy issues that are essential to a rational refining policy have yet to be addressed. For example, in several of the southern Chinese ports that receive crude oil imports investment is under way in refineries capable of handling the high-sulphur-content crude from overseas. Yet these investments are being undertaken in the absence of any clear national policy that sets out the expected volumes and sources of China’s future crude import requirements. A fundamental point to bear in mind in thinking about China’s integration into the world energy economy is that Chinese oil costs are generally high when compared to those in the low-cost producers. Indeed, the Chinese are constantly trying to reduce costs to below $10 per barrel. One result of this has been that as commercial consumers are increasingly free to buy low-cost oil imports, the higher-cost Chinese fields are being put under strong financial pressure. Imports have already been a factor in some oil well closures, including a significant one in the Daqing field. Conversely, however, the oil price boom of 2004–2005 has had some positive effects on China’s oil supply prospects. China’s transfer prices to refineries are designed to shadow world market trends so that the price jump not only brought marginal wells into production but has also encouraged more intensive efforts in exploration. The problem of course is that this kind of price instability takes China’s long-term planning and financing for energy into uncharted waters, far more difficult to navigate than the pre-reform days when the Chinese oil economy was largely isolated from price movements in the outside world and government provided the development finance from central resources.

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‘OIL SECURITY’ AND CHINA’S PARTICIPATION IN OVERSEAS OIL DEVELOPMENT By 1990 it was clear to the Chinese energy planners that the domestic energy supply was going to be inadequate to demand and that the likelihood of huge, unexpected oil discoveries (onshore or offshore) was remote. In particular they now understood from detailed geophysical investigation that the geology of the Tarim Basin was not such that it could be expected to provide a solution to the Chinese oil supply problem in the form of ‘super giant’ fields of the kind known in the Middle East. In these circumstances China had to abandon thinking in terms of energy self-sufficiency and plan instead for a comprehensive oil security programme. To be successful, such a programme would involve a combination of domestic development, participation in exploration and ownership of overseas reserves, and a plan for a national strategic oil stock. At this time, the Chinese learned much about the practicalities of such a strategy from the Japanese, especially that based on the many decades of experience of the Japan National Oil Corporation. The JNOC had been responsible for both policies to develop state stockpiles and the implementation of what is known as an ‘[own] development of overseas oil’ (kaigai sekiyu jishu kaihatsu). The meaning of this last phrase is not likely to be familiar to readers in Europe and the USA. The activity described is simply the ‘upstream’ activities of the major oil companies, i.e. exploration and development of oil and gas supplies. Japan’s position in the 1960s was that it had no significant domestic oil and gas supplies and no companies that ranked as ‘majors’ on the international scene. This was felt to be a serious national disadvantage and one that could only be overcome if appropriate Japanese companies approached the oil-producing governments directly, and agreed with them programmes of exploration and development. The first attraction of these approaches was that the Japanese companies could offer host governments both capital and rewarding revenue-sharing schemes. In addition, these schemes had the added virtue that they were a form of competition with the oil majors that, hitherto, had kept a strong hold on the skills and other assets needed for exploration and development. This policy was advanced vigorously in the 1970s and 1980s, mainly with energy-rich economies in South-East Asia and the Middle East. As a result, the supply of so-called ‘yen oil’ rose at its peak to 34 mmt – 15.1 per cent of Japanese petroleum consumption in 1995. Among other oil importers, the USA, UK and the Netherlands have oil majors based in them. For big oil importers that do not have majors based at home, an alternative strategy is one that has been followed by Germany.

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This is the strategy of allowing the majors to operate freely in a competitive market.11 The Chinese position is that while it has been moving from being an oil surplus to oil deficit economy, it has also been trying to develop an ‘external’ oil strategy that has much in common with the Japanese model. In 1998 the China National Petroleum Corporation was restructured into a group of joint stock companies, all with shares listed in Hong Kong and New York. Part of the remit of these companies was to become active participants on the world energy scene. PetroChina, SINOPEC Corp. and CNOOC Ltd have all made initiatives in exploration and development in various places and, since 2000, their activities have been supported by funds raised on international capital markets. This is believed to have totalled about $8 billion so far. The main problem for China, however, is that there are now few areas of the world that can be considered ‘underdeveloped’ in terms of oil and gas exploration and the majors and others who hold significant development rights will not part with them cheaply. In some cases it is believed that the Chinese have paid extraordinarily high prices for interests in oil development contracts, and some specialists in the market have criticized the Chinese for being ‘obsessed with the oil problem’. Chinese companies now operate in some 30 countries and in the process of developing an ‘own oil’ policy find themselves competing with India, which has started a similar policy. However, if countries such as China and India seek to achieve status in the global oil scene that compares to that of the majors, they have a very long way to go. Such status involves long-term commitments to both buy and sell oil and gas and, in present circumstances, the old-style ‘concession’ rights for oil and gas no longer exist. Foreign companies seeking to enhance their global standing now have three possible options open to them if they wish to share (‘farm in’, as it sometimes called) overseas oil development. The choices are, first, to negotiate for exploration and development rights in given regions or designated ‘mining lots’; second, to enter production-sharing agreements with foreign countries; or third, to pay ‘operating fees’ (in oil) for exploration and development services to state oil companies. With regard to the first choice, few developing countries have new ‘mining lots’ for tender at the present time. Thus the only way into this type of activity is to seek to participate in or buy outright lots already granted to other firms. Today this basically means they have to negotiate for such agreements with American firms that own development interests around the globe. Among the countries that China is now operating in are Venezuela, Kazakhstan, Indonesia and other South-East and Central Asian countries.

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China and the global energy crisis

They have also been very active in Africa, with significant oil-related ventures in the Sudan, Angola, Nigeria, Libya, Republic of Congo and Gabon. They have even sought participation in the Canadian oil sands, an exceptionally ambitious project. In some cases, companies have created ‘Chinese villages’ to support their overseas operations, even developing local farming to supply their food needs. This is the case in Sudan and Venezuela, whose oil is to be shipped through a pipeline system to local ports and then trans-shipped to China by tankers. The biggest Chinese actor on the world stage is CNOOC Ltd, which in Indonesia now controls oil production and is second in size only to Caltex. Among its achievements, CNOOC Ltd has gained participation in the Java Sea and other Indonesian projects and has become a significant member of the consortium formed to take LNG from the Northwest Shelf in Western Australia to the LNG terminals at Shenzhen. During 2004 Chinese companies imported approximately 30 mmt of oil from their ‘overseas oil’ developments. This represented about 10 per cent of total petroleum consumption, but remains a very small amount in terms of the operations of the major oil companies. During 2004/2005 the world oil price jumped above the $50 per barrel mark. If the price remains above $50, although modest in scale, then China’s overseas oil deals to date must all be considered to have been successes and the work of their international advisers invaluable. The oil price rise, however, makes future progress in developing ‘overseas oil’ even more difficult. Under present circumstances few oil-owning countries are prepared to accept foreign involvement in their upstream activities. It is reported that Iran has signed development-operating agreements recently, but on terms that are not favourable to the foreign party. At one time the Caspian Sea seemed a likely candidate for new agreements, but these opportunities have now largely been taken up by the majors. Thus, overall, the worldwide opportunities for the Chinese now appear very restricted. The problem of ‘oil nationalism’ is also proving to be an obstacle to the Chinese. This phenomenon, now very widespread, was revealed by the events surrounding the Chinese bid for Unocal in 2005. Unocal (formerly Union Oil Company of California) is a middle-ranking American company with proven domestic and overseas oil and gas reserves of 1.7 billion barrels of oil equivalent. These overseas assets are mainly in Thailand, Indonesia, Myanmar, Bangladesh, Azerbaijan and the Congo. Although the Chinese were ultimately willing to bid $18.3 billion against the under-bidder, Chevron, US governmental action ensured the success of the lower Chevron bid.12 In January 2006 a senior official of the National Energy Leading Group, Ma Fucai, told a conference that China ‘has laid a solid

