CHINA'S OFFSHORE OIL PRODUCTION RAMPING UP

Although exploration off China has not yielded the giant fields hoped for, offshore oil production continues to increase and is on target to meet Beijing's near term goals.

Chinese offshore production began in 1985 and has undergone a 400% jump the last 5 years.

China National Offshore Oil Co. (Cnooc) Pres. Zhong Yiming predicts Chinese offshore production will climb to 100,000 b/d by 1992.

Recent discoveries may result in production doubling from current levels by late 1992 or early 1993, say Alexander Li and David Fridley in a study for East-West Center, Honolulu.

They also note a key to meeting long term production goals is China's increased flexibility in dealing with foreign companies in offshore exploration and production.

In other China developments:

Chinese oil fields produced more than 2.7 million b/d in April.
Several hefty gas wells have been completed in North Central China.
Beijing established an economic development zone in Northeast China, targeting oil and chemical production.

EXPECTED ON STREAM

Cnooc projects China's offshore production will average 36,000 b/d in 1991, which may prove conservative in light of two fields expected to begin producing this year.

ACT Group's 1988 discovery, Huizhou 26-1 field in the South China Sea, is to start up in September, peaking at 50,000 b/d early in 1992. The strike is in the same contract area and just 15 miles southwest of ACT's Huizhou 21-1 field, which started up in September 1990, adding 20,000 b/d of productive capacity (see map, OGJ, Sept. 24, 1990, p. 56).

Also expected to go on stream this year is a discovery by Cnooc subsidiary Nanhai West Oil Corp. extending the producing Weizhou 10-3 field in Beibu Gulf. A 12 well platform is scheduled for Weizhou 10-3N, eventually doubling Weizhou area production to 8,000 b/d.

Li and Fridley predict China's offshore production will climb to 40,000-45,000 b/d in 1991, taking into account declining production from a couple of fields to partly offset the start-ups.

DEVELOPMENT PROSPECTS

Predictions about China's offshore oil production beyond 1993 are less certain, but the East-West Center study authors estimate it will reach 160,000 b/d by 1995.

Several fields are in preparation for development, led by Amoco Orient Petroleum Co.'s Liuhua 11-1 field in the South China Sea's Pearl River Mouth basin.

The discovery was originally considered a major find with a 70 m thick pay zone. However, testing on extended drillstem test yielded 8,000 b/d, less than expected for the 240 sq km anticline.

Deep water and heavy crude make the field a technological challenge (OGJ, Feb. 4, p. 20). The East-West Center authors place development costs as high as $500 million. They cite estimates of original oil in place at 1.8 billion bbl and speculate peak production could be 20,000 b/d.

ACT Group made its third discovery off China in 1990 with Huizhou 32-2-1 (OGJ, Mar. 4, 1991, p. 17). The well flowed 15,000 b/d of 27-360 oil. It is just 10 km from Huizhou 21-1 and 30 km from Huizhou 26-1, raising the possibility of concurrent development for the latter strike.

Cnooc plans joint development with Phillips Petroleum Corp. International of Xijiang 24-3 and Xijiang 30-2 oil fields in the South China Sea. The Xijiang 24-3 discovery well in 1985 flowed 6,730 b/d. Reserves are estimated at 45 million bbl of oil. Initial estimate of reserves in Xijiang 30-2, a 1990 discovery, is 4060 million bbl.

Other developments Li and Fridley noted are:

Occidental Petroleum Corp.'s Lufeng 22-1 in the South China Sea has had problems with water coning, but Oxy has been developing a new process to simplify the production system and reduce costs.
Cnooc's self-financed Jinzhou 9-3 oil field in Bohai Gulf reportedly is being developed with an artificial island and is getting interest from Norwegian and Japanese investors.
Bohai Oil Corp. drilled a discovery with its first wildcat on the Jinzhou 21-1 prospect. The well flowed 1,970 b/d of crude oil, 223 b/d of condensate, and 10.5 MMcfd of gas.
Progress toward development of Yacheng 13-1 gas field south of Hainan Island has been mired in a price dispute between ARCO and Cnooc. An agreement has been reached but not signed. The final disposition of gas has also slowed things down, and Cnooc has created China National Offshore Gas Utilization Co. to handle the issue.

SWEETENED TERMS

China has taken major steps to increase foreign investment in its offshore provinces, Li and Fridley noted.

Beijing has created a sliding scale rate for royalty payments, depending on field size.

Royalty rates begin at zero on production of less than 1 million tons/year for oil fields and rise to 4% on 1-1.5 million tons/year, 6% on 1.5-2 million tons/year, 8% on 2-3 million tons/year, 10% on 3-4 million tons/year, and 12.5% on more than 4 million tons/year.

For gas fields the rate is zero on production of less than 2 billion cu m/year, 1% on 2-3.5 billion cu m/year, 2% on 3.5-5 billion cu m/year, and 3% on more than 5 billion cu m/year.

Previously, there was a 12.5% fixed rate applied to all fields.

China now offers a seismic option package whereby oil companies are not obligated to drill a wildcat if seismic results are unfavorable.

Li and Fridley point to opening the East China Sea to foreign bidders as perhaps the most important step China has made to attract foreign investment in its offshore.

To date, all exploration in the East China Sea has been conducted by the Ministry of Geology and Cnooc, which in 1989 tested the second largest well recorded off China. The 4 Pinghu flowed 10,100 b/d of light crude and condensate and 53 MMcfd of gas.

PRODUCTION RESULTS

Most of China's major oil fields met April production goals, in all producing 8,760 b/d more in April than in January, China Daily reported.

In the Daqing area in Northeast China's Heilongjiang province, production reached an average 1.119 million b/d in April.

Production in China's second largest producing area, Shengli, increased 1.2% in the first 4 months of 1991 to 669,167 b/d.

Only Liaohe complex in Liaoning province experienced a drop in production during the period, down 0.5% to 271,925 b/d.

Offshore China production increased 9.1% during January-April to 46,478 b/d.

Production from the Tarim basin in the Xinjiang Uygur Autonomous Region was up 10.5% at 10,645 b/d in the first 4 months.

GAS WELLS

An official of China National Petroleum Corp. told Beijing's China Daily seven gas wells have been completed in North Central China's Ordos basin as of Apr. 20.

One well, 6 Shan, was thought to be capable of producing 35.3 MMcfd.

About 35 km away, the 7 Shan flowed 3.5 MMcfd of gas.

Three other wells in the area flowed at rates of 1.11.7 MMcfd.

CNPC subsidiary Changqing Petroleum Exploration Bureau drilled the seven wells, and it also is drilling five more wells in the basin.

ECONOMIC ZONE

In Northeast China's Jilin province, Beijing created Qiangfu economic development zone covering 12,000 sq km and 1.5 million people in the west central part of the province to expand oil and chemical development.

The area includes Jilin producing area, China's eighth largest. Proven reserves for the economic zone are about 3 billion bbl oil and 106 bcf of gas, the official Xinhua News Agency reported.

Wang Yunkun, vice-governor of the province, said the zone will strengthen economic and technological cooperation and exchanges with domestic and foreign firms, and the provincial government will adopt preferential policies for foreign investment, export, and border trade in the zone.