China - Oil and Gas China - Oil and Gas
In 2018, China had record oil and gas imports and remains the number one crude oil importer in the world after surpassing the United States in 2017 and is the number two natural gas importer, behind Japan, according to the International Energy Administration. In the same year, China was the world’s fifth largest oil producer but aims to clean up the environment and reduce reliance on coal. All these and ensuring energy security by increasing oil and gas reserves are strong drivers for the import growth. China’s central government aims to enhance domestic energy security through increasing domestic exploration and reducing imports, according to Reuters. In addition, the lack of infrastructure has hampered progress on transitioning use of coal to natural gas. This is why China’s 13th Five Year Plan on oil and gas topics are filled with goals for self-sufficiency and infrastructure construction. Related reforms in recent years and the near future may open up new opportunities for private and foreign companies.
Historically, U.S. companies had a very weak presence in China’s oil and gas market. China’s oil and gas market (both upstream and downstream) has been dominated by three national oil companies (NOC): Sinopec, China National Petroleum Corporation (CNPC), and China National Offshore Oil Corporation (CNOOC).
In China’s upstream industry, international oil companies (IOCs) and international service companies have established their presence in China mostly through partnering with these NOCs and a few other Chinese companies and only accounts for 2% and 5% of China’s oil and gas production, according to Wood McKenzie. Since the United States lifted its oil and gas export ban and experienced the shale revolution, U.S. companies have also been able to enter the Chinese market through crude oil and natural gas exports. In 2018, Cheniere formed the first ever long-term LNG supply contract with CNPC. However, market trends suggest natural gas may continue to be primarily purchased through the spot market.
Recent reforms are likely to create more competitors for the three NOCs and new ways for U.S. companies to participate in the China market. In 2015, China loosened its regulations and began allowing private companies to apply for import and refining authorizations and reforms in the past few years has led to an increase in imports as well as refinery capacity for local companies. In March 2019, the Chinese government announced plans to create a new national pipeline company, named China Pipelines Corp., which will take over the control of all transportation and pipelines from the three NOCs. This change will ensure that a new major SOE will have its main focus on building infrastructure as well as draw in private investment.
Despite goals to increase self-sufficiency, China’s reliance on imports of crude oil and natural gas will likely remain strong due to China’s challenging geology. U.S. firms engaging in oil and gas commodity trading will continue to have great potential in the market. In general, areas with high government support and low domestic product maturity offer the best prospects for foreign companies. Local industry experts believe that crude oil and natural gas, including liquefied natural gas (LNG), will be leading sub-sectors of prospects for U.S. exporters. In addition, oil and gas exploitation technologies will continue to have market opportunities in China.
According to China Custom’s statistics, crude oil imports rose 10.1% in 2018 versus the previous year to a record 461.9 million tons, or 9.24 million barrels of oil per day (bpd). This establishes China as the top crude oil importer for the second year running. Presently, Russia is China’s top crude oil supplier, followed by Saudi Arabia, Angola, Iraq, and Oman. The United States was the fastest growing crude oil supplier to China in 2018, up by 1,994% since 2016. New refinery capacity and strategic inventory stockpiling, combined with declining domestic oil production, were the major factors contributing to the recent increase in China’s crude oil imports.
Overall, China’s reliance on oil importation continued climbing in 2018 and accounted for 69.8% of consumption according to a report released by CNPC. It is predicted that 80% of China’s crude oil supply will be imported by 2030. Based on this trend and the United States’ growing crude oil production, there will continue to be opportunities for crude export to China.
Natural gas is China’s fastest growing major fuel which saw demand quadruple in the past decade. According to International Energy Agency (IEA) statistics, global demand for natural gas is forecast to increase at an average of 1.6% over the next five years with emerging Asian markets as the main engine for demand. China alone accounts for a third of global demand growth through 2022 thanks in part to the country’s “Blue Skies” policy and the strong drive to improve air quality. This will be the main driver for gas consumption growth in China, led by the chemical and manufacturing sectors. Meanwhile, gas demand in the residential and commercial sectors are clearly benefiting from the ongoing coal-to-gas conversion. The Chinese government expects gas to provide 10% of the country’s energy mix by the end of the 13th Five Year Plan period (2016-2020).
