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Viktor Katona

Viktor Katona

Viktor Katona is an Group Physical Trader at MOL Group and Expert at the Russian International Affairs Council, currently based in Budapest. Disclaimer: views set…

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The 'Mega' Oil Field That Will Never Boom

2017 will most likely witness a continuation in the decline of conventional oil discoveries. This year has seen no major onshore discovery, pretty much all significant finds were confined to offshore areas of the Americas, where Mexico’s continental shelf unearthed two highly promising formations, the Ixachi (1.5 BBbl) and Zama (1.4 BBbl), whilst Alaska’s Horseshoe discovery gave rise to hopes that this once-prolific region might be back in the game again. Europe’s headway has been incomparably paler – it seems that the biggest find will be Statoil’s Verbier field which is estimated to contain up to 0.13 BBbl. In stark contrast with the above, China’s CNPC announced last week that its latest discovery, the Mahu field located within the Junggar Basin of Xinjiang province, is estimated to hold between 0.52 and 1.24 billion tons of crude (4-9 BBbl), by far the largest find of recent years – provided that one is to believe that this oil is actually recoverable.

Shortly after the announcement Chinese media were replete with overly upbeat sentiments that China is finally on the brink of ending its decade-long dependence on oil imports. These were supported by the claim that further oil discoveries are to be expected in the Junggar Basin, also surpassing the 1 billion ton mark. However, very rarely did one encounter mentions of the Junggar Basin’s extremely difficult geology – not to mention the fact that Chinese estimates are usually given as oil-in-place, not recoverable volumes. This is not to say that the Junggar Basin has been under close scrutiny for decades, prospecting works there started right after the Communist Party established its power and the Karamay field has been producing for more than 60 years (output still at around 200 000 bpd). The emergence of a new oil-producing region in China’s eastern provinces would be an unquestionable blessing as its model fields along the Pacific coast (Daqing, Shengli, Huabei) are in irretrievable decline. Related: Higher Oil Prices Widen U.S. Trade Deficit

Moreover, the remote whereabouts might not be necessarily a bad thing. The Junggar Basin is far away from China’s major oil consumption centres – the Xinjiang province, however, hosts three refineries (Karamay, Dushanzi and Urumqi) which were built to process Kazakhstani crude that was supplied to China via the Atasu-Alashankou pipeline. So far, an annual 11-12 million tons of crude reached the easternmost of China’s provinces from Kazakhstan, of this 7 million tons accrued to Rosneft’s transit supplies to CNPC. Kashagan’s shareholders, however, had high hopes for this supply route as most of the giant offshore field’s output was bound to end up on the Chinese market. If even a fraction of new Junggar oil were to hit the Chinese market, this would seriously draw the necessity of importing a lot of Kazakh crude into question.

Spontaneous oil springs have been recorded in the Xinjiang area for more than a century, even the largest field’s name Karamay (“Black Oil”) serves as proof that the locals have long known the oil is there. However, the Junggar Basin, a triangular-shaped depression, is a highly asymmetric formation with steep anticlines and complex discontinuous fault lines, very prone to overcooking due to massive pressure and high temperatures. At least the flat terrain and desert-like climate do not represent a challenge, rather an easement. It is worth noting that the Mahu field is a conventional one - it would be reasonable to assume that the quality parameters of Mahu oil might resemble the Karamay one (31-32° API, 0.2 sulphur content and 0.1 paraffin content) - and even though its development presupposes the usage of horizontal drilling and hydraulic fracturing, the Chinese oilmen are still yet to go all out on the tight reservoirs, despite the tight oil bounty there. Related: OPEC’s Latest Agreement May Not Stabilize Oil Prices

According to a recent analysis, of the estimated in-place 2 billion tons of tight oil in the Lucaogou-Permian formation (deemed to be the most oil-prolific) of the Junggar Basin only 0.11 billion tons were technically recoverable. Although the Junggar Basin contains also conventional oil reserves, their volumes are significantly smaller, the total recoverable numbers counted in tens of millions tons. Across the Junggar Basin, the standard tight oil-conventional oil ration is 5-6:1, therefore the main challenge for relevant Chinese companies is to extract the more costly tight oil. This, however, might be jeopardized by the fact that China has many options to pick from – and as it seems currently that Beijing will prioritize the development of its shale gas reserves in Sichuan and Tarim provinces. This moderate approach is shared by the Xinjiang oilmen who intend to bring the total Xinjiang oil output to 10 million tons by the end of the decade (a mere 5 percent of China’s total oil demand at that point).

When one reads the June 1987 CIA assessment of the Junggar Basin, one might wonder how little has changed in Xinjiang’s infrastructure – infrastructure is still incipient, the only major trunk pipeline that connects Xinjiang to the rest of China westwards is the Kazakhstan – China oil pipeline. To a certain degree, CIA’s estimates that the Junggar Basin is set to become China’s Prudhoe Bay were dictated by Cold War logic and the incessant power struggles around China in that period, however, the oil is still there, yet most likely most of it will never reach the level where it is economically viable to develop it. China’s oil production has been falling by 6-7 percent annually and its import dependency this year is about to reach an all-time high of 67-68 percent, therefore any new additions to the domestic portfolio should be more than welcome. The Mahu field was a result of 10-year geological prospecting works and CNPC is sure to have gained enough understanding of the Junggar Basin to follow up with new projects in the area – yet all of them will have a local effect, far from the new global phenomenon the media might want to portray it as.

By Viktor Katona for Oilprice.com

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