Global Insight Perspective | |
Significance | The China National Petroleum Corp. (CNPC) is hosting the first ever World Heavy Oil Conference in Beijing this week alongside the government of Alberta, Canada. CNOOC has been the first to set out a major target for heavy oil production, stating it will account for 60% of total output by 2010. |
Implications | Heavy oil accounts for 20% of China's remaining national oil reserves. Other NOCs are also looking to boost heavy oil production but have been held back up to this point by the absence of stronger policy support. |
Outlook | The potential upside of heavy oil production in China, which includes improved national energy security, is tempered by substantial developmental costs. Heavy oil will continue to rely upon high conventional oil prices for any sort of commerciality in the absence of an improved regulatory framework. |
Heavy Duty
With conventional oil reserves offering only a limited domestic production forecast, China's NOCs look set to place greater emphasise on heavy oil in their future E&P work. The major turn towards non-conventional sources, including shale oil, oil sands, natural asphalt and natural gas hydrates, has been made plain at the proceedings of the inaugural World Heavy Oil Conference. Taking place in the Chinese capital, Beijing, this week, the event is co-sponsored by the China National Petroleum Corporation (CNPC) and the government of the Canadian province of Alberta. The CNPC-Alberta Petroleum Centre (CAPC), the joint venture the parties have formed, has sought to raise the profile of this alternative supply source and China's industry authorities and NOCs have certainly taken notice.
Ma Kai, the head of the influential National Development and Reform Commission (NDRC), opened the Conference by reiterating that the Chinese government should encourage and support the development of heavy oil in line with its 11th Five Year Plan (2006-2010). That message, and the need to maximise domestic upstream potential to offset China's worsening import dependency and avoid energy shortages, is nothing new to the country's leading NOCs. Supply diversification has become an increasingly important aspect of the activities by CNPC and its listed subsidiary, PetroChina, as well as by Sinopec and the China National Offshore Oil Corp. (CNOOC). This has involved new upstream positions abroad, but also a recognition that non-conventional supply sources will have to play a part in China's future energy security.
Zhang Fengjiu, the deputy chief engineer of CNOOC, has been quoted by the China Daily as saying that "as prices for conventional oil products will remain high in the long run, heavy oil and alternative oil products will unavoidably become part of our energy segment in the near future". CNOOC is best known as China's leading offshore upstream player, but even this core business looks set for revision. Zhang went on to say that by 2010, CNOOC's daily production from heavy oil sources will reach some 500,000 barrels. That will leave heavy oil with an increasingly important share of CNOOC's total output. Indeed, Zhang put this at 60% for the 2010 period.
Outlook and Implications
A vice-president at PetroChina, Jia Chengzao, who was also in attendance, stated that his company is interested in increasing its heavy oil production. It was too early to make a major announcement though and Jia's caution could prove well founded. For while there is certainly a latent contribution to the supply mix to be seen in China's heavy oil reserves, as they represent 20% of China's total remaining oil deposits, this potential is not without unique qualifications. Most importantly, the cost of commercialisation is extremely high. From extraction to processing, heavy oils come at a premium to conventional deposits.
The close alignment that already exists with the Albertan industry bodes well, as its technical assistance and financial support could aid the commercial prospects of new heavy oil production sites in China. Chinese investments in Alberta may also flow from partnerships like the CAPC. However, heavy oil needs either strong regulatory support from political authorities or persistently high conventional oil prices to attract the necessary investment and sustained operational commitments to make a bigger contribution to the supply mix. Jia himself said that the Chinese government needs to offer greater policy support for heavy oil E&P. In the absence of that, Zhang is betting on a high conventional price future. However, a swing in international markets could prove to be profound. Although the domestic nature of the heavy oil production China's NOCs are eyeing brings with it the promise of greater national energy security, the pursuit of other upstream interests, notably less capital-intensive conventional oil acquisitions abroad, will continue to figure at the front of NOC strategies.
China produced 23.86 million tonnes of heavy oil last year, the equivalent of 13.2% of national oil output. Some 70 heavy oil fields have been discovered across 12 basins. With lighter crudes in increasingly short supply, the changing nature of the domestic production mix represents a challenge to the country's established downstream operations. If China is to benefit from increased heavy oil production, refining capacity will have to adjust in kind to deliver the sorts of products that are in greatest demand. That entails still further costs, for which again, China's oil industry officials have not offered sufficient support. Five major heavy oil production centres have been established: four across the Henan, Liaoning and Heilongjiang Provinces and one offshore. The bullish forecast coming out of this first World Heavy Oil Conference would imply they will soon be joined by others. However, China will need to match its considerable upstream potential with the appropriate regulatory framework if this industry is to flourish in the manner suggested today.