Global Energy Review

China: Coping with rising Oil Demand

A Report by Dr Paul McDonald
Consulting Editor, Oil and Energy Trends

Contents

List of Tables

Introduction

Oil consumption of 7.9 mn bpd makes China the second-largest consumer in the world after the US. Until recently, the growth in Chinese demand had been a major factor in driving oil prices upwards.

Since late 2008, economic recession in the OECD has been the key demand factor in setting world prices. Forecasts for world oil demand during 2009 tend to show a decline of between 0.5 mn bpd and 1.5 mn bpd compared with the previous year.

In all this financial and economic turmoil, China’s oil demand continues to grow, though not at the rates seen in recent years. At the same time, China’s oil production remains more or less static at 3.8 mn bpd, leaving some 4.1 mn bpd to be imported. Imports are likely to absorb nearly all of any future increases in demand.

China is anxious to limit the growth in imports by switching to other forms of primary energy. It is also keen to mitigate the effect of rising imports through the ownership of oil reserves and production in other countries.

This report assesses the state of China’s energy security and looks at what China may do to improve it.

Oil Demand

Oil Balance

Chinese consumption of 7.9 mn bpd makes it the second-largest oil consumer in the world after the US.

Until 1992, China was a net exporter of oil. Since then, consumption has grown by 197%, whilst production has increased by only 34%. The result has been a steady rise in oil imports. Net imports are now 4.1 mn bpd, constituting 52% of total consumption (see Table1).

Most of China’s oil imports are made up by crude oil. Of the gross import total of 4.4 mn bpd, some 3.6 mn bpd, or 82%, is crude oil. A small amount of crude oil is exported, making net imports 3.5 mn bpd.

Gross product imports amount to 0.8 mn bpd, of which about 0.4 mn bpd are heavy fuel oil. There is a small export trade in products, giving a total of 0.6 mn bpd for net imports.

Chinese economic policy tends towards the promotion of self-sufficiency. The rise in both crude and product imports is therefore a cause of some concern. The government hopes to limit the rise in crude oil imports by producing more domestically and substituting oil by natural gas, especially in power generation and industrial applications (see below).

China also wants to curb the rise in product imports. To do this it will be necessary to raise refinery throughput from its existing level of 6.8 mn bpd (see Table1). There are therefore plans to increase the country’s crude distillation and upgrading capacity.

Demand Patterns

China’s demand barrel is dominated by middle distillate, which makes up 39% of the total demand slate. The main product is gasoil–principally used to make diesel–which accounts for 35% of Chinese oil demand. Jet kerosine accounts for a further 4%. Together, their consumption amounts to 3.1 mn bpd out of a total demand of 7.9 mn bpd (see Table2). The other main products are gasoline (1.5 mn bpd, or 19%) and heavy fuel oil (0.8 mn bpd, or 10%).

Like several of its Asian neighbours, China relies heavily on naphtha for its petrochemical industry, having insufficient gas liquids of its own. Naphtha consumption for petrochemical use–principally olefins and their derivatives–amounts to 0.5 mn bpd: equivalent to 6% of total oil demand (see Table2).

Table 1
China: Oil Balance, 2008
(mn bpd)
Production
Total 3.8
Consumption
Total 7.9
Refinery Runs
Total 6.8
Imports
Crude 3.6
Products 0.8
Total 4.4
Exports
Crude 0.1
Products 0.2
Total 0.3
Totals rounded
Source: Pearl Oil estimate based on data from Chinese National Bureau of Statistics and China Petroleum and Chemical Industry Association

Of the three main refined product groups, middle distillate has shown the largest increase over the last decade or so. Between 1997 and 2007, China’s oil demand rose by 88%. Over the same period, demand for the main product groups rose as follows:

(%)
Light distillate
(naphtha; gasoline) 63.7
Middle distillate
(gasoil; kerosine) 133.6
Heavy ends
(fuel oil) 16.0

Total
(including other fuels) 88.0

Provisional figures for late 2008 and early 2009 suggest there has been a sharp slowing-down in the rate of increase in the main product groups. At the end of 2008, Chinese refiners were cutting runs in response to weak demand. Between November and December 2008, the output of gasoil and kerosine fell by 10%; gasoline production dipped by nearly 3%.

