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Tim Daiss

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China Faces An Uphill Battle For Energy Independence

A Reuters report last week examining China's renewed oil and gas exploration and production push should make the country’s oil majors, Beijing energy planners, and just about everybody else in the country’s Oil Patch breathe a collective sigh of relief - but at the end of the day, the question has to be asked, will it still be enough?

First the good news

First the good news: China’s national oil companies are raising spending on domestic oil and gas drilling to the highest levels since 2016. This push comes as Chinese President Xi Jinping calls for the country to boost energy development to enhance national energy security. A few months ago, China National Petroleum Corporation (CNPC), one of China's largest oil majors with some $428.62 billion in revenue in 2017, announced an oil discovery at Mahu in the Junggar basin which has 400 million tonnes of oil in place, one of the largest oil finds onshore China in years. Approximately 100 million tonnes will be technically recoverable. Annual output at Mahu will reach over 3 million tonnes per year in three years, a demonstrative addition to the 10-million tonne per year Xinjiang field.

Also, a few months ago PetroChina, CNPC’s listed arm, struck sizeable oil and gas flow in exploration well Zhongqiu-1 in the Tarim basin, in the Xinjiang region, in northwestern China. Zhongqiu-1 tested a daily natural gas flow of 330,000 cubic meters and condensate of 21.4 cubic meters. The well is located in the southern part of Kuche trough in the Tarim basin, part of a 5,200 square-km exploration zone. Related: Iran Puts ‘Recoverable Reserves’ At 160 Billion Barrels

In December, CNPC said it also struck daily gas flows of 225,000 cubic meters at the exploration well Yongtan-1, in Sichuan province’s Jianyang city, part of a 350 square-km gas-rich acreage of volcanic rock layers. Production at CNPC’s flagship shale gas play Chuannan in Southern Sichuan hit a daily record of 20.11 million cubic meters in late December, up from 12 million cubic meters in October, the Reuters report said, citing CNPC data. CNPC also struck high volumes of gas flows at four exploration wells at Dagang, near Beijing, that could lead to a sizeable gas field called Lianhua.

More good news

CNOOC, China's largest offshore driller, also has joined the act. The state-run firm discovered 348 meters of gas bearing deposit and 25 meters of oil-bearing structure and tested daily gas flows of 6.4 million cubic feet. Bozhong 29-6, also in the Bohai Sea, is an oil find with potentially 100 million tonnes of oil reserve in place. CNOOC completed eight appraisal wells by August 2018.

Lingshui 17-2, 93-miles (150 km) off China’s southernmost province of Hainan is CNOOC’s single-largest fully-owned deepwater find. CNOOC made a final investment decision in March 2018 and total investment is estimated at $2.98 billion (20 billion yuan). Energy consultancies Wood Mackenzie and IHS Markit estimate that the block, at an average water depth of 1,450 meters (4,750 feet), has recoverable reserves of 2.5 trillion cubic feet.

The rest of the story

Despite Beijing’s push to ramp up oil and gas development, it will not be enough to offset the projected increase of both hydrocarbons, while aging fields and infrastructure will still be an impediment for China's goal of greater energy security and self-sufficiency. In other words, the U.S. goal of energy independence is out of reach for China in the foreseeable future, at least in the era dominated by fossil fuels. Related: The Key Takeaways This Earnings Season

China surpassed the U.S. in 2017 as the world’s largest crude oil importer, while the country will likely solidify that top position in the decades to come. Meanwhile, at the end of last year, China surpassed South Korea as the second largest importer of liquefied natural gas (LNG) and is projected to bypass Japan within the next few years to become the top global LNG importer, a dynamic unthinkable just a few years ago.

China's increase gas usage comes amid Beijing’s mandate that gas make up at least 10 percent of the country’s energy mix by 2020, with further earmarks to 2030, in an effort to clean up rampant air pollution, particularly in its major urban centers. China, already the world’s largest oil and coal importer, will see its gas imports approach the level of the European Union by 2040, the Paris-based International Energy Agency (IEA) forecasted last year.

China's oil and gas push also has geopolitical overtones amid Beijing’s ongoing development in disputed areas in the South China Sea. As China continues its buildup and militarization of artificial islands in the area, against growing international scorn and among concern from its neighbors in the region, it will nonetheless be tempted to drill for more oil and gas in these areas it now claims as sovereign territory.

By Tim Daiss for Oilprice.com

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