FOREIGN FIRMS TO GET EXPANDED ROLE IN CHINA'S ACCELERATED E&D EFFORT

China is stepping up efforts to boost exploration and development.

Foreign companies are likely to play an increasingly important role in that effort.

Faced with rising domestic demand for oil and a declining rate of oil production replacement, the country is refocusing its E&D efforts to rebuild its reserves base. In addition, China wants to sustain a strong level of oil exports to ensure a steady flow of hard currency. That calls for an increase in crude production of more than one third this decade from current levels.

Beijing newspaper China Daily reported the government will spend more than 100 billion yuan (more than $20 billion U.S.) for oil and gas E&D during its eighth 5 year plan, 1991-95.

China Oil & Natural Gas Exploration & Development Corp. (Congedc) estimated China would have to prove another 5.6-7 billion bbl in that period in to maintain "a rational proportion" between oil reserves and production, China's official Xinhua News Agency reported.

Until 1985, exploration accounted for 45% of total Chinese investment in its petroleum sector, Xinhua said. However, exploration spending has fallen drastically since then.

BACKGROUND

In the 1980s, China's oil policy hinged on rapid increases in offshore production and maintaining output in its major onshore producing areas. That approach was intended to underpin China's industrial base and provide a major source of hard currency from crude oil exports.

The need for advanced technology to work offshore spurred China's efforts to attract foreign companies as operators in a region many had thought rivaled the North Sea in hydrocarbon potential. However, offshore results have been disappointing, and Chinese petroleum officials are setting their sights on onshore potential, notably the massive Tarim basin in Northwest China. Executives with multinational companies have long viewed the area as one of the world's most prospective untapped basins, often comparing it with Alaska's North Slope.

Tarim basin E&D at first was to be reserved solely for Chinese oil agencies, with only technology and consultation coming from foreign companies. But recent indications from the government are of some headway toward allowing foreign companies to take a more direct role in Tarim basin E&D.

Those indications came about the time the government stepped back from earlier claims it would achieve record production levels in 1990 and boost oil exports sharply in the wake of the Middle East crisis.

Meantime, China is still concentrating on stemming declines in its major producing areas and stepping up E&D offshore. Further, the government late last year signed two agreements covering joint venture E&D with foreign companies, representing the second such deal on Hainan Island and the first on the mainland (OGJ, Oct. 15, 1990, p. 26; Dec. 24, 1990, p. 21).

CHINA'S DILEMMA

China's oil production will fall 200,000 b/d short of demand by 2000-assuming production at 4 million b/d by then and no change in export levels-if China takes no steps to reverse the decline, says Enserch Corp. Vice Pres. Robert E. Ebel.

He estimates China's 1990 crude production at 2.72-2.74 million b/d.

Ebel, writing in Geopolitics of Energy last year, said the potential for an expanded oil production base in China exists but that potential probably won't be realized without greater investment by non-Chinese companies.

Geopolitics of Energy is a publication of Conant & Associates Ltd., Washington.

Ebel cited domestically subsidized oil prices, increasing production costs, excessive oil exports, and inadequate exploration spending as factors in the worsening outlook for Chinese oil self-sufficiency.

In particular, Ebel noted China's declining reserves base, blaming it on high rates of production during the late 1970s and the absence of recent large oil discoveries.

In 1988, China's ratio of reserves:production was 17:1, which Ebel deems inadequate with current levels of demand growth and exploration.

China's major fields are mature and their rate of decline is increasing, Ebel wrote. In addition, Chinese production costs increased at the rate of 10%/year during 1980-87 and will continue to rise, he contends.

In recent years, oil production hikes have been based on ever increasing investment levels, and China now finds it difficult to reduce such outlays, Ebel wrote. But exploration has taken a back seat to other priorities, which Ebel contends involve first sustaining welfare benefits of Chinese state agency employees and, second, field development.

In addition, China's controlled domestic crude price, at 21% of the international price, is too low and must be raised if it hopes to recoup costs and generate cash flow for E&D, Ebel wrote.

China also should rethink its export policies to trim crude exports and increase refinery runs for domestic markets, Ebel contends, adding that only crude deemed excess to local needs should be exported.

China needs to reject central planning and adopt a free market economy, along with some political reform, to attract such investment, he wrote.

CRISIS EFFECTS, PRODUCTION

The Persian Gulf crisis spurred China to boost its crude exports late in 1990 and led some officials to predict China will achieve record production levels.

