November 2019

First oil

Adding up China’s numbers
Kurt Abraham / World Oil

There has been plenty of media discussion about the ups and downs of trade negotiations between the U.S. and China. There also has been plenty of news stories about Chinese intentions, as regards the Spratley Islands and the South China Sea (see columnist Jeff Moore’s latest update of the situation on page 19 of this issue).

Yet, we’ve heard little about the state of Chinese E&P and the extent of China’s upstream operations overseas. Looking at data from IEA and EIA, as well as our own numbers, China is producing its domestic oil at a steady 3.7 MMbpd to 3.8 MMbpd. Yet, Chinese demand for refined products averaged 13.0 MMbpd in 2018 and was up to about 13.4 MMbpd during the first seven months of 2019. That leaves a demand gap of roughly 9.3 MMbopd to 9.6 MMbopd, to be satisfied with imports.

For some years, China has been a net oil importer, and the demand deficit has grown steadily. The three state oil companies—CNPC, Sinopec and CNOOC—are responsible for China’s domestic output, either on their own or in conjunction with Western firms. Accordingly, over the last 12 to 15 years, these same companies have pursued an extensive campaign to gain operatorships or interests in concession contracts and E&P blocks in various countries globally. They also have negotiated numerous export contracts, to flow oil back to the homeland.

Thus, CNPC is involved in Canada, Venezuela, Abu Dhabi, South Sudan, Iran, Iraq, Kazakhstan and Uzbekistan. Sinopec is involved in Canada, Gabon, Sudan, Ethiopia, Nigeria, Angola, Brazil and the UK, among others.

CNOOC focuses on offshore activity at home but has a substantial onshore position in Canada, due to taking over Nexen in 2013. The firm also has extensive operations and interests in the U.S., Argentina, Colombia, Mexico, Trinidad & Tobago, Ireland, the UK, Algeria, Congo, Gabon, Iraq, Nigeria, Uganda, Indonesia, Australia and Papua New Guinea. CNOOC is a major player in sucht promising offshore exploration areas as Guyana, Newfoundland (Canada), Brazil and Senegal.

The point of all of this is that China is one of the world’s largest E&P players, a position that will only increase with time.

The gas side of China. Due to its growing industrial activity, among other factors, China also has a voracious natural gas appetite, and must import much of it from overseas. In 2017, notes EIA, China surpassed South Korea to become the second-largest LNG importer behind Japan. EIA expects China’s natural gas consumption to continue to increase—driven by economics and environmental policies—with demand met by imports and greater domestic production. China’s LNG import capacity, says EIA, should reach 11.2 Bcfd by 2021, as soon as capacity expansions at existing terminals and new terminals under construction are completed.

A muddled mess in Canada, the UK and the U.S. It is ironic that the three largest English-speaking countries are all having governmental problems simultaneously. In the U.S., the same political party, which is trying to impeach the President, has many candidates for the 2020 election that are calling for an end to, or heavy restrictions on, E&P activity.

In the UK, the Brexit situation refuses to resolve itself. Even when it looked like Prime Minister Boris Johnson had a workable deal, enough elected officials in multiple parties found ways to mess it up, causing the EU to grant one last delay until Jan. 31, 2020. So far, the effect on British E&P is minor, but will that last?

Canada has the worst of it. Prime Minister Justin Trudeau’s Liberal Party was unable to win a majority in the Oct. 21 election, meaning that he must attract another party, or two, to form a coalition. This will force an even more left-leaning, anti-industry approach, making it even more difficult to build badly needed pipelines and open new areas to E&P. In response, Encana announced that it was moving its headquarters to the U.S. and changing its name to Ovintiv.

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Kurt Abraham
World Oil
Kurt Abraham
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