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material foundation for the realisation of self reliance in domestic [energy] supply’. It was reported that this renewed emphasis on self-reliance was in part a direct reaction to the Chinese Unocal experience.13 Against this background of ‘oil nationalism’ and heightened concern about the world energy market, the keys to China’s future oil security would appear to lie in the following principles. First, China needs to keep on good diplomatic terms with all the petroleum-exporting economies, especially those in the Middle East. Second, China must develop measures to ensure the safe passage of oil tankers through the sea lanes linking the Middle East with China. Third, China should develop appropriate international, regional and bilateral arrangements to avoid the most obvious forms of energy-related conflict, especially with Asian neighbours. The recent agreement with India of January 2006 for the ‘Enhancement of Co-operation in Oil and Gas’ seems a good precedent. According to this, the two countries will exchange information in order to avoid conflicts arising from their competitive interests in the acquisition of exploration rights, and the two countries will also cooperate in research for exploration and development of oil and natural gas. Gunboats and confrontational diplomacy in any part of the world are not going to help the Chinese here. What is called for is an energy diplomacy of the kind Japan initiated after the oil crises of the 1970s. The omens for such policies are good. Former President Jiang Zemin visited a number of oil producers in the Middle East and Middle Eastern visitors to China get a very warm reception. These exchanges have as part of their background the good reputation Chinese oil workers have built up in the region. Chinese standing is particularly high in Kuwait, where they helped dampen the oil fires and revive production after the first Iraq War. The Chinese also have the advantage in oil diplomacy that they are willing to act in countries about which other members of the international community have reservations (Sudan, Venezuela, Myanmar). The problem of safe shipping lanes is very important. Oil tanker routes in the world’s oceans are rather limited – especially for the larger classes of vessel. Asian countries, including Japan, Korea and China, are all largescale oil importers, mainly from the Middle East countries. This oil must pass from the Arabian Gulf, across the Indian Ocean, then up through the Malacca Straits that divide the Malay peninsula and Sumatra, finally moving from Singapore to the Southern and Eastern China Seas. The narrow Malacca Straits and Indonesian waters remain highly dangerous and vulnerable to pirates. The Chinese have recently negotiated a series of agreements to protect their interests in these routes. For example, Indonesia has agreed that, in return for Chinese Silkworm missiles, Chinese navy vessels can use three

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China and the global energy crisis

Indonesian ports. Chinese submarines already patrol the Malacca Straits and the Andaman Sea, and China has also entered into an agreement with Myanmar to use radar facilities in the Cocos Islands and in the Andaman Sea, and with Pakistan for use of her new naval base at Gwadar in the Arabian Sea. This network of protection for Chinese oil has now become known as the Chinese ‘pearl necklace’ (see Figure 7.2). After joint naval exercises in the Indian Ocean in the summer of 2005, the Chinese ambassador to India, Mr Sun Yuxi, even declared that China would welcome Indian naval patrols against piracy and other crimes in the Malacca Straits, but at the same time insisted that Beijing did not favour the presence of outside powers such as the USA in the South-East Asian region.14 The Chinese oil supply position would be helped if they could re-route tankers through the Lombok Straits (between the islands of Bali and Lombok) instead of taking the Malacca Straits route to the southern Chinese terminals. The Lombok Straits are able to take the ultra-large crude oil carriers (ULCCs) fully laden as they do for Japan. The problem is that the Chinese have no terminals capable of handling the ULCCs.

Caspian Sea

Turkey Japan

Lebanon

Syria Israel Iraq Jordan

Mongolia

Baku

Beijing

Baghdad

Tianjin Qingdao

Iran

Kuwailt

Afghanistan

Bahrain

Kiire

East China Sea

Shanghai

Pakistan Gwadar

Fuzhou New Delhi

Nepal

Bhutan

Bangladesh

Oman

Zhanjiang

India

Vietnam Hainan Dao Laos

Myanmar Yangon

Arabian Sea

Thailand

Bay of Bengal Coco Is.

Srilanka Maldives

Taiwan

Guangzhou

Cambodia

Andaman Sea Str .o fM ala

Ho Chi Minh

South China Sea

Palawan

Brunei cca

Malaysia

Su

Malaysia Kalimantan Borneo

Indian Ocean Singapore

Philippines Chinese VLCC & other tankers route

ma

Former Japanese ULCC route

tra

Makas sar Str .

UAE

Karachi

Yemen

Korea

Nanjing

China

Saudi Arabia

Abu Dhabi

North Korea

Dalian

Sulawesi

Indonesia Bali Jawa Lombok Is.

Note: Oil tankers are classified as follows: 50 000–100 000 tons, ordinary tankers for ocean voyage; 200 000–300 000 tons, VLCC; 400 000–500 000 tons, ULCC.

Figure 7.2

Chinese sea-lane for oil tankers: the ‘pearl necklace’

Summing up and looking ahead

125

However, in the event that the Malacca Straits were closed in an emergency, Chinese oil tankers of the smaller VLCC class could take the Lombok route to the South China Sea. One alternative to this, at present highly speculative, would be the building of a huge oil terminal in Myanmar, which could then be connected to China’s south-western provinces of Yunnan and Sichuan by long-distance pipeline. However, this project is neither technically nor economically feasible at the present time. The other important dimension to Chinese oil security is stockpiling. At present China is not a member of the International Energy Agency and is therefore unable to take advantage of the IEA’s ‘emergency oil rationing scheme’. This means that in the event of any interruption of supply, China has to depend entirely on its own stockpiles of fuel. At present there are four terminals for national oil reserves under construction in the coastal areas. The first to be completed will be at Zhenhai in Ningbo City (Zhejiang Province). This will have a capacity of 5 million kilolitres (in 52 storage tanks) and its first stage was to be completed by the end of 2005. By 2008 three more stockpile terminals are to be prepared. These are at Qingdao (Shandong Province), Dalian (Liaoning Province) and at Zhoushan (Zhejiang Province). Each facility is expected to have a capacity of 3 million kilolitres. Under this plan, therefore, China’s total reserves will be 14 million kilolitres, which is equivalent to 100 million barrels of oil – 16 days’ supply at current usage. Under present regulations, China’s oil-importing companies are in addition each required to make their own stockpiling provisions, so that as these are built up the total reserves may be expected to increase considerably. Although still low in relation to the strategic reserves of major consumers, this growing stockpile will add to the stability of Chinese supply and give reassurance to those concerned about threats to world energy markets posed by Chinese instabilities in energy demand and supply.