At the same time, however, implementation of United Nations sanctions against Iraq and Kuwait cost China $2 billion in trade, transport, and civil aviation losses, the official China Features news service reported.

Last October, Xinhua quoted Chinese oil industry officials as predicting oil production would top 2.76 million b/d in 1990, surpassing the previous record of 2.75 million b/d in 1989. Production in 1989 was up 13,000 b/d from 1988.

However, China Daily in November reported, "Experts said the oil industry now stands a very good chance of meeting the year's target of 137 million tons (2.74 million b/d)."

During the first 10 months of 1990, China's crude production totaled 83.7 million bbl, up 0.6% from the same period in 1990, China Daily said.

Chinese crude production slipped 1.3% in October 1990, due mainly to heavy flooding in the Daqing area, the newspaper reported.

EXPORTS SURGE

The Persian Gulf crisis created an opportunity for China to boost its oil exports, wrote Xu Yihe for China Features.

Xu quoted Jiang Yunlong, vice-president of China National Chemical Import & Export Corp. (Sinochem) as predicting Chinese crude exports would jump to as much as 556,000 b/d in fourth quarter 1990, compared with Sinochem's target of 460,000 b/d for the quarter. Sinochem also predicted refined products exports would average 14,000 b/d in fourth quarter 1990.

Xu reported Sinochem had planned to export an average 480,000 b/d of crude and 100,600 b/d of products in 1990.

In first quarter 1990, Sinochem exported 466,000 b/d of crude, compared with its target of 425,000 b/d. Chinese crude production usually slides in the first quarter, when domestic demand for crude jumps, Xu wrote. International oil prices at the time were a little less than $20/bbl, and exports of Daqing crude to Japan netted about $19.21 /bbl.

Second quarter 1990 price declines sliced Daqing crude to $16.09/bbl, spurring Sinochem to cut exports by 40,500 b/d from the 483,000 b/d planned for the period.

After Iraq's Aug. 2 blitz of Kuwait and subsequent loss of both countries' oil exports and spike in prices, the export price for Chinese oil jumped 52% to about $35/bbl and for products 90% to $380/metric ton by November from first quarter 1990 levels.

In third quarter 1990, Sinochem exported 528,000 b/d of crude and 127,000 b/d of products, up 21,000 b/d and 2,600 b/d, respectively, from the quarter's plan, Xu wrote.

Japan buys most of China's oil exports, about 240,000 b/d. Other buyers of Chinese crude and/or products include the U.S., Singapore, Philippines, Thailand, and South Korea.

Sinochem's Jiang told China Features the company plans to increase its oil storage capacity to take greater advantage of future price fluctuations and give it more flexibility.

"Expansion of domestic refineries in recent years has been taking an increasing amount of crude, leaving smaller amounts for export," he said.

REFINING CONSTRAINTS

China's refineries are pushing capacity to the limit, Ebel wrote.

"There is very little flexibility left. Any substantial increases in future runs will be possible only if capacity is expanded. Western assistance is desirable because of capital shortages."

Refining capacity reached 2.2 million b/d in 1988, having jumped by an average 62,000 b/d/year since 1978, Ebel noted.

As crude exports dropped in 1985-88, however, refinery throughput increased by an average 100,000 b/d/year.

If refinery construction lags, Ebel said, crude exports may be maintained to a degree but would be offset by increased product imports.

The government allocates about 1.726 million b/d of crude to the 37 refineries administered by China Petrochemical Corp. (Sinopec), Xu wrote for China Features. China's total refining capacity is 2.48 million b/d.

Sinochem usually imports about 160,000 b/d of crude to accommodate refinery slates to meet domestic demand for products. But crude imports plunged to 70,000 b/d after the second half runup in oil prices, Xu wrote.

The government encourages China's refineries to process imported crude for reexport as products to the crude suppliers. China processed 90,000 b/d of such crude imports in 1990, up 4,000 b/d from 1989's level, Xu wrote.

EXPORT CAPABILITY

China is expanding its export capability with new storage and transportation capacity.

An oil transshipment terminal is under construction at Aoshan Island off Zhejiang province, Southeast China. It will be the country's first commercial marine oil terminal, Xinhua reported.

In May 1990, Zhoushan Xingzhong Oil Transfer Corp. Ltd., a joint venture of Zheijian province and Hong Kong interests, agreed to spend $30 million for the terminal.