Demand looks unlikely to grow by very much in 2009 and may even decline slightly. On present trends, it looks like being close to 2008’s level of 7.9 mn bpd.

Table 2
China: Product Demand, 2008
(mn bpd)
Naphtha 0.5
Gasoline 1.5
Gasoil 2.8
Jet Fuel 0.3
Heavy fuel oil 0.8
Others 1.9
Total 7.9
Totals rounded.
Source: GER estimate based on data from PetroChina and Xinhua News Agency

Crude Oil Imports

China imported 3.6 mn bpd of crude oil in 2008. Its principal supplier was Saudi Arabia, with 0.7 mn bpd, or 20% of the total (see Table3).

China has traditionally imported most of its crude from the Middle East. The crudes themselves are mainly light and medium sour blends. Of the top ten suppliers, half are Middle Eastern, and supply nearly 1.7 mn bpd, or 46% of the total.

In recent years, however, China has sourced increasing volumes of crude oil from Africa. Angola is now the second-largest foreign supplier, with 0.6 mn bpd, or 17% of the total, and Nigeria is also emerging as an important supplier. The African crudes are required for their yields of light, low sulphur refined products, for which there has been growing demand in China as the country tries to reduce its high levels of air pollution.

Table 3
China: Crude Oil Imports, 2008
Country Volume
(th bpd)
Saudi Arabia 729
Angola 599
Iran 427
Oman 292
Russia 233
Sudan 210
Venezuela 129
Kuwait 118
Kazakhstan 114
UAE 92
Others 640
Total 3,583
Source: Chinese Customs data

Africa is also emerging as an important area of investment by China’s state oil companies, as part of the government’s policy of acquiring ownership of mineral resources overseas (see below). The idea is to try and guarantee supplies of oil and other raw materials in future times of scarcity.

China’s largest foreign production is located in the Sudan, which is its sixth-largest overseas supplier. Imports from Sudan amounted to 210,000 bpd in 2008, or 6% of the total. Chinese state-owned oil companies also have a growing presence in Angola.

Product Imports

China’s refined product imports are estimated at 800,000 bpd in 2008. Some 55% of these, totalling 440,000 bpd, consist of heavy fuel oil (see Table4).

The large volume of fuel oil imports appears to reflect high levels of demand for oil-fired electricity in the first eight months of the year, which include the period of the Summer Olympics. The high demand for electricity coincided with a shortage of coal supplies, forcing generators to bring more oil-fired capacity on-line.

Table 4
China: Refined Product Imports, 2008
Product Volume
(mn bpd)
Gasoil 0.13
Heavy Fuel Oil 0.44
Others 0.23
Total 0.80
Totals rounded
Source: Pearl Oil estimate based on data from Chinese National Bureau of Statistics and China Petroleum and Chemical Industry Association

The coal shortages appeared in January following severe weather in some coal-producing regions. The shortages were compounded by a fall in hydro-electric power–also caused by severe weather–and damage to electricity transmission lines. There were even reports from Canton province of shortages of natural gas.

The result was a sharp rise in fuel oil imports. In January, China was reported as buying several VLCCs of heavy fuel oil from Venezuela. Some areas also stepped up the import of diesel for small, private domestic and commercial generators. Later in the year, some coal-fired generating capacity–together with some heavy industry–was closed for the duration of the Peking Olympics in order to improve air quality in the Chinese capital.

By the end of 2008, refined product imports were reported to be falling. Electricity demand and industrial production were reported down versus a year earlier. Recession in western markets is likely to depress demand for China’s manufactured goods during 2009, cutting demand for petroleum products.