CONCLUSION The development of China’s oil and gas resources has been a remarkable and largely unrecorded story. China’s natural oil and gas resources are significant but their exploitation has always presented technical difficulties of a kind that were a particular challenge in an economy still at a relatively low level of technological development. Since the beginning of the period of opening up and reform, two important changes have taken place. On the one hand the demand for energy has

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China and the global energy crisis

been strong and, in the early years of the present century, exceptionally so. Looking ahead to 2010 and 2020, further strong growth of energy demand is inevitable as China continues to modernize. At the same time, however, China has entered the global energy scene. However much the leadership may wish to revert to the days when China’s energy policies could be largely indifferent to the outside, this is not a long-term option. In terms of imported energy supplies, technological solutions for developing their own resources, and probably in terms of finance, China needs the support of the global economy and all parties need to get to grips with the implications of this. Looking ahead for the next decade or so, however, there appears to be no fundamental reason why China’s demands on the world energy economy should prove unmanageable. Throughout this book we have attempted to explain the realities of the Chinese oil and gas supply as we understand them from study and firsthand experience. However, what is clear is that the future will be determined not only by physical resources and the trajectory of supply capacity, but by the success of the Chinese in continuing on the path of internal reform and external opening up. At the present time energy pricing is primitive and unbalanced, power capacity sharing weak, long-term financial planning not yet in evidence, and expenditure on energy-related research (especially conservation technologies) far too low. These problems are in principle well understood in China, but the context in which the continued reform must take place will be complicated by the considerable turmoil in the outside world. The problems of reform and international cooperation are thus important to all partners in the global energy enterprise, as well to the Chinese themselves.

NOTES 1. 2.

3. 4. 5. 6.

Bo Chengde, ‘Zhongguo youqi ziyuan xin shiji zhanwang’ (Prospects for China’s oil and gas resources in the new century), World Petroleum Industry, April 2001. Chinese estimates of future oil output remain very cautious, and estimates often imply that the peak will come before their 2020 planning horizon (see Appendix). For example, Liu Xiaoyu, ‘The strategy for an improved energy structure in the “comfortable” society’, in Zhou Dadi (ed.), Zhongguo nengyuan wenti yanjiu 2003 (Research into China’s energy problems 2003), Beijing: China Environmental Science Publishing House, 2005, p. 14. Liu uses the 200 mmt figure but does not name the peak year. Institute of Energy Economics, Japan, Production Forecasts for the Oilfields in Eastern China. The official priorities for exploration are: offshore, the western, eastern, central and southern regions. Overall policy is summed up in the phrase ‘Stabilise the east and develop the west’, China’s Energy Development Report 2003, p. 44. Zhongguo nengyuan tongji nianjian (China energy statistical yearbook), Beijing: China Statistics Press, annual issues to 2004. US Energy Information Administration, International Energy Outlook, 2005.

Summing up and looking ahead 7. 8. 9. 10. 11. 12.

13. 14.

127

Zhongguo nengyuan fazhan zhanliu yu zhengce yanjiu (Research on national energy comprehensive strategy and policy of China), Beijing: Economic Science Press, November 2004, pp. 261–62. (Hereafter RNECSPC), p. 262. See China’s Energy Development Report 2003, chs 3 and 5; and especially the detail in ‘Our country’s progress toward and an evaluation of energy marketisation’, in RNECSPC, pp. 724ff. Zhu Meiping, ‘Choumou Zhongguo shiyou zhanliu’ (Thinking a way through to an oil strategy for China), Guoji maoyi wenti (Problems of international trade), 2002, No. 2. In 2002, the price of natural gas for electricity generation in Shanghai (per ton of coal equivalent) was nearly four times the coal price and twice the oil price, ensuring the environmentally worst choice. At one time Germany experimented with entrusting oil security to a state-owned company called Deminex, but the company was eventually privatized. The Senate was able to delay the Chinese bid and the US Federal Trade Commission facilitated Chevron by decisions on regulatory matters. The underlying US concern was part strategic and part the lack of reciprocity with China over foreign control of national assets. ‘China’s goal of self reliance in energy “within reach” – official’, South China Morning Post, 14 January 2006. Reported in The Himalayan Times, Kathmandu, 29 October 2005.

Appendix: The background to China’s energy planning The way China assembles its economic plans has changed very significantly in recent years. At one time the modern sector of the economy was largely centrally controlled and planned in one-, five- and occasionally ten- and twelve-year time horizons. These plans had detailed numerical targets. Although imperfections in the initial compilation and unexpected events could derail such plans, they did have an operational meaning. This is no longer the case. Annual economic plans are still announced at budget time and these and the Five Year Plans are given publicity and approval by the Party and by the National People’s Congress, which is China’s parliament and law-making body. But, increasingly, plans include only a small number of indicative figures, usually relating to key points of focus on the national political agenda. These changes reflect the fact that the Chinese economy is now so much more decentralized and marketized, and includes so many foreign elements that the totality cannot be planned in the old way. This trend is fully embodied in the announcements in March 2006 surrounding the Eleventh Five Year Plan for 2006–10. This is now described as a ‘layout’ or ‘programme’ and its main pronouncements have been qualitative statements about the general principles that should guide economic development. The Eleventh Plan, for example, signals a new emphasis on ‘green’ approaches, with economic growth and trade being demoted in favour of balance, environmental protection, social and regional equity. Some of these statements do, of course, have important practical implications, particularly the decision to nominate three areas as China’s key ‘growth poles’.1 In spite of this important change in the nature of China’s planning, the state still maintains a very strong leadership function. It maintains responsibility for overall industrial development, still owns large swathes of the modern sector, and, because China’s financial system is so underdeveloped, through the banking and fiscal systems controls much investment. These powers are used to nominate and protect ‘pillar industries’ and to ensure that strategically important decisions remain at the centre. Energy clearly comes into the category of industries in which state involvement is crucial. The scale, uncertainties, cross-regional and international ramifications of 128

