For countries who have complete control over their oil industry through their state-run oil behemoths, it’s easy to order them to increase oil output—costs be damned. But sinking money into oil and aging oil fields or in new and cost-intensive plays comes with risks, and in China’s case, investors aren’t so sure that its onslaught of capex planned over the next five years is a winning bet.
Still, China’s largest state-run oil majors, China Petroleum & Chemical (SINOPEC), China National Petroleum Corporation (CNPC), and China National Offshore Oil Corporation (CNOOC) have plans to shell out billions for what some see as rather unprofitable oil fields for the sake of shoring up the state’s energy security in direct response to President Xi’s call last year for them to increase oil production.
The billions in capex planned for the next five years from China’s three companies that together operate over 90 percent of China’s oil-producing fields are not insignificant and represent a huge increase from spending in recent years. Sinopec, for one, announced only days ago that it will spend US$20.3 billion in 2019 alone—US$8.9 billion of which will be dedicated to just upstream operations. This upstream capex represents more than a 40 percent increase in spending over 2018, and will be used in part to increase production at its aging Shengli oilfield, whose reserves fell to just 16 million barrels by end 2018 vs 49 million barrels the year prior, according to Reuters.
Sinopec’s dilemma is clear. Its net profit plunged in 2018 as its costs for purchasing crude oil rose over 40 percent as oil prices ticked upward. It is being squeezed by the rising cost of oil, and it has plans to refine even more crude in 2019, making it even more desperate to lower the amount of crude oil it must purchase by pumping more oil at home.
CNOOC, too, has major plans to up its capex, to the highest level since 2014. In January, it announced that it would lift capex to between US$10 billion and almost US$12 billion this year, and announced even bigger plans to double the number of exploration projects and proven oil and gas reserves by 2025. Related: Sources: Saudis Admit They Want $70 Oil
CNPC—China’s largest oil and gas supplier, last year promised to spend US$22 billion by 2020 to boost oil production as its production in old and dying fields peters out. CNPC is hoping this spend will increase production by 75 percent. To this end, CNPC plans on enlisting the help of foreign firms as well in order to capitalize on others’ technology that it lacks, according to a South China Morning Post article from earlier this month.
The mad scramble by China’s big three to make large investments comes in response to President Xi’s directive last July to increase production as its thirst for oil continues to be robust. Its own oil production, too, is on the decline, leaving it in a predicament of potentially catastrophic proportions that are only exacerbated by the trade row that is endlessly dragging on with the United States.
But producing oil and producing oil at a profit are two entirely different things. The reality is that China’s oilfields are aging, and getting oil out of the ground will be costly. According to data crunched by Bloomberg earlier this week, China’s oil reserves have been on a steady and “terminal” decline, with producing falling about 12 percent over the last three years.
While China’s hopeful increase in production may indeed offset production declines in its older oil fields, it is unlikely to be sufficient enough to also decrease its appetite for crude oil imports, which serviced a whopping 70 percent of its crude oil needs in 2018.
By Julianne Geiger for Oilprice.com
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With its major oilfields depleting quickly and proven reserves declining fast, China hopes that an increase in new production may indeed arrest the sharp decline in its production. Still, it is unlikely to be sufficient enough to also decrease its thirst for crude oil imports expected to account for 72% of its oil needs this year
Overshadowing this economic picture is the rising geopolitical tension between China and the United States. Relations between the two titans will increasingly run into trouble over Taiwan, trade war and also a conflict over the disputed islands and reefs in the South China Sea. On the current trajectory, war between China and the United States in the decades ahead is much more likely than is currently recognized.
The great rivalry between the United States and China will shape the 21st century. It is a truth universally acknowledged that a great power will never voluntarily surrender pride of place to a challenger. The United States is the pre-eminent great power. China is now its challenger.
Were a conflict to arise, the first thing the United States would do is to try to starve China of oil by blocking any oil supplies from the Middle East passing through the Strait of Hormuz or the Strait of Malacca.
Much of China’s imported oil from the Middle East must pass through a major chokepoint: the Strait of Hormuz which is guarded by the US navy.
Another chokepoint is the Strait of Malacca between Malaysia and Indonesia, through which 80% of China’s imported oil pass.
The channel is 625 miles long, and less than two miles wide at its narrowest point. With the Indian navy guarding the northern end of the Strait, and the US navy the southern end, China feels sandwiched in and strategically vulnerable. The former president of China, Hu Jintao, has referred a number of times to what he describes as the ‘Malacca dilemma’.
That is why the newly-opened China-Myanmar crude oil pipeline is pivotal to China’s oil security in that it reduces its excessive reliance on seaborne oil imports.
The 479-mile-long oil pipeline with a transport capacity of 442,000 b/d, runs from the port of Kyaukpyu on Myanmar's west coast and enter China at Ruili in Yunnan Province.
Crude oil will be shipped from the Middle East via the Indian Ocean -- instead of through the risk-prone Straits of Hormuz and Malacca -- before reaching Myanmar and entering China.
The China-Myanmar crude oil pipeline received its first shipment of oil on the 9th of April 2017.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London