Another indicator of falling oil demand is the level of Chinese exports of refined products. December 2008’s gasoil exports were reported at 48,000 bpd: the highest level for more than three years and up more than five-fold over the same month in 2007. Gasoline exports, at 69,000 bpd, were up two-thirds on December 2007’s total.

High inventory levels also suggest a fall in demand. The country’s main economic planning body, the National Development and Reform Commission, said that December 2008’s refinery inventories were “at record levels”, though it did not provide further details. There have been various other indications that the two main state-owned refiners, PetroChina and Sinopec, were running at unusually high stock levels at the beginning of 2009, having built-up refined product stocks during the summer in order to ensure that there would be no shortages during the Summer Olympics.

Energy Security

China’s recent high levels of economic growth have made it difficult for the government to pursue its policy of reducing the level of oil imports. Having failed, then, on the demand side it has turned to the other aspects of its energy security programme: increasing oil production.

Table 5
China: Oil Production Profile, 1970-2008
Year Production
(mn bpd)
1970 0.7
1980 2.1
1990 2.8
1998 3.4
1999 3.4
2000 3.4
2001 3.4
2002 3.5
2003 3.6
2004 3.6
2005 3.8
2006 3.8
2007 3.8
2008 3.8
Total 6.8
Source: OET Annual Statistical review, 2008 (2008) National Bureau of Statistics

China’s recent oil history suggests that increasing oil production will not be easy. Output grew strongly from the 1960s following the discovery in 1959 of Daqing, which turned out to be the country’s largest oilfield. Between 1970 and 1990, Chinese output grew four-fold to 2.8 mn bpd. Since then it has increased by a further third to 3.8 mn bpd, but output has remained at this level for four years and has scarcely changed since the late 1990s (see Table5).

For several years Daqing defied predictions of imminent decline, as output remained above 1 mn bpd. In the mid-1990s, Daqing’s chief engineer forecast that the field would go on increasing production for up to 30 years. This has not proved to be the case, however, and Daqing’s output is now 800,000 bpd (see Table6), though it remains the country’s largest field.

Table 6
China: Oil Reserves and Production, 2008
Reserves: 16.0 bn bbl
Reserves Remaining: 11.5 years
(mn bpd)
Production
Daqing 0.8
Xinjiang 0.3
Liaohe 0.2
Karamay 0.2
Tahe 0.1
Others 2.2
Total 3.8
Source: (Reserves) Oil & Gas Journal
(Reserves Remaining) OET calculation based on 2008 output
(Production) CNPC; Chinese press reports

The plan is now for Daqing’s output to decline gradually. The target for 2010 is 710,000 bpd. Even this will require the increasing application of enhanced oil recovery for what is clearly a mature oilfield on the threshold of long term decline. This means that China must look elsewhere for additional oil.

New Production

During the 1990s it was hoped that as much as 2 mn bpd of China’s future production would come from offshore, but the present output level is only about a quarter of that level, though two new fields are due to be commissioned in 2009 capable together of producing 165,000 bpd. Conoco’s Peng Lai II field has forecast peak output of 150,000 bpd. The other development–Hui Zhou 25-1 and 25-3–is expected to produce about 15,000 bpd.

The main area for new production looks like being the west of China. The Chinese have been trying to develop the region as a major oil province for several decades. In 1993, it was decided to open the region to foreign oil companies. The area chosen for development was the Tarim Basin: one of three prospective basins in the Xinjiang Uyghur Autonomous Region. Several foreign companies began to negotiate exploration contracts with the state-owned China National Petroleum Corporation (CNPC), including BP, Exxon, Texaco and Agip. An oil bonanza was confidently predicted.

Chinese officials began to talk of reserves of up to 180 bn bbl: more than ten times the figure for China’s current reserves (see Table6). A series of dry holes were bored and the optimism disappeared. Foreign companies began to lose interest and CNPC was accused of overcharging for geological information and then failing to provide satisfactory data about the field. It rapidly became evident that the complex geology and the depth of some of the pay-zones made the basin a high-cost area, and uneconomic at the oil prices then prevailing. A final problem was Tarim’s distance from the country’s main oil-consuming areas in the east of China, requiring the construction of a 2,000-mile pipeline.

