Crude Oil Production in China Dips, Refining Volumes Surge in 2009

Upstream Dip

China's crude oil production has fallen in 2009 to 189.48 million tonnes, or 3.79 million b/d, down 0.5% from 2008. The crude oil production fall was partially attributable to the country’s largest oil producer, PetroChina, which in early 2009 set a plan to reduce oil production from some of its oilfields at an overall level of between 10% and 20% due to the global economic recession and volatile crude oil prices. The plan affected output from the company's oilfields in the Junggar and Tarim basins in Xinjiang province, which decreased by approximately 12% and 15% respectively. However, output from Daqing, PetroChina's largest oilfield in the Songliao Basin, also dipped slightly to 40 million tonnes in 2009 from 40.2 million tonnes a year earlier, although it was supposed to be exempt from the output cut plan. Nevertheless, Daqing did not dip below the 40-million-tonne output level, which field operators hope to maintain over the next decade, while output at other large oilfields like Sinopec's Shengli oilfield in the Bohai Gulf Basin and PetroChina's Changqing oilfield in the Ordos Basin were maintained at high levels of 27.91 million tonnes and 15.7 million tonnes respectively.

The crude oil production dip was accompanied by a surge in crude oil imports, which increased to 204 million tonnes in 2009, accounting for around 52% of consumption compared to 48% in 2008. The surge in imports was likely due to the efforts by the government to take advantage of the fall in crude oil prices to fill inventories and increase oil stockpiles that could be used to deal with future supply shocks or demand volatility in the case of private stockpiles. China's government and NOCs have been pushing ahead with the second phase of the emergency crude oil stockpile programme during 2009, seeking to build a stockpile equivalent to 100 days of its net imports by 2020. In the January-October period crude oil imports came mainly from Saudi Arabia (32.8%), Angola (25.6%) and Iran (20.2%), although Russia (12.9%), Oman (10.4%), and Sudan (9.8%) were also important suppliers. As the table below demonstrates, China's crude oil imports have haltingly recovered over the year, increasing from 12.8 million tonnes in January 2009 to 21.3 million tonnes in December 2009.

The growth in crude oil imports can also be accounted for by the surge in refining runs during the year. China processed 7.9% more crude oil during 2009 than in 2008, with runs for the year totalling 374.6 million tonnes, or 7.52 million b/d, according to the country’s National Bureau of Statistics. The processing boom was partially accountable to increases in gasoline (petrol) production as vehicle sales rocketed following the introduction of incentives by the government. A new fuel price mechanism launched in December 2008 also incentivised refiners to produce greater volumes of gasoline and diesel, which had an impact on overall crude processing. China's gasoline production grew 13% to 71.9 million tonnes during the year, while diesel production also increased by 6% in 2009 to 141.3 million tonnes. While production of kerosene also increased by 27% to 14.79 million tonnes, production of fuel oil decreased by 19% as the government raised consumption taxes on the fuel and closed down independent refiners in Guangdong province that rely on fuel oil as feedstock.

Outlook and Implications

The dip in crude oil production, although the result of PetroChina's strategy, will raise fears that China's oil production may finally be peaking. The limited capacity for output growth at the country’s largest oilfields such as Daqing and Shengli is a cause for concern, particularly due to the difficulties experienced in meeting the 40-million-tonne production target at Daqing this year. Furthermore, despite state media reporting that the Shengli oilfield surpassed oil reserve additions of 100 million tonnes for the 27th consecutive year in 2009, only around 21.84 million tonnes are believed to be technologically recoverable while a significant chunk of the growth in output at the Changqing field is gas. However, upstream activity over the past year suggests there are still good opportunities for discovering new oilfields, although they are perhaps unlikely to match China's largest. The country’s proven oil reserves increased by 1.34 billion tonnes in 2008, while over 50 additional oil discoveries were made during 2009. China's NOCs are continuing exploration activities around major oilfields to widen oil reserves while discoveries are still regularly being made in the Bohai Bay area, although they are generally quite modest. PetroChina also announced that a record 497 million tonnes of 3P (proven, probable and possible) oil reserves were discovered at the Tarim Basin in Xinjiang, which is only around 12% explored, although the basin is believed to be mainly prospective for gas (see China: 12 January 2010: Oil Reserves Surge in 2009 at China's Tarim, Shengli Oilfields). Statistics from the China Academy of Social Sciences (CASS) suggest that China's oil production will stand at 177-198 million tonnes in 2010 and will reach 182-200 million tonnes by 2015, while overall oil production is forecast to peak by 2020 after which there will be a gradual decline in output.

The uncertainties surrounding China's crude oil output potential coupled with rapid forecast increases in oil demand will increase China's reliance on crude oil imports over the coming years, as industrial output and GDP growth rise back to pre-crisis levels. China's crude oil import dependence is forecast to account for 64.5% of total oil consumption by 2020 and increased reliability on imports will be underpinned by rapid forecast growth in refining capacity. Within seven to eight years CNPC/PetroChina plans to raise its refining capacity to between 200 million and 240 million t/y, while by 2015 Sinopec plans to expand refining capacity to 232 million t/y to cope with expanding demand from the transportation sector as well as industrial users. Increased reliance on crude oil imports and a limited domestic resource base will encourage China's NOCs to take a more active role on the international stage as they seek to maintain earnings, reserve replacement ratios, and supplies for their downstream operations.