China's tired fields
China's output is continuing to slow, which is good news for exporters targeting the country
The Daqing field provides a fair illustration of why China's demand for imported crude should keep rising through 2017 and beyond. One of the country's biggest and oldest resources famed for the "Iron Man" legend, its production fell by about 3% in 2016 and further declines are likely. The operator, China National Petroleum Corporation, announced it will slash its exploration and engineering budget for Daqing by 20%.
China's fundamental problem is tired fields and increasingly uneconomic costs of production at today's oil price. As Nomura's head of Asia-Pacific oil and gas research, Gordon Kwan, pointed out in a note earlier this year: "China's largest oilfields are ageing rapidly. Advanced technology can only mitigate the rate of decline. They can't reverse the structural trend."
One of the more optimistic of China-watchers in terms of production, Neil Beveridge, senior energy analyst at Sanford C Bernstein, estimates China's total crude production will fall by 4% in 2017. Although the upstream has become more efficient, he points out that the new onshore oilfields have still not got their economies of scales right and postulates a break-even point for them of about $50 a barrel.
Mainly for these reasons, total Chinese production is predicted to fall by 4-7% in 2017, according to a consensus of analysts. This would follow last year's record decline of 6.9% in the first 11 months to about 4m barrels a day, the biggest recorded fall in a quarter century.
Putting more numbers on it, the International Energy Agency estimates production in 2017 will drop by about 240,000 b/d while, looking further ahead, consultancy Wood Mackenzie predicts a fall of nearly 400,000 b/d by 2020. At that rate of decline China's daily production would sit at around 3m b/d. (China's energy regulator, the National Energy Administration, stands alone in forecasting stable output for 2017 of 4m b/d.)
The latest round of first-quarter results more or less confirms independent analysts' predictions. First off the block was Cnooc, announcing a 4.2% year-on-year slump in total net production to 119.1m barrels of oil equivalent, "mainly due to the natural decline of the natural oil and gasfields".
One big question mark hanging over the import market is the industry reform plan, with its promise of some privatisation in the upstream
The overall picture suggests China will rely even more on imports than it has before. Energy Aspects, another consultancy, estimates that China will have to buy in more than 65% of total crude needs this year. Once again, the latest figures confirm this assumption. In March, imports soared to a record-breaking 9.21 m b/d and, although they slipped to 8.4m b/d in April, the general trend is obvious.
Adding to China's demand, the independent refiners—the so-called "teapots"—are expected to crank up again during the year. Most of them shut down for routine maintenance (in some cases enforced maintenance after an official crackdown on regulation-breakers). But research firm Icis China has spotted that imports into the oil capital of Qingdao, where many of the privately-owned refiners are located, accounted for a third of total crude purchases in January and February.
"China demand will continue to rise as more teapots are expected to receive import quotas in the second half of the year," forecasts Gao Jian, energy analyst for Icis, in a note.
Last year, the teapots imported around 40m tonnes (almost 1m b/d) of crude, according to Platts, an oil-data and price-assessing firm, and up to December produced 54m tonnes of gasoil and gasoline, up 81% compared with 2015.
One big question mark hanging over the import market is the industry reform plan, with its promise of a certain level of privatisation. The National Energy Administration is reportedly working on a policy that would admit privately owned companies into upstream activities, thus spelling an end to the historic monopoly of state-owned operators.
For now, falling output and rising import needs are the state of play.
Growing (old) pains
PetroChina's largest oil and gas producing property, the Daqing field is located in the Songliao basin and covers about 1m acres. As HSBC points out in its 2017 global oil report, it has surprised analysts and oilmen alike because production has held up against the odds for decades, mainly through constantly improving engineering and technology. Output is now about 0.75m b/d compared with 1.1m b/d 20 years ago. But as the report makes clear, Daqing's underlying annual decline rate is unstoppable.
Similarly, China's other two major national oil companies (NOCs), Sinopec and Cnooc, also operate in more mature basins and are recording significant well declines of 4-8% a year in core production areas. And reflecting the general trend, Sinopec estimates that its Shengli field, accounting for 65% of the group's domestic crude production, will see a decline of nearly 2% in 2017.
On the bright side, the improvement in international prices is boosting the NOCs' profits. As Cnooc reports, in the first quarter of 2017 its average realised oil price rose by 58.7% year on year to $51.64 a barrel, roughly matching international prices.
PetroChina is heading in the same direction. On the back of a 2.9% decrease in lifting costs per unit, its upstream sector turned last year's loss into a first-quarter profit of 1.9bn yuan ($279m). That's a 22.2bn yuan turnaround on the first three months of 2016.