In 2004, the Chinese decided to develop its western oilfields without foreign help if necessary. The main Tarim Basin field–Karamay–produced 245,000 bpd in 2008 and is slated to produce 320,000 bpd in 2009. It is becoming obvious that with the country’s main eastern fields in decline (see Table6) the main upstream efforts in future must be in the west. This will mean large scale developments in the Tarim, Junggar and Ordos Basins in the north-west, and the Sichuan Basin in the south-west.

Table 7
China: Oil Reserves, 2001-2008
Year Reserves
(bn bbl)
2001 24.0
2002 24.0
2003 18.3
2004 18.3
2005 18.3
2006 18.3
2007 16.0
2008 16.0
Source: Oil & Gas Journal

For all this, China may struggle to produce enough in the west to offset the decline in its older eastern fields. With proven reserves of 16 bn bbl at the beginning of 2009, China has a reserves:production ratio of only 11.5:1. The country’s Eleventh Five Year Plan (2006-10) calls for the addition of 7.3 bn bbl in each year of the plan’s operation. It is by no means clear, however, where such huge undiscovered reserves might lie. China’s proven reserves have–if anything–been falling since 2006: and, indeed, since before then (see Table7).

Official production plans tend to contradict the notion of major new reserve additions under the Eleventh Five Year Plan. Output is scheduled to grow at a modest 1-2% a year up to 2011, as follows:

Table 7
China: Oil Reserves, 2001-2008
Year Planned Total
(mn bpd)		 Annual Increase
(%)
2008 3.79*  
2009 3.84 1.3
2010 3.92 2.1
2011 3.96 1.0
* actual
Source: Eleventh Five Year Plan; Xinhua News Agency

Higher Imports

With such small production increases planned, China will need to meet much of any increase in oil demand from imports. The government appears to accept this. A report in the official China Dailyi> in November 2008 said that China would “try” to cap imports at 60% of demand by 2020. The present proportion is 52% (see Table1).

The additional imports are likely to come from a variety of sources. The Persian Gulf may well be called upon to supply around half the increase, but most Gulf crudes are sour, and China’s refineries will require sweet crudes as well in order to meet present and future limits on sulphur in middle distillate and fuel oil.

Some of the extra may come from North and West Africa, but there may be strong competition for such crudes from refiners in the US and Europe, which are better placed logistically to import from Africa than those from China. The ideal source for China from the point of view of logistics would be the Asia/Pacific region.

Whilst there are several additions planned in the Asia/Pacific region, they are not large. In 2009, for example, the planned new crude streams amount to only 335,000 bpd. Moreover, most of the new fields are small in size, the largest being 125,000 bpd (see Table8). Additions in future years are likely to be smaller both in terms of field sizes and the total volume of additions.

Table 8
China: Potential Asia/Pacific Suppliers, 2009
Country Field Peak Output
(th bpd)
Australia Coogee 30
  Van Gogh 65
India Mangala 125
Indonesia Cepu 20
New Zealand Maari 35
Philippines Calauit 15
Thailand Bua Ban 5
Thailand/Malaysia Joint Development Area 40
Total 335
Volumes approximate
Source: PIW; Oil press

Overseas Production

Given the small size of potential production additions outside the Persian Gulf, and the likely competition for such supplies, China believes that the only way to ensure the future security of supplies is to own production acreage outside China,. In the past few years the main state oil companies–CNPC, Sinopec and the China National Offshore Oil Corporation (CNOOC)–have been recapitalized in order to enable them to purchase assets abroad.

The result has been a series of agreements with countries in Africa, Asia and Latin America (see Table9). So far these agreements have yielded only modest flows of oil. The largest overseas involvement has been in Sudan, which provided only 5.9% of China’s crude oil imports in 2008 (see Table3).