Appendix: background to China’s energy planning

129

investment in energy make the central government a key factor. But as we have seen, forecasting failures and lack of coordination are serious and proved to be a major factor in the crisis of 2002–2005. There is no doubt that this crisis focused the government’s mind sharply on the issue of energy planning. In November 2004 a vast authoritative report on China’s energy future was compiled led by the State Council Development Research Centre (the RNECSPC). In 2005 the government established a very high-level State Energy Office under Mr Ma Kai, who is concurrently in charge of all economic planning at the Development and Reform Commission and, in January 2006, a start was made in drawing up a new legislative framework for the development and implementation of energy plans and policies. Where, however, does energy planning start? The RNECSPC report provides us with many insights into these issues. The starting point, in fact, is the phrase we have already mentioned, xiao kang. This was used by Deng Xiaoping as a slogan to describe his long-run objective for Chinese society. Translated, this means ‘a moderately comfortable life’. The phrase has a classical origin, in which its meaning emphasized the qualitative virtues of a just, caring society. It still has important qualitative connotations but has been given a quantitative dimension as well. Originally it was to imply an intention to quadruple national income between 1980 and 2000, and then to quadruple it again. This objective has been repeated by later leaders, who have identified 2020 as the date for the second quadrupling. This gives a long-run growth rate target of about 7.2 per cent per annum. In the event, growth has been in the range of 8–9 per cent and per capita living standards have risen by 7–8 per cent. As these above-range achievements came in, the leadership tried to modify the rate of progress, as suggested by the new Eleventh Plan, but usually without success. This growth rate figure and the 2020 horizon provide the starting point for Chinese energy thinking. The xiao kang growth rate objectives fit into the Five Year Plan framework, so that 2010 is important as representing the end of the Eleventh Plan and the half-way mark to 2020. However, in addition to this simple quantitative framework, there are a large number of other targets defined as necessary to achieve xiao kang. These include a range of indicators of human resource development, urbanization, education, housing, and various types of equality. This background provides the planners with a number of starting points to think about energy in 2020, although they are also thinking well beyond this, for example to 2030 and even 2050. First, there is the long-run growth rate, Here, the income quadrupling plans provide a lead, although alternative scenarios are considered. Having identified a growth rate, they can then consider the historical experience of the energy elasticity of output growth

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China and the global energy crisis

Table A1 Output and energy annual growth rates and elasticity coefficients, 1980–2000 Period Economic growth Energy consumption growth Elasticity coefficient (energy) Elasticity coefficient (electricity only)

1980–85

1986–90

1991–95

1996–2000

10.7 4.9 0.46

7.9 5.2 0.66

12 5.9 0.49

8.3 ⫺0.01 ⫺0.02 0.77

Source: RNECSPC, p. 149; Zhou Dadi (ed.), Research into China’s energy problems 2003, p. 19.

and analyse the determinants of this by exploring the elasticities of different sectors and mapping the results on alternative predictions of China’s changing economic structure. Built into these visions of the future can be xiao kang targets that have quantifiable energy implications. In identifying the level of energy consumption needed for the xiao kang society, two comparative yardsticks are useful. First are international comparisons; second are internal ones, since in China’s most developed cities and regions it is judged that the xiao kang state has already been reached. Let us now consider the past experience of China’s energy elasticity of growth. Table A1 shows the experience from 1980 to 2000. We see here that energy elasticity has fluctuated considerably. During 1980–95 elasticity averages 0.56, but then collapses to a low negative value. The data for the decade of the 1990s provided the background for decisions on energy (especially electricity) requirements in the Tenth Five Year Plan, 2001–2005. We see from Table A2 what a disastrous guide this proved to be. From 2000 onwards both elasticities jumped above unity and, in the first half of 2002, electricity elasticity was reported to be nearly two and a half times its average level during 1995–2000. As a result of this unexpected demand, the overall target for energy consumption in 2005 was exceeded by the end of 2002, with electricity and coal experiencing the sharpest expansion.2 It was in these circumstances that the State Council held a mid-term revision of the Tenth Five Year Plan, ordered an emergency programme to build more electricity-generating plants, and initiated a variety of energysaving and sharing measures. Experiences like this call long-term planning into question unless they can be understood and built into the future. Three factors seem to have been important. One was the bringing into operation of much new capital plant, much of it of an energy-intensive kind. Second was the rapid rise in vehicles. Third was the boom in new office and residential construction. These factors have been intensively studied in

131

Appendix: background to China’s energy planning

Table A2 Output, energy and electricity annual growth and elasticities, 2000–2003 Period GDP growth Energy consumption growth Electricity consumption growth Energy elasticity Electricity elasticity

2000

2001

8 0.1 9.5

7.5 3.5 8.6

⫺0.25 1.18

1.73 1.15

2002 first six months

2002 8.3 9.9 11.6

1.88

1.73 1.39

2003 9.3 15.3 16.5 1.6 1.77

Source: Based on data in the China Energy Statistical Yearbook, 2004, Table 1–1; Zhou Dadi (ed.), Research into China’s energy problems 2003, p. 19.

thinking about the 2010 and 2020 targets. Of the three, it may well be the third that is the most intractable. China is forecasting a continuing rise in the relative size of the services sector, which means that modern-style office space will grow rapidly. Also, the residential space targets for the xiao kang standard are quite high, and these spaces too will be increasingly equipped with heating, air conditioning and other electricity-using equipment. The RNECSPC report suggests that in round figures, the growth prospect for the next 20 years will about 7 per cent (the long-run xiao kang target) and that energy should be able to grow at about 4 per cent (elasticity of 0.5–0.6) They then develop three scenarios to 2020 based on per capita income growth rates of 6.5, 6.4 and 6.3 per cent and on energy demand growth for three major sectors of 3.3, 4.1 and 4.7 per cent respectively. (The ‘ideal’ scenario has high-income growth but low population and energy demand growth.) In the central scenario, the growth and shares of energy consumption by the three main sectors are as shown in Table A3. This analysis of the future is based on the view that in industrial production there is scope for regular gains in energy conservation and that, as discussed earlier, transport demand will be large. However, the predictions are also based on the view that expansion in both the residential and commercial buildings sectors will be fast. Because present standards are so low in terms of both space and heating/air conditioning, this source of demand is set for an unprecedented share of total energy consumption on any scenario. Where does this leave China in terms of its xiao kang objective? In terms of tonnes of coal equivalent (tce) the richest Chinese city of Shanghai is already close to 4 tce per head. Poorer cities are in the 1–2 tce range. The Chinese believe that xiao kang standard will be reached if the whole nation

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China and the global energy crisis

Table A3 Sectoral shares of energy consumption, 2000 and 2020 (% shares and annual growth)

Production departments Transport Commercial and private residential buildings Total energy consumption Source:

Share in 2000

Share in 2020

Growth rate of energy consumption

73 11 16

58 17 25

2.9 6.3 6.5

100

100

4.1

RNECSPC, pp. 12–13.

