• 3 minutes e-car sales collapse
  • 6 minutes America Is Exceptional in Its Political Divide
  • 11 minutes Perovskites, a ‘dirt cheap’ alternative to silicon, just got a lot more efficient
  • 7 days They pay YOU to TAKE Natural Gas
  • 3 days How Far Have We Really Gotten With Alternative Energy
  • 4 days What fool thought this was a good idea...
  • 6 days Why does this keep coming up? (The Renewable Energy Land Rush Could Threaten Food Security)
  • 2 days A question...
  • 13 days The United States produced more crude oil than any nation, at any time.
Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

More Info

Premium Content

Declining Chinese Oil Production Could Help Boost Oil Prices

oil tanker anchored

While all eyes are on OPEC to see whether or not they will follow through on production cuts, there is another major source of oil supply that will have a substantial impact on prices this year, and very few people are talking about it.

China is often a central player in oil market analysis, but usually in terms of oil demand. But even as China is the world’s second largest crude oil consumer, and the largest importer, it is also no slouch in terms of production. Crude oil output climbed steadily over the past three decades, rising from 2 million barrels per day in the 1980s to a peak of about 4.4 mb/d in 2015, enough to rank it as the fourth largest producer in the world after the U.S., Russia and Saudi Arabia, and roughly on par with Canada.

However, the collapse of crude oil prices has forced Chinese oil production into a state of decline. Many of China’s oil fields are old, mature and require heavy investment to stave of depletion. The market meltdown for crude oil beginning in 2014 forced China’s state-owned companies to take a hard look at whether or not pumping money into their older fields was still a worthy investment.

In May 2016, we wrote about forecasts for Chinese oil output, projecting a decline of roughly 5 percent for the year. Those estimates turned out to be too conservative – some older and costly fields were shut down, forcing the country’s output to decline by 335,000 bpd in 2016, or about 6.9 percent. But even as oil prices have climbed back above $50 per barrel, the declines are expected to continue. Output could fall by an additional 7 percent this year, taking another 240,000 bpd off the market, according to several oil watchers interviewed by Bloomberg, including Bernstein & Co., Nomura Holdings Inc., and CLSA Ltd. Related: Saudi Arabia To Spend $50 Billion On Massive Solar Push

Some of China’s oil fields are just too costly in today’s pricing environment. “China’s domestic crude output decline will certainly help OPEC’s plan to reduce global supply,” Nelson Wang, an oil and gas analyst at CLSA, told Bloomberg. ”Even if that isn’t China’s intention, it’s just the reality that China can’t produce more under the current circumstances.”

Bernstein analysts say that there is “little hope” of a rebound from the older fields, while China’s state-owned firms likely will fail to find adequate new discoveries to offset the decline.

The supply problem is larger than just China. Across the entire Asia-Pacific, oil supply will fall in the coming years as upstream investment has suffered from the collapse of oil prices and new exploration tends to be focused on natural gas. For the whole of the Asia-Pacific, "[w]e estimate 2016 production of 7.5 million barrels per day will fall by over a million barrels per day by 2020," Angus Rodger, the Asia-Pacific upstream research director for Wood Mackenzie, said this week.

China will account for half of those losses. Much of Asia’s production comes from “giant fields” in Indonesia, Malaysia and China, but the fields are “super mature and will require expensive techniques, high break-evens and capex cuts,” Rodger added. Decline rates will “spiral across the region” as very few new discoveries come online to offset more drastic cuts to spending. “We don't see any large greenfield oil developments coming stream by 2020,” he said. Related: OPEC Production Cuts: Here’s The Cheat Sheet

China’s central government is not ready to concede as much, publishing figures this week as part of its 2016-2020 five-year plan that pegs output at 4 mb/d in 2020. Wood Mackenzie thinks Chinese output in 2020 will be more like 3.5 mb/d.

At this point, the upside potential in China is in the domestic shale gas sector rather than oil. The EIA estimates that China has 1,115 trillion cubic feet of unproven technically recoverable shale gas reserves, the largest resource base in the entire world and about twice as much as the United States. China has struggled to develop those reserves to date as an array of obstacles stand in the way, including complex geology, lack of infrastructure and water scarcity. Ramping up LNG imports is another avenue to help meet domestic energy needs that China has prioritized in its five-year plan.

In the near-term, China’s oil production declines are one more factor to consider when trying to get a gauge on the supply/demand balance this year. To put it in context, the 2017 loss of 240,000 bpd from China is more than the promised cuts from Iraq as part of the OPEC deal, and about half of the cuts that Saudi Arabia is undertaking.

China’s declining output will also help offset the bearish news regarding the country’s slowing demand growth. China’s imports rose at the fastest rate in a half-decade last year as it rushed to fill up its strategic petroleum reserve. With many storage facilities at capacity, China’s crude import demand was set to slow in 2017. But in order to satisfy domestic demand, China will need to find more supply to offset its declining output from its aging oil fields. That means more imports from abroad.


By Nick Cunningham of Oilprice.com

More Top Reads From Oilprice.com:

Download The Free Oilprice App Today

Back to homepage

Leave a comment
  • JHM on January 18 2017 said:
    China may have a few aces up its sleeve. I figure, China needs to produce about 5 million electric vehicles to offset production of 240,000 bpd crude. Since they export middle and heavy distillates they only need the crude for about 20 gallons of gasoline per barrel. So 5 million EVs could easily offset 4.8 million gallons of gasoline per day. China is working up to this level of EV production by 2020.

    Moreover, solar and wind displace about 15 and 25 BCF per year per GW, respectively. Nobody is building out solar and wind as fast as China.

    So China's strength is in manufacturing. EVs and renewables give China an opportunity to replace fossil supplies with manufactured goods. By about 2020, they should be able to more than replace declines in oil and gas fields with these alternatives. So it is foolish to count on China increasing energy imports for decades to come. China will undercut the oil and gas industry.
  • Adrian on January 18 2017 said:
    Nick, thoughts on China's vertical line of plug-in vehicle sales growth?

    350,000 new plug-ins last year, and YOY sales growth at 188% could result in over a million sales this year. That's going to bend their oil demand negative pretty quickly. Fleet of 1.4M plugins at end of 2017 should be displacing demand of 70kbpd.

    Extrapolation past 2017 gets very bearish for Chinese oil demand...
  • dav on March 16 2017 said:
    @JHM @Adrian - Your arguments are flawed. China bought/produced 24 million new cars last year, a tiny percentage being EV. EV growth will only slow oil demand growth not reduce it. Give it 10 years before we see EV sales outpace ICE sales.

Leave a comment

EXXON Mobil -0.35
Open57.81 Trading Vol.6.96M Previous Vol.241.7B
BUY 57.15
Sell 57.00
Oilprice - The No. 1 Source for Oil & Energy News