The Chinese have high hopes of Kazakhstan as a supplier in future years. There are plans to raise import levels from their current total of just over 100,000 bpd to 400,000 bpd by 2010 via a new pipeline link. Kazakhstan has ambitious plans to raise its crude oil production from 1.1 mn bpd in 2008 to 3.0 mn bpd by 2020.

The problem for China, however, is that Kazakhstan’s main oilfields lie on the western side of the country. As such, they are likely to export most or all of their crude westwards towards Europe and new pipeline routes out of Kazakhstan are being planned on that basis.

Russia is another possible supplier. The two countries opened a pipeline link in 2008 which supplied 21,000 bpd to China for the year as a whole. State-owned oil company Rosneft is discussing the possible supply of 300,000 bpd from 2010. The deal involves the construction of a pipeline of that capacity into northern China.

The Chinese pipeline is planned as a spur from a much larger pipeline from Eastern Siberia to the Pacific Ocean, from where Russian crude could be exported to other parts of East Asia and even as far away as the US West Coast. Early in 2009, however, it was reported that the scheme to supply China was in danger of delay owing to problems financing the pipeline link to China. Moreover, indications in 2009 are that Russian oil production may be on the threshold of a long term decline.

Table 9
China: Foreign Energy Agreements
Country Agreement
Algeria Sinopec to develop Zarzaitine oilfield
Angola Sinopec production in Blocks 3, 15 and 18
Congo Sinopec exploration in Marine XII and High Sea C
Ecuador Production in Block 16
Gabon Sinopec exploration acreage
Kazakhstan CNPC production at Kenkiyak and Kumkol oilfields
Libya CNPC exploration in Blocks 2 and 17-4
Nigeria CNPC infrastructure investment
  CNOOC production at Akpo oilfield
Sudan CNPC production at Heglig and Unity oilfields plus Melut
  Basin and oilfield in southern Darfur
Venezuela CNPC, Sinopec in Orinoco heavy oil developments
Source: Oil press

OET ARCHIVE

Curbing Demand

China may struggle to source the imports it needs in future unless it can curb the growth in its oil consumption. There are signs that high oil prices and economic recession in China’s principal export markets have slowed down demand growth in 2008 and will do so again in 2009; but China needs to keep its demand under control once the world’s major economies begin to grow again.

Fuel Substitution

There are plans to substitute other fuels for oil, including natural gas, coal, nuclear power, hydro-electricity and biofuels. China began to import gas in 2006 when its first LNG import terminal was commissioned at Dapeng in Canton. Imports in 2008 amounted to 445 mn cfd, of which approximately 80% came from Australia.

There are plans for two more terminals–in Fujian and Shanghai–in 2009, which will add 750 mn cfd to China’s import capacity. Imports will be supplied from Indonesia and Malaysia. Other terminals are planned but their numbers will depend on China’s ability to source long-term supplies for them.

LNG imports are supposed to be supplemented by gas from Turkmenistan via a 3 bn cfd pipeline, due to be commissioned in 2011. This, though, depends on Turkmenistan’s ability to develop its gasfields in time.

Coal was supposed to play a growing role in China’s energy balance, but it already provides 70% of China’s commercial energy (see Table10). It is doubtful that this proportion can be increased, especially given the poor state of many of China’s coal mines and the need to reduce the high levels of air pollution in many of China’s large cities.

Hydro-electricity and nuclear power could increase their existing small share, but any oil substitution effect will be confined largely to the fuel oil sector whereas China’s oil demand growth is being driven by light and middle distillates.

China has tried top substitute some of its oil-derived transport fuels with fuels made from biomass, but state-owned PetroChina has been experiencing difficulties in sourcing feedstocks for its production facilities. The programme, in any case, is only on a small scale. PetroChina’s first production plant, which was opened in 2007, has a capacity of about 200 bpd, though there are plans to raise this eventually to 1,200 bpd. Even when China’s independent biofuel production is added, the national total is well under 10,000 bpd and is likely to remain at this low level for several years.