Table A4 Shares of primary energy consumption, 1980–2004 and central forecast for demand in 2020 (% shares) Coal

Oil

Natural gas

Hydroelectricity

1980 1990 2000 2004

72.2 76.2 66.1 67.7

20.7 16.6 24.6 22.7

3.1 2.1 2.5 2.6

4.0 5.1 6.8 7.0

2020 (forecast)

61.7

27.5

6.7

4.1

Source: China Statistical Abstract 2005, Beijing: China Statistics Press, 2005, p. 139; forecast from RNECSPC, p. 4.

moves to Beijing’s level of 3.1 tce. However, to reach this by 2020 would require an expansion of energy output of 6.2 per cent per annum over 2000–2020, which suggests that in energy terms, the comfortable life would be very difficult to achieve inside this time horizon. The other aspect of energy planning that gives rise to great concern is the structure of primary energy. China is unusual among industrial nations in that the share of coal in total energy supply (and electricity generation) is very large. How this has changed in recent decades and how the central forecast looks are shown in Table A4. These data show that coal gained in the 1980s but then lost ground over the whole period. They also show the quite sharp fall in the coal share predicted and the planned rise in the role of natural gas. This shift is desired partly on the social grounds discussed earlier, but also on environmental grounds, which we have not discussed in this book. However, this desire to reduce the role of coal has been around for a long time and tends always to be frustrated. As we have seen, coal is the flexible sector when demand

Appendix: background to China’s energy planning

133

grows strongly. Also, in present circumstances, the renewal of anxieties about ‘energy independence’ will work in coal’s favour. In the speech by Mr Ma Fucai, deputy director of the new State Energy Office, cited earlier, he spoke of coal in 2030 retaining a share of ‘60–70 per cent’. This figure suggests that these 2004 forecasts may already be being overtaken by events.

NOTES 1. These are the Shanghai–Yangzi river delta region, the Beijing–Tianjin agglomeration in the north, and the Chengdu–Chonqing agglomeration in Sichuan, western China. The Sichuan pole replaces the overdeveloped Guangdong–South China pole. 2. China’s Energy Development Report 2003, pp. 42–6.

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Zhang Moxin, Dangdai Zhongguo de shiyou huaxue gongye (Contemporary China’s Petrochemical Industry), Beijing: China Social Science Publishing House, 1987. Zhao Wenzhi et al., Zhongguo hanyouqi xitong (The Chinese system of oil and gas basins), Beijing: Science Publishing House, 2003. Zhongguo nengyuan fazhan baogao 2003 (China’s Energy Development Report 2003), Beijing: China Econometric Publishing House, December 2003. Zhongguo nengyuan fazhan zhanliu yu zhengce yanjiu (Research on national energy comprehensive strategy and policy of China), Beijing: Economic Science Press, November 2004 (RNECSPC). Zhongguo nengyuan tongji nianjian (China energy statistical yearbook), Beijing: China Statistics Press, annual. Zhongguo tongji nianjian (China Statistical Yearbook), Beijing: China Statistics Press, annual. Zhongguo tongji zhaiyao (China Statistical Abstract), Beijing: China Statistics Press, annual. Zhou Dadi (ed.), Zhongguo nengyuan wenti yanjiu 2003 (Research into China’s energy problems 2003), Beijing: China Environmental Science Publishing House, 2005. Zhu Meiping, ‘Choumou Zhongguo shiyou zhanliu’ (Thinking a way through to an oil strategy for China), Guoji maoyi wenti (Problems of international trade), 2002, No. 2.

Index agreements 20, 63, 122, 123–4 see also contracts; joint ventures, foreign; production-sharing agreements (PSAs) agricultural policies 14, 26, 68 Amoco 63, 75 Aoshan 79–80 Arco 29, 62, 75, 103 Australia 77, 78, 122 Bachu–Taxinan zone 86, 88 ‘battle-front’ methods 13, 14–16, 18–19, 20, 52 Beibu (Tonking) Gulf 29, 61, 62 Beijing 17, 19, 71, 72, 90, 97, 103, 110, 132 block fault formations 51, 52 Bohai Bay Basin (Huabei Basin) 13, 20, 21–2, 38, 51, 56, 81 Bohai Gulf 26, 27, 29, 39, 40, 41, 61, 64, 65 Bohai Petroleum Corporation (BPC) 61, 64, 65, 67 BP (British Petroleum) 65, 75, 78, 79, 94, 103, 115–16 bureaucratic power 25–6, 29, 43, 46 ‘buried hill’ oil fields 21–2, 52 capital investment 14, 44, 45, 64–5 Changbei gas fields 71–2, 110 China National Petrochemical Corporation (SINOPEC) 46, 47, 48, 55, 56–9, 75, 97, 104, 105, 117, 121 China National Petroleum Corporation (CNPC) 26, 46, 47, 48, 69, 71–2 China Petroleum Corporation (CPC) 29, 46 Chuan Dong gas field 68, 69, 70

CNOOC (China National Offshore Oil Corporation) 29, 47, 48, 61, 64–5, 67, 75, 77, 79, 115–16, 121, 122 coal 1, 10, 33–4, 45–6, 71, 112, 116, 132–4 competition 43, 46–7, 117–18 consumption, energy 1, 70, 96, 101, 103, 107, 110 contracts 27–9, 30, 61–3, 88, 115–16, 120–24 see also agreements; foreign companies; joint ventures, foreign corporations 47–8 see also CNOOC (China National Offshore Oil Corporation); PetroChina; SINOPEC (China National Petrochemical Corporation) costs oil and natural gas exploration and development 59–60, 63, 67, 118 oil production 51, 67, 119 ‘Transfer Gas from West to East ‘ project 92–4 transportation 76–7, 104 crude oil carriers 79, 124–5 consumption 96 demand 12, 112–13, 114–15 exports 1, 20, 24–5, 34, 51, 107 geological basis 36–7 geophysical problems 15–16, 18–19, 21–2, 32 imports 1, 12, 13, 79–80, 96, 104, 106, 107, 112–13, 114, 115 production see crude oil production properties 18, 22–3, 24–5, 52, 56, 67, 96, 101, 104, 113 refineries see refineries reserves see crude oil reserves 137

