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All eyes on China (part 2)

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China’s crude oil production is on course to decline for the second consecutive year after registering a higher than expected fall of 5.1% in 1H17.

According to China’s National Bureau of Statistics, the country produced 96.45 million t (3.917 million bpd) in 1H17, down from 101.63 million t (4.12 million bpd) over the same period last year.

Analysts do not foresee a recovery in China’s domestic production in the near-term. The country’s two major oilfields in Daqing and Shengli are in decline, while its emerging shale and offshore sectors have disappointed. Chinese and foreign companies operating in the country have also reduced their exploration and production budgets.

UK consulting firm Wood Mackenzie expects Chinese oil production to average 3.5 - 3.6 million bpd by 2020. China alone will account for around half of Asia’s 1 million bpd production decline between 2016 and 2020.

Angus Rodger, Wood Mackenzie’s Upstream Research Director, stated: “The main factor that would change this outlook is if current government strategy changed and Beijing sought to push the big state oil companies into increasing or restarting production from marginal fields.”

Rodger’s bearish outlook contradicts Beijing’s official forecast for the country’s oil production to recover and to exceed 4 million bpd by 2020.

Crude import set for another record-breaking year

Following a 13.8% surge in 1H17, China’s crude oil import is on course to reach another record high level this year.

Investment firm Jefferies Hong Kong and UK’s Gibson Shipbrokers estimates that China imported around 8.55 million bpd in the first six months of 2017, compared with 7.51 million bpd over the same period last year. The surge will consolidate China’s position as the world’s largest crude oil importer in a single year, having snatched the title from the US in 2016.

According to the EIA, the US imported an average of 7.36 million bpd last year, and will decline further as its domestic production is forecast to rise 5.2% to 9.33 million bpd in 2017. The EIA expects US crude imports to fall 6.1% to 6.88 million bpd in 2017, and by a further 8.1% to 6.32 million bpd next year.

Gibson said it expects China’s oil imports to surge as the country develops its refining industry and builds strategic petroleum reserves to meet its rising energy demand.

“A large percentage of overall crude import growth can be potentially attributed to strategic petroleum reserves (SPR) build,” said Gibson. China’s urgency to build up its SPR is largely driven by two major concerns. The country’s domestic crude production has been in gradual decline while most of its suppliers in the Middle East, Asia, Africa and Russia are faced with political and military threats that could lead to abrupt oil export cut-offs.

China deal boosts Rosneft’s export plans

Russian energy giant Rosneft is on course to expand its China ties with the help of two major transactions in recent months.

Chinese conglomerate, CEFC China Energy Company, has agreed to pay US$9.1 billion to acquire a 14.16% stake in the Moscow-based firm. China’s CEFC is acquiring its shares from a consortium comprising Swiss Glencore and Qatar Investment Authority.

The deal follows the June completion of Rosneft’s sale of a 20% stake in a subsidiary firm, Verkhnechyonskneftegaz (VCHNG), to Beijing Gas, for US$1.1 billion.

The two transactions will strengthen Rosneft’s goal to develop its enormous oil and gas resources in Russia’s frontier Far East area as well as help China meet its growing energy demand.

Building on its deal with Beijing Gas, Rosneft signed a strategic co-operation agreement with another Chinese firm to scope opportunities for joint projects in oil, gas, petrochemicals and financial products.

The agreement with CEFC was signed during Chinese President Xi Jinping’s visit to Moscow in early July.

Both countries share a common distrust of the US as well as a vision to jointly develop their economies, focusing on the vast potential of their shared border region.

In contrast, US-Russia relations have plummeted to their worst levels since the Cold War in the 1960s, crippling Rosneft’s plan to build an LNG plant with US major ExxonMobil that was announced three years ago. Rosneft has been forced to turn its attention to building the LNG plant with Beijing Gas.

China’s focus on developing its ties with Russia through joint energy projects does not surprise former Russian Energy Minister Igor Yusufov, who helped lay some of the early groundwork for their growing bilateral relationship. Yusufov played a key role in the early construction of pipelines to export crude oil from Russia to China.

Russia’s gas giant Gazprom said it expects to start up the Power of Siberia pipeline to export natural gas to China in December 2019. The 3000 km pipeline will deliver up to 38 billion m3/y of natural gas for 30 years, as part of a contract signed by Gazprom and China National Petroleum Corporation in May 2014.

Outlook for 2018

The International Monetary Fund (IMF) and Asian Development Bank (ADB) are less upbeat about China’s future prospects once the pumped-up effects of the National Congress wear off next year.

The ADB said China will continue to face a glut in manufacturing capacity that will constrain future industrial investment growth while saddling the economy with huge debts. The bank expects China’s economic growth to slow down to 6.4% in 2018 after two consecutive years of 6.7% expansion.

The IMF sees a steady slowdown in China’s economic growth over the next five years, starting with 6.4% in 2018 and 2019. Amid global uncertainties, it will weaken to 6.3% in 2020 and 6% in 2021. The economy will face further resistance, with growth hitting a projected new low of just 5.8% in 2022.

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