Table 10
China: Primary Energy Balance, 2008
Fuel Share
(%)
Oil 20
Gas 4
Coal 70
Nuclear Power 1
Hydro-electricity 5
Total 100
Source: GER estimate

OET ARCHIVE:

Demand Outlook

China’s oil production is unlikely to rise much above its present level of 3.8 mn bpd. CNPC–the country’s main producer–expects only a modest rise to 4.0 mn bpd by 2020. The state company, on the other hand, predicts oil demand of 9.0-12.0 mn bpd by that date.

Oil Balance, 2020

Using CNPC’s figures, the oil balance in 2020 would be as follows:

  (mn bpd)
Consumption 9.0-12.0
Production 4.0
Net Imports 5.0-8.0

The low end of the range for net imports entails a rise in net imports of 0.9 mn bpd from 2008’s level of 4.1 mn bpd (see Table1). The higher consumption figure translates into an increase in net imports of 3.9 mn bpd, being a virtual doubling of 2008’s level.

It is by no means certain that total world oil production is capable of increasing by that amount between now and 2020. The only way to prevent such a rise in Chinese demand might be via substantially higher world oil prices and prolonged periods of low economic growth.

HYPER-LINKS:

Latest Developments

Refining

Sinopec and Kuwait Petroleum Corporation are to build a 300,000 bpd refinery in Canton Province.

Previous:

Oil Imports

OET ARCHIVE LINK: ‘Russia’s output revival boosts exports’, Focus, May 10

Refining

China’s Dongming refinery is to be expanded from 52,000 bpd to 212,000 bpd

Oil Imports

Saudi Aramco is to cease storing crude on the Caribbean island of St Eustatius and to store it in Asia instead, marking a shift in emphasis in Saudi sales away from the US and towards China.

Refining

China North Industries Group Corporation has opened a 100,000 bpd refinery at Huajin, in Liaoning province. Fujian Petrochemical Company has trebled the size of its Fujian refining and cracker complex to 240,000 bpd and China National Petroleum Corporation has announced plans to raise capacity at its Ningxia refinery by 70,000 bpd to 100,000 bpd.

Oil Imports

China is considering a slight liberalization of its oil imports trade by allowing private companies to import more. State-owned companies account for 90% of imports at present.

Refining

A new refinery has been proposed for Shandong province in China and there are plans to add capacity at the Jinling, Yangzi, Fushun and Dushanzi refineries.

Refining

PetroChina is to postpone a 200,000 bpd expansion of its Jinxi refinery in Liaoning.

Oil Imports

China is to finance a 440,000 bpd pipeline that will allow it to import crude via a new terminal on the Bay of Bengal in Burma.

Refining

Kuwait Petroleum and Sinopec have abandoned plans to build a 300,000 bpd refinery and cracker complex at Nansha in southern China following objections on environmental grounds.

A 200,000 bpd refinery is to be built at Beihai in Guangxi.

Oil Imports

China has agreed to loan $10 bn to Brazil’s Petrobras in return for a long term supply contract for 200,000 bpd of crude oil.

Refining

PetroChina has agreed to buy 46% of Singapore Petroleum Company, giving it a 23% share in Singapore Refining’s 285,000 bpd Pulau Merlimau refinery.

Kuwait has agreed to participate in a 300,000 bpd refinery in Canton, China, to run on Kuwaiti crude.

Refining

China is preparing plans to close-down or merge its small, independent refineries. The scheme is reported to apply to plants with capacities of under 20,000 bpd. Several plants are likely to be acquired by the main state oil companies, CNPC, Sinopec and CNOOC.

OET ARCHIVE LINK: ‘Asia heads for glut in refinery capacity’, Focus, May 09

Refining

China has proposed to build a 200,000 bpd refinery in Tianjin and to double the capacity of the 200,000 bpd Qinzhou refinery.

OET ARCHIVE LINK: ‘China looks for more oil’, Focus, March 09

Refining

China has approved plans to modernize and expand several oil refineries as part of a package of measures designed to stimulate the economy. The government says that new refinery units are necessary in order to enable China to meet new emission standards for gasoline and diesel.