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stabilized production (wenchan) 30, 32, 50–51 transportation see oil transportation crude oil production 1920–2120 actual and projected data 42 1949–60 data on total production 13 1960–2005 data on total production 19, 32 1971–2005 data on total production 29, 30, 33 1994 data from major sedimentary basins 40 2003–2005 data from major fields 60 2004 data on total production 1 costs 51, 67, 119 Daqing fields 16, 18, 19, 24, 30, 32–3, 34, 48, 50–51, 74, 109 forecasts 107–10 Jilin and Liaoning fields 51, 52, 53–4, 109 Ordos Basin 71 Qaidam field 73 Shengli fields 56, 58, 109 Sichuan Basin 68 Tarim Basin fields 40, 55 Xinjiang fields 55 crude oil reserves estimation procedures 36–7 geographical location 37–9 geological resources 39–40, 41–2, 54, 108 oil in place 37, 39–40, 41, 42, 48, 56, 65–6, 67, 87, 88, 108 proven, recoverable reserves 32, 37, 40, 41, 42, 48, 66, 108–9 reserves:production ratio 11, 25, 37, 42 total supply 107, 120 world proven, 2005 113–14 Cultural Revolution 17, 18, 23–4, 25, 44, 96, 118 Dagang field 20, 21, 38, 64 Dalian 10, 64, 79, 97, 115, 125 Daqing 30, 31, 97 Daqing fields crude oil production 16, 18, 19, 24, 30, 32–3, 34, 48, 50–51, 74, 109 description 39, 48

exploration and development 12–14, 15–20, 23, 48–51, 81 exports 34 natural gas production 23, 48–9, 50, 74 recovery techniques 14–16, 18, 33, 48–9, 50–51 refineries 16–17, 19, 34, 97, 106 transportation 34 Daqing method 14–16, 18, 33, 48–9 demand crude oil 12, 112–13, 114–15 energy 12, 24, 65, 125–6, 130–31 natural gas 73, 75, 92, 93, 116 petroleum products 10, 12, 96, 101–2, 103, 112–13 Deng Xiaoping 26–28 Dushanzi oil fields 9, 10, 11, 54 East China Sea Basin (Dong Hai) 27, 39, 40, 41, 65, 66, 75 economic development and growth 1, 4, 14, 129, 130–31 economic reforms 1, 29–35, 44, 68, 117–19 electricity supply 3, 33–4, 45, 71, 78, 118, 130, 131, 132 Elf Aquitaine 29, 61, 62 energy conservation 130 consumption 1 demand 12, 24, 65, 125–6, 130–31 prices 67, 118 security 117, 120–25 shortages 3, 24, 33, 45, 116 see also coal; electricity supply; natural gas; oil energy policies and crude oil imports 79–80 and economic reforms 117–19 elasticities of growth 33–4, 129–30, 131 and energy planning 129–33 and gas imports 77–9 and gasoil imports 102 and investment plans 45–6 ‘Look West’ policy 34 oil security 120–25 stabilized production (wenchan) 30, 32, 50–51

Index ‘Transfer Gas from West to East’ (Xiqi Dongyun) project 2, 73, 86, 88, 89–95 and transportation costs 76–7 environmental policies 24–5, 103, 128, 132 environmental pollution 103, 132 exploration see oil and natural gas exploration and development exports 1, 20, 24–5, 34, 51, 102, 107 fertilizer feed 23, 59, 71, 74, 110 Five Year Plans 3–4, 11, 33, 104, 128, 129, 130 foreign companies LNG (liquified natural gas) projects 78–9, 115–16 offshore oil and natural gas exploration 2, 27–9, 33, 60–63, 64, 65, 66–7, 75–6, 122 oil and natural gas exploration 2, 9–10, 11–12, 71–2, 82, 88, 120 refinery joint ventures 106 technology and technical knowledge 2, 11, 21, 27, 64 and ‘Transfer Gas from West to East’ (Xiqi Dongyun) project 93–4 foreign investment 66–7, 72, 122 France 28–9, 61, 62, 106 fuel oil 8, 24, 101 Fujian 77, 104, 106 Fushun 10, 12, 19 Gansu oil fields 8, 11, 12, 13, 23 gas see LNG (liquified natural gas); LPG (liquified petroleum gas); natural gas gasoil (diesel) 24, 102–3, 112 gasoline 3, 8, 24, 96, 101, 102, 103, 112 geographical factors 34, 37–9, 68, 89, 97, 101 geophysical factors 15–16, 18–19, 21–2, 32, 51, 52, 84–5 geophysical surveys 8, 13, 29, 64, 71, 75, 81, 82, 84, 86 Guangdong 77, 102, 105

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Guangzhou 3, 20, 34, 75, 77, 78, 97, 103, 104 Hainan Island 29, 62, 74, 111 heavy industry 26, 34, 44, 101 history of oil and natural gas industry 1949–mid 1950s, Soviet support of PRC, 10–12 1960, Daqing method 14–17 1960–late 1970s, self-sufficiency and Daqing method and development 17–25 1960s–late 1980s, bureaucratic structural change, 25–6 1970–1982, ‘Open Door’ and offshore oil industry, 26–9 early period to 1948 7–10 late 1950s, Daqing field discovery, 12–14 post 1976, production and trade after economic reforms, 29–35 Hong Kong 62, 74, 75 Huabei Basin (Bohai Bay Basin) 13, 20, 21–2, 38, 51, 56, 81 imports crude oil 1, 12, 13, 79–80, 96, 104, 106, 107, 112–13, 114, 115 forecasting 111–16 gasoil (diesel) 102 kerosene 7 LNG (liquified natural gas) 77–9, 115, 122 LPG (liquified petroleum gas) 103 natural gas 116 oil 1, 2, 13, 34, 96, 111–12, 122 petroleum products 1, 10, 12, 13, 24, 80, 96, 107, 122 raw materials 77 incentives 29–30, 63 India 121, 123 industrial policies 26, 34, 44 industry 26, 34, 44, 77, 101 infrastructure and storage LNG (liquified natural gas) 115 natural gas industry 43, 75, 90, 116 oil industry 52, 54, 79–80, 82–3, 124–5 institutions 46–7, 117–19 internationalization 1–2

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investment 30 see also capital investment; foreign investment; joint ventures, foreign; public investment Iran 96, 113, 114, 122 ‘Iron Man’ Wang Jinxi 16, 18 Japan crude oil exports to 20, 22, 24, 51 offshore oil exploration 28–9, 61–2, 65, 82 oil and natural gas exploration and development 7–8, 71, 84, 88 oil security 120 pollution reduction policies 24–5 shale oil development 9–10 technology 64 territorial disputes 75–6 and ‘Transfer Gas from West to East’ (Xiqi Dongyun) project 93–4 Japan–China Oil Development Company 29, 61–2 Japan National Oil Corporation (JNOC) 28, 51, 71, 120 JHN Group 62–3 Jiang Zemin 89 Jiangsu 102, 104 Jilin 10, 48, 49, 51, 97 Jingbian gas fields 71, 90, 110 Jinling 97, 104 joint ventures, foreign LNG (liquified natural gas) 78–9, 115–16 offshore oil and natural gas exploration 2, 27–9, 61, 65, 75, 122 oil and natural gas exploration 2, 9, 11–12, 71–2, 82, 88, 120 refineries 106 ‘Transfer Gas from West to East’ (Xiqi Dongyun) project 94 Junngar Basin oil and gas fields 9, 11, 12, 39, 40, 54, 73, 91, 111 Kambara, Tatsu 13, 28, 82 Karamai oil field 9, 11, 12, 39, 54, 81, 82, 84, 85 Kela 2 gas field 86, 87 kerosene 7, 8, 101, 103, 112

