This is a best prospect industry sector for this country. Includes a market overview and trade data.
Last Published: 7/25/2017

Overview
China is the world’s top crude oil consumer and importer. For each day in 2016, China consumed 11.5 million barrels of oil, over a half million barrel increase from 2015, according to the annual report released by China Petroleum and Chemical Industry Association (CPCIA). With a domestic production of around 4 million barrels per day, China relies heavily on the international market for its oil supply. Statistics from Chinese Customs indicate that China imported 7.59 million barrels of crude oil per day in 2016, an increase of 13.6 percent over the previous year. China’s reliance on oil importation exceeded 65.6 percent. It is predicted that China’s consumption of crude oil by the year 2020 will be 12 million barrels a day, and by 2030, 80 percent of China’s crude oil supply will be imported.

Natural gas is China’s fastest growing major fuel, with demand quadrupling in the past decade. Natural gas now accounts for 6 percent of China’s energy demand, double the market share in 2007. In 2016, China’s consumption of natural gas grew by 6.4 percent, reaching 224 billion cubic meters. China’s domestic gas production in 2016 was 150 billion cubic meters, up by 2.2%, and China’s gas imports increased 22 percent to reach 75 billion cubic meters.  This indicates there was a slight oversupply of gas in China last year. However, as China is moving forward with its plan to replace coal with cleaner and more efficient natural gas in power generation, the demand for gas will increase steadily in the long-run. The Chinese government expects gas to provide 10 percent of the country’s energy by the end of the 13th Five-year Plan period (2016-2020).

China’s oil and gas markets are dominated by four national and provincial oil companies: PetroChina, Sinopec, China National Offshore Oil Corporation (CNOOC), and Yanchang Petroleum (a Shaanxi Provincial-level state-owned company). Sinopec controls 46 percent of total crude refining capacity, while PetroChina accounts for 31 percent. The remainder is processed by smaller refineries. CNOOC focuses on offshore oil development and has limited refining capacity.

In the field of equipment manufacturing, Chinese domestic companies are dominating the market, in particular the lower end market. China’s State-Owned Enterprises (SOEs) control approximately 66 percent of the market for well-drilling equipment. Small- and medium-sized private Chinese companies make-up 19 percent of the market. Foreign companies make up 10 percent of the market and supply advanced complete-set equipment. Chinese privately owned oil and gas equipment companies are catching up quickly. Among them, Sichuan-based HongHua Group and Shandong-based Jereh Group and Kerui Group are among the leading suppliers of such equipment.

As global oil prices continue to stay at a level below $50/per barrel, Chinese oil and gas operators are confronted with more challenges than their international counterparts because of the fact that production costs for many wells in China are above competing international production prices. Given current crude oil prices, PetroChina, Sinopec, and CNOOC have been unable to compete within such a low-price environment and were forced to reduce production from many of their high-cost fields, mostly within China. In 2016, China’s capital investment in oil and gas exploration and production dived by 31.9% to RMB 233.1 billion Yuan (about USD32.4 billion). As a result, China’s oil output dropped 6.9% to 3.98 million bbl/d. Despite these challenges, low global crude oil prices have allowed the Chinese Government to fill its strategic petroleum reserve with inexpensive foreign crude oil.

Oilfield service companies and equipment manufacturers have also been hurt badly by low oil prices as their customers stopped or delayed purchases to try to minimize expenditures. Some service companies and equipment manufacturers have reported that their businesses revenues have dropped between 30 to 50 percent this past year.

International Oil Companies (IOCs) and international service companies have established their presence in China mostly through partnering with Chinese companies. At present, IOCs mostly team up with CNOOC in offshore oil development projects while service companies are hired by the Big Three oil giants on both onshore and offshore projects, which often include complex drillings. IOCs and international service companies have started working with Sinopec, PetroChina, and Yanchang to develop shale gas and tight oil and gas in Sichuan, the Erdos Basin, and Xinjiang.

The following chart explains the market size and penetration of foreign products in this industry including drilling and refinery equipment, compressed vessels, and offshore engineering equipment. U.S. manufactured oil and gas equipment represents 50-60 percent of China imports in this sector.  This will likely increase in the future as China looks to more fully develop its shale gas resources, much of which are in more geologically complex locations than those of the United States.
 
