China is the world’s second largest consumer of crude oil with oil consumption growing 4% in 2013. However, the country is able to cater to only 42% of this demand with China expected to become the largest net importer of crude oil in 2014.
Emerging economy needs to fuel its growth
The world’s fastest growing economy consumed about 10.7 million barrels per day (bblpd) of oil in 2013 according to the US Energy Information Administration (EIA). The country grew at an uncontrollable pace over the past two decades, doubling its crude oil demand over the past decade alone. Recent years have seen some cooling in the growth experienced by China, with a modest 4% YoY growth in demand in 2013.
China was also one of the largest net oil importers in 2013, only second to the US. The economy imported 6.2 million bblpd in 2013 to support its economic growth process. EIA forecasts that China will overtake the United States in 2013 to become the largest net importer of crude oil in the world.
Production unable to keep pace with escalating demand
China produced 4.5 million bblpd of oil in 2013 as the fourth largest producer in the world. However, production growth has stagnated at 54% over the past two decades while consumption has almost quadrupled over the same period. Demand overtook supply in 1993 when the country experienced massive demand growth. However, “EIA forecasts China’s oil production to rise to about 4.6 million bblpd by the end of 2014. Over the longer term, EIA projects a steady growth for China’s oil and liquids production, reaching 4.6 million bblpd in 2020 and 5.6 million bblpd by 2040,” says a recent report from EIA.
Figure 1: Chinese production versus consumption of crude oil, 1983-2013
China holds 24.4 billion barrels of proven oil reserves, the 13th largest in the world. Given the population of the country and the growth potential, this amount is trivial and inadequate to serve the growing demand. Hence, the country will become more and more reliant on imported oil.
China’s exploration and production sector
“China’s national oil companies dominate the oil and gas upstream and downstream sectors, although the government has granted international oil companies more access to technically challenging onshore and deep water offshore fields. China revised its oil price reform legislation in 2013 to further reflect international oil prices in the country’s domestic demand,” says the EIA.
However, the primary issue is that Chinese oil producing areas have matured and reached peak production. This means that oil companies need to invest heavily in modern extraction methods in order to sustain oil flows at current levels. Furthermore, modern techniques are required to explore the untapped reserves in new areas including some difficult terrain and offshore regions. Essentially, territorial disputes in the East China Sea have to date limited large-scale development of oil and gas fields in the region, where China and Japan compete for territorial claims.
“Approximately 81% of Chinese current crude oil production capacity is located onshore, while 19% of crude oil production is from shallow offshore reserves. New offshore production, enhanced oil recovery (EOR) of older onshore fields, and small discoveries in existing basins are the main contributors to incremental production increases. China’s NOCs are investing a great deal in EOR techniques such as water injection, polymer flooding, and steam flooding, among others, to offset oil production declines from these mature, onshore fields,” reports the EIA.
Figure 2: China’s largest oil fields