Korla 82, 83, 86 Kucha–Tabei gas zone 86, 87 labour supply 14–15 Lamadian field 15, 18–19 Lanzhou 8–9, 10, 54, 55, 73, 86, 90, 111 Li Siguang 12–13 Liaohe fields 22–3, 38, 51–4, 109 Liaoning fields 51, 74, 97 LNG (liquified natural gas) 77–9, 115, 122 ‘Look West’ policy 34 LPG (liquified petroleum gas) 23, 103, 107 Lunnan oil field 84, 87, 90 Ma Fucai 133 Maoming, Guangdong province 12, 79, 97, 105 market economies 2–3, 46–7, 118, 128 Middle East 3, 96, 103, 113, 114, 115, 122, 123 Ministry of Geology (MOG) bureaucratic power 25, 29, 46 and Daqing field discovery 12–13 exploration 13, 52, 69 in period of Soviet support 11 and Tarim field 82, 83 Ministry of Geology and Mining (MGM) 61, 64, 82 Ministry of Petroleum Industry (MPI) bureaucratic power 25, 26, 29, 46 Crude Oil Responsibility Contract 30 and Dagang field 21 exploration 13 foreign offshore contracts 61 in period of Soviet support 11–12 and self-sufficiency 14 and Tarim field 82, 83 natural gas associated and non-associated 48–9, 58, 74, 86, 109, 111 consumption 70, 110 demand 73, 75, 92, 93 exploration and development see oil and natural gas exploration and development

Index geological basis 36–7 imports 116 offshore see offshore natural gas pipelines see natural gas pipelines prices 2, 71, 117 production see natural gas production reserves see natural gas reserves supply 116 uses 7, 23, 59, 70, 71, 74, 110 see also LNG (liquified natural gas); LPG (liquified petroleum gas) natural gas industry see oil and natural gas industry natural gas pipelines from Ordos Basin 71, 90, 110 from Pinghu fields 75 from Qaidam and Tarim Basins 72–3, 90, 91, 94–5, 111 from Russia and central Asia 115, 116 from Shengli fields 58–9 from Sichuan fields 7, 70 from ‘West to East’ 89–95, 111, 115, 116 from Yacheng fields 62, 74, 75 natural gas production 1971–2005 total production data 30 2003–2005 total production data 60 Daqing field 23, 48–9, 50, 74 forecasts 110–11 Junngar and Turfan–Hami Basins 73, 111 Ordos Basin 71, 74, 110 Qaidam Basin 72, 73, 110–11 Shengli fields 58 Sichuan fields 23, 69, 70, 111 Tarim Basin 72, 73, 109, 111 Zhongyuan fields 58, 74 natural gas reserves estimation procedures 36–7 gas in place 37, 70, 71, 72, 74, 86, 87, 88 geographical location 37–9 geological resources 39, 40–43, 58, 69–70, 72, 74 proven, recoverable gas reserves 37, 43 Ningbo 75, 79, 115, 125 Ningxia oil fields 13, 23

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offshore natural gas exploration and development 27–9, 62, 65, 66, 67, 74–6 geographical location 39, 62 pipelines 62, 74, 75 production 66, 111 reserves 40, 41 offshore oil exploration and development 27–9, 33, 61–7, 75–6, 122 foreign investment 66–7 production 65, 66, 67, 109 reserves 39, 40, 65–6, 67 sedimentary basins 39 transportation 62 oil consumption 1, 101, 107 geophysical factors 15–16, 18–19, 21–2, 32, 51, 52, 84–5 imports 1, 2, 34, 96, 111–12, 122 offshore see offshore oil overseas development 120–25 prices 2, 3, 34, 63, 114, 117, 119, 122 reserves see crude oil reserves self-sufficiency 13, 14, 17, 23–5, 96 stockpiles 120, 125 supply 13, 23–5, 96, 107, 114 terminology (shiyou) 7, 8 transportation see oil transportation see also crude oil; fertilizer feed; fuel oil; gasoil (diesel); gasoline; kerosene; LPG (liquified petroleum gas); petroleum products; shale oil oil booms 30, 32, 33, 34 oil crises 3, 24, 123 oil nationalism 122–3 oil and natural gas exploration and development capital investment 45 and competition 43 costs 59–60, 63, 67, 118 Daqing fields see Daqing fields effort by China 59 and foreign companies 2, 9, 11–12, 71–2, 82, 88, 120 history see history of the oil and natural gas industry Jilin and Liaoning Province fields 51–4

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‘Look West’ policy 34 offshore natural gas 27–9, 62, 65, 66, 67, 74–6 offshore oil 27–9, 33, 61–7, 75–6, 122 Ordos Basin 11, 12, 13, 23, 39, 40, 41, 70–72, 74 Qaidam Basin 72–3 responsibility 47–8 risk 59–60, 61, 67, 118 Shengli fields 56–9, 81 Sichuan Basin 23, 68–70 Tarim fields see Tarim Basin fields Xinjiang fields 54–6, 81 Zhongyuan fields 58–9 oil and natural gas industry administration and organization 44–7, 117–19 competition 46–7, 117–18 history see history of oil and natural gas industry infrastructure and storage 43, 52, 54, 75, 79–80, 82–3, 90, 116, 124–5 production see crude oil production; natural gas production oil products see petroleum products oil security 117, 120–25 oil transportation pipelines 19, 20, 34, 51, 54, 55–6, 72, 84, 86, 88, 110 rail 15, 18, 19, 51, 54, 55, 86, 109, 110 road 54, 82–3, 86 sea 19–20, 34, 62, 123–5 Oman 96, 113, 114 ‘Open Door’ policies 26–9, 34, 61, 89 Ordos Basin oil and natural gas fields 11, 12, 13, 23, 39, 40, 41, 70–72, 74, 90, 110 Pearl River Delta 39, 40, 62, 66, 78 Penglai oil field 65, 67 PetroChina 47–8, 55, 86, 92, 93, 97, 105–6, 111, 115, 116, 117, 121 petroleum products 1, 10, 12, 13, 24, 96, 101–2, 107, 112–13 see also fertilizer feed; fuel oil; gasoil (diesel); gasoline; kerosene; LPG (liquified petroleum gas) Phillips Petroleum 63, 67 Pinghu gas field 66, 75