China’s Oil and Gas Equipment Market (USD Billions)

Year

2014

2015

2016

2017 (Estimated)

Total Local Production

89.98

83.5

59.5

51

Total Exports

18.9

18.6

17

16

Total Imports

6.9

5.9

5.53

4.8

Imports from the US

 

1.5

n/a

 

Total Market Size

77.98

70

48

39.8

Exchange Rates

 

 

1USD=6.88RMB

 

(total market size = (total local production + imports) – exports
Source: China Petroleum Equipment Industry Association (CPEIA)
The 2017 numbers are estimated by U.S. Commercial Service, Beijing
 
Leading Sub-Sectors
In general, areas with high government support and low domestic product maturity offer the best prospects for foreign companies. Oil and gas exploitation technologies enjoy strong government support and high demand, specifically steam-assisted gravity drainage (onshore), geologic exploration equipment, position navigation systems, deep-water drill systems (offshore), and fracturing technology (shale gas).

Natural Gas
The Chinese Government is looking for ways to increase demand for cleaner sources of energy production, including natural gas. The government recently reduced the price for non-residential users to $8/mm Btu to better reflect market conditions. While this will immediately decrease domestic production of natural gas, it should contribute to increased long-term demand.

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.

Difficulties in developing domestic shale gas resources have forced the Chinese Government to turn to imported gas as an alternative effort to reach the goal of replacing coal with cleaner natural gas. China is the third largest buyer of gas in Asia after to Japan (35 percent) and Korea (15 percent).  The size of the Chinese economy and population as well as climate change concerns will push up China’s demand for natural gas. In particular, as the Chinese government encourages the construction of gas-fired power plants and plans to help 140 million more people connect to gas pipelines in the 13th Five-Year-Plan period, China will have import more natural gas. It is estimated that China’s reliance on imported natural gas would go up from the current 33% to 50% in the end of 2020. The Chinese Government now allows privately-owned companies to build LNG (liquefied natural gas) 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. While the world economy, including Chinese economy, is slowing down, the LNG market will remain a spot market for at least a few more years. LNG buyers will be hesitant to enter long-term contract with suppliers. AS more natural gas infrastructure, including LNG receiving terminals, pipelines, and distribution networks, will be built in China, the demand will catch up.

The Chinese government is encouraging distributed energy in the use of shale gas because it is not economically viable to transport the already high-cost locally produced shale gas to regions where there is a need of energy. U.S. firms with expertise, technologies, and products in distributed energy should have opportunities in helping Chinese companies to develop their distributed power generation stations.
 
 
Opportunities
With China struggling to meet its defined targets for natural gas production, U.S. companies are expected to find significant opportunity in investment and exploration. This situation has the potential to create substantial sales for American companies across the shale gas value chain. For example, firms that have developed significant advantages in extraction technologies – particularly in water efficiency and deep extraction - are well positioned. Companies that specialize in drilling, extraction equipment, or provide operational services for shale gas developers may also benefit from the growth of the Chinese shale gas market.  Furthermore, China is becoming an important buyer in the world’s LNG market. U.S. LNG exporters will have an ample opportunity to ship U.S. LNG to China.

In addition, U.S. firms that have technologies and expertise in other unconventional gas sector such as tight gas, coal-bed methane, and coal gasification will also have sales opportunities in the market as China is trying to cope with the increasing demand for gas and searching for alternative and cleaner ways for using its coal resources.
 
Trade Events
U.S.-China Oil and Gas Industry Forum
September, 2017
City (TBD), China
 
18th China International Petroleum & Petrochemical Technology and Equipment Exhibition
Date: 3/27/2018 - 3/29/2018
Venue: New China International Expo Center (NCIEC), Beijing
 
Web Resources
Government Authorities
National Energy Administration
Ministry of Land Resources
National Development and Reform Commission
Ministry of Environmental Protection
 
Additional Information
China Greentech Initiative Reports
Gas Technology Institute
Energy Information Administration
United States Energy Association
 
U.S. Commercial Service Contact for Oil and Gas Sector
Helen (Haiyan) Hua, Haiyan.Hua@trade.gov
T: +86 28-8598-6738
M: +86 138-8206-5380
 

Prepared by our U.S. Embassies abroad. With its network of 108 offices across the United States and in more than 75 countries, the U.S. Commercial Service of the U.S. Department of Commerce utilizes its global presence and international marketing expertise to help U.S. companies sell their products and services worldwide. Locate the U.S. Commercial Service trade specialist in the U.S. nearest you by visiting http://export.gov/usoffices.



China Oil and Gas Trade Development and Promotion