In 2018, China consumed 276.6 billion cubic meters (bcm) of natural gas, an increase of 16.6% over 2017. China’s gas output rose to a record 157.3 billion cubic meters (bcm), up 6.7% from 2017, according to the data released by the National Bureau of Statistics of China. To fill the gap between local production and market demand, China’s imports of natural gas soared to 125.4 billion cubic meters (bcm) in 2018, which was a 31.7% year-on-year increase. This indicates that 45.3% of China’s gas demand was met by imports in 2018. It is estimated that China’s reliance on imported natural gas will rise to 50% by the end of 2020. The United States exports to China in the form of LNG. Exports of LNG from the United States quadrupled from 2016 to 2017, according to the U.S. Energy Information Administration, and exports to China made up 15% of U.S. LNG exports. Based on existing trends, it is likely that a significant increase of U.S. LNG shipping to China in the coming five years when U.S. LNG export facilities are built and placed into operation.
On import infrastructure, the Chinese government allows privately-owned companies to build LNG receiving terminals along the eastern coastline and in southern China. ENN, Guanghui, Jovo, and Changchun Sinoenergy, among many others, are constructing terminals near Shanghai and Guangzhou to prepare for receiving LNG ships from outside China, including LNG from the United States. Given that the current global economic downturn is impacting China, the LNG market will remain a spot market for at least a few more years. LNG buyers will be hesitant to enter long-term contracts with suppliers. As more natural gas infrastructure, including LNG receiving terminals, pipelines, and distribution networks, will be built in China, the demand will continue to rise.
Oil and Gas Exploration
Supporting China’s goal to reduce oil and gas reliance on imports, China’s NOCs are spending a lot of money in oil and gas exploration, with CNPC planning to increase its budget fivefold, according to Oilprice.com. With much untapped reserves and new discoveries in the Tianjin and Xinjiang regions, China hopes to discover its own “shale revolution”. Despite holding 31.6 Tcf of technically recoverable shale gas resources, shale gas producers face China’s complex topography, and the remote location of shale resources has increased the price and time required for drilling new shale gas wells. Since the geology of Chinese shale has proven difficult to develop, the government is incentivizing producers to increase investment and production.
Foreign participation in China’s shale gas development is limited, and lack of competition and uncertain regulations continue to frustrate international companies’ efforts. Nonetheless, ample subsidies, legal reform, and productivity targets are among the reasons companies are still investing in China’s shale gas sector. U.S. companies that specialize in drilling, extraction equipment, pipeline monitoring systems, or providing operational services for shale gas developers may benefit from the growth of the Chinese shale gas market. In addition, companies with expertise in seismic analysis and water treatment and production efficiency technologies will also be well-positioned as the market continues to develop. Chinese operators, leading Chinese state-owned oil companies, and new players that have been rewarded shale gas development licenses in previous mineral rights auctions, are interested in partnering with experienced IOCs to deal with the complex topographical conditions in China.
Oil and Gas Equipment
Chinese domestic companies dominate the equipment manufacturing market, particularly at the lower-end of the market. China’s State-Owned Enterprises (SOEs) control approximately 66% of the market for well-drilling equipment. Small- and medium-sized private companies in China make-up 19% of the market while foreign companies make up 10% of the market and supply advanced complete-set equipment.
With the growth of and the increasing competition from local Chinese equipment suppliers, U.S. oil and gas equipment companies will have more challenges in the market. Nevertheless, those companies who have unique solutions and expertise will continue to enjoy the opportunities offered by the development of China’s oil and gas industry. As China’s reliance on imports of crude oil and natural gas for the country’s economic development continues to rise, U.S. firms engaging in oil and gas commodity trading will have more opportunities in the market.
U.S.-China Oil and Gas Industry Forum
China International Petroleum & Petrochemical Technology and Equipment Exhibition
National Energy Administration: http://www.nea.gov.cn/
Ministry of Natural Resources: http://www.mnr.gov.cn/
National Development and Reform Commission: http://www.ndrc.gov.cn/
National Food and Strategic Reserves Administration: http://www.lswz.gov.cn/
Ministry of Ecology and Environment: http://www.mee.gov.cn/
U.S. Commercial Service Contact for Oil and Gas Sector:
Helen (Haiyan) Hua
U.S. Consulate – Chengdu, China
T: +86 28-8598-6738
M: +86 138-8206-5380
Grace (Yue) Cao
U.S. Embassy – Beijing, China
T: +86 10 8531 4796