pipelines, oil 19, 20, 34, 51, 54, 55–6, 72, 84, 86, 88, 110 pipelines, natural gas see natural gas pipelines planned economies 1, 24, 44–5, 61, 128 policies agricultural 14, 26, 68 energy see energy policies environmental 24–5, 103, 128, 132 Five Year Plans 3–4, 11, 33, 104, 128, 129, 130 industrial 26, 34, 44 ‘Open Door’ 26–9, 34, 61, 89 xiao kang (‘moderately comfortable life’) 33, 129–32 politics 3–4, 8, 14, 44–7, 75–6, 94–5 port facilities 79–80, 115, 116, 124–5 prices energy 67, 118 gasoil 102 natural gas 2, 71, 117 oil 2, 3, 34, 63, 114, 117, 119, 122 production coal 34 crude oil see crude oil production natural gas see natural gas production offshore natural gas 66, 111 offshore oil 65, 66, 67, 109 reserves:production ratio 25, 37, 42 production-sharing agreements (PSAs) 28–9, 71–2, 75, 84, 88 proven, recoverable reserves concept 41, 42 crude oil 32, 33, 37, 40, 41, 42, 48, 65–6, 108–9 natural gas 37, 43 public investment 45, 46, 67, 69, 119 Qaidam Basin oil and natural gas fields 12, 39, 72–3, 90, 91, 110–11 Qingdao 79, 115, 125 Qinhuangdao 19, 20, 21, 79 rail transport, of oil 15, 18, 19, 51, 54, 55, 86, 109, 110 recoverable reserves see proven, recoverable reserves

Index recovery techniques ‘battle-front’ methods 14–16, 18–19, 20, 23, 52 innovative methods 33, 42, 50, 51, 52–3, 59, 82 pumping methods 33, 50 steam injection techniques 22–3, 52 sulfonate 56 water injection 16, 18–19, 33, 37, 49–50, 51 refineries capacity 24, 96–7, 98–9, 102, 104, 112 Daqing oil 16–17, 19, 34, 97, 106 geographical factors 34, 97, 101 joint ventures 106 Lanzhou 8–9, 10, 12 Liaoning 10, 51 organizational structure 97 quality of products 102–3 restructuring, expansion and modernization 104–6, 119 Shengli 20, 34 Tarim Basin 86, 88 technology 96, 97, 100, 101–2, 119 types 100–102 Xinjiang Autonomous Region 54 reserves see crude oil reserves; natural gas reserves risk 59–60, 61, 67, 118 RNECSPC (State Council Development Research Centre) report 129, 130 road transport, of oil 54, 82–3, 86 Russia 94, 95, 115, 116 see also Soviet Union Saertu field 15–16, 18 Saudi Arabia 96, 103, 106, 113, 114 sea transport, of oil 19–20, 34, 62, 123–5 sedimentary basins 37–43, 68 seismic surveying and analysis 52, 63, 64, 65, 83 self-sufficiency 13, 14, 17, 23–5, 96 shale oil 10, 12, 13 Shanghai 3, 7, 20, 34, 65, 73, 77, 79, 90, 97, 103, 104, 111, 115, 131 Shanxi Province 7, 13, 23 Shasan 2 oil field 83, 86

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Shell 7, 71–2, 75, 79, 94, 110 Shengli fields 20–21, 33, 34, 38, 56–9, 81, 109 Shenzhen 77–8, 115, 122 shortages 3, 24, 33, 116 Sichuan Basin oil and natural gas fields 7, 12, 23, 39, 40, 41, 68–70, 90, 111 Sino-Soviet dispute 14, 59 SINOPEC (China National Petrochemical Corporation) 46, 47, 48, 55, 56–9, 75, 97, 104, 105, 117, 121 Songji No.3 well 13–14, 15 Songliao Basin 38–9, 40, 48, 49, 81 see also Daqing fields Songliao Plateau 12–13 South China Sea Basin (Nan Hai) 27, 29, 39 South China Sea West Petroleum Corporation 61, 64 South West Oil and Gas Fields Operating Corporation (SWOGFOC) 69 South Yellow Sea Basin (Nan Huang Hai) 39, 62, 64 Soviet Union 9, 11–12, 14, 24 see also Russia stabilized production (wenchan) 30, 32, 50–51 Standard Oil Company 7, 8 Star Petroleum 55, 69, 86 State Council 29, 46, 47, 129, 130 State Development and Reform Commission 46, 129 State Energy Office 129, 133 sulphur content 96, 101, 104, 113, 119 supply capital 14 electricity 3, 45, 71, 78, 118, 130, 131, 132 labour 14–15 natural gas 116 oil 13, 23–5, 96, 107, 114 Taiwan 9, 65, 75 Taklamakan Desert 39, 81–2, 83 Tarim Basin fields crude oil production 55, 109 exploration and development 82–8

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foreign joint offshore oil ventures 82 geophysical structure 39, 81–2, 84–6 infrastructure and storage 82–3 natural gas production 73, 109, 111 natural gas reserves 40–41, 86–8 oil reserves 40, 87, 88 ‘Transfer Gas from West to East’ (Xiqi Dongyun) project 73, 86, 88, 89–95 transportation 82–3, 84, 109 Tazhong oil field 83–4, 87, 92 technical knowledge 11, 14, 21, 27, 59 technology computer-assisted techniques 21, 52 drilling rigs 64 from foreign companies 2, 11, 21, 27, 64 recovery techniques see recovery techniques in refineries 96, 97, 100, 101–2, 119 see also geophysical surveys; seismic surveying and analysis Teikoku Oil 75–6 territorial disputes 75–6 Total 29, 61, 62, 106 ‘Transfer Gas from West to East’ (Xiqi Dongyun) project 2, 73, 86, 88, 89–98, 115, 116 transportation costs 76–7, 104 natural gas see natural gas pipelines oil see oil transportation safety 123–5

vehicles, fuel consumption 3, 70, 96, 102, 103, 130 Turfan–Hami Basin oil and gas fields 39, 55, 73, 90, 111 Unocal 75, 122–3 Urumqi 54, 97 USA 7, 9, 27, 29, 37, 62–3, 75, 114, 120 Wang Jinxi 16, 18 water injection recovery techniques 16, 18–19, 33, 37, 49–50, 51 ‘West to East’ (Xiqi Dongyun) project 2, 73, 86, 88, 89–98, 115, 116 WTO accession 117, 119 Xi’an 71, 89, 90, 110 xiao kang (‘moderately comfortable life’) 33, 129–32 Xining 73, 91, 111 Xinjiang fields 9, 11, 54–6, 81, 94–5 see also Tarim Basin fields Xinshugang field 15, 18 Yacheng gas field 62, 66, 74–5 Yanchang oil field 8, 10, 11, 23, 71 Yellow River (Huang He) 20, 56, 64, 79 Yinge Sea Basin 29, 39, 61, 62, 66 Yu Qiuli 25, 26 Yumen oil fields 8, 11, 12 Zhongyuan oil and natural gas fields 38, 58, 74 Zhou Enlai 18, 23, 25, 26, 27