It will be able to handle oil tankers of 200,000 dwt capacity and have two 630,000 bbl and two 315,000 bbl capacity oil tanks.

When completed, the terminal will be able to store and move oil at the rate of 52,000 b/d. It is expected to be on stream early in 1993.

Plans call for the terminal to receive crude from large foreign tankers. Small Chinese tankers will take crude from the terminal for transport to China's eastern coastal cities or reexport.

Of the 19 major harbors along China's coast, none has the capability for oil transshipment.

Meanwhile, China last month launched its first domestically built tanker under a foreign contract, Xinhua reported.

The 95,000 dwt Wilomi Eira petroleum products tanker has a shallow draft and a length of 790 ft. Norway's Anders Wilhelmsen ordered the tanker under a contract with Dalian shipyard that calls for two more similar tankers to be built at the shipyard.

TARIM BASIN

China's ambitious target of producing 4 million b/d by 2000 hinges on bringing major offshore discoveries or the huge postulated oil resources of the Tarim basin on stream by then.

Generally disappointing results offshore put increasing pressure on the need for stepped up Tarim E&D. The government last year earmarked 1.5 billion yuan ($319 million) for Tarim basin E&D during 1991-92 (OGJ, Oct. 15, 1990, p. 27).

Ebel compares the Tarim basin with the Soviet Union's Tengiz field: The potential is there, but developing it will require technology, equipment, and expertise beyond China's current capability.

There are many hurdles to overcome in the area: deep pay, high drilling costs, complex geology, high subsurface pressures and temperatures, a harsh climate, and lack of infrastructure. In addition, moving crude to market from the remote basin in the Xinjiang Uygur autonomous region would require a costly 1,500 mile pipeline.

Earlier indications were that non-Chinese companies would not be permitted to take equity interests in Tarim basin projects. However, Chinese Premier Li Peng indicated otherwise in a meeting last fall with Mitsubishi Corp. Pres. Shinroku Morohashi, Xinhua reported.

Morohashi told Li of Mitsubishi's willingness to participate in oil development in the Tarim basin.

"Li responded by saying these items hold great potential for cooperation," Xinhua reported.

Li gave "a very good impression" arrangements could be worked out for joint projects in the Tarim basin, but officials did not discuss details or a timetable. China spent 3 billion yuan ($636 million) in 1989-90 for exploration in the Tarim basin, where it expects production to jump sevenfold to 20,000 b/d in 1991, China Features said.

ONSHORE POTENTIAL

Onshore fields in mature areas still are the mainstay of China's oil production, and China is pressing gains in technology to boost output and discover more reserves in proven basins.

About 75% of China's crude production comes from three onshore producing complexes in Northeast China: Daqing, Shengli, and Liaohe.

China is mounting a major effort to stave off a decline in Daqing production, which has averaged more than 1 million b/d for 12 straight years.

Chinese oil officials last fall projected Daqing would meet its target of 1.113 million b/d for 1990, Xinhua reported.

They also estimated Liaohe production at 272,000 b/d for 1990, exceeding plan by 2,000 b/d. Flow from Liaohe, a subbasin of the Bohai basin, climbed to as much as 274,480 b/d in October, an increase of 3,650 b/d from the prior month. Liaohe produced 240,000 b/d in 1989.

Elsewhere, Dagang oil field production in October jumped 2,387 b/d to 77,528 b/d from the previous month.

Northeast China has yielded another major oil and gas discovery, Xu reported.

The first development well was spudded by yearend 1990 in the unnamed field in Kangping county, Liaoning province. The field, about 100 km north of provincial capital Shenyang, has an oil resource estimated at 730 million bbl and gas resource estimated at 706 bcf.

When development is complete in 1993, production is expected to reach 10,000-20,000 b/d of oil and 48-96 MMcfd of gas, Xu reported.

Xinhua also reported full start-up of Eren oil field in the Inner Mongolia autonomous region. Full production of more than 17,000 b/d represented a 257% increase from early production levels in 1989.

In addition, Chinese explorationists have identified a third petroliferous basin in East Xinjiang Uygur, in addition to the Junggar and Tarim basins. Teams from Con gedc's Yumen petroleum administration identified 10 likely hydrocarbon bearing structures in the Turpan-Hami depression. The basin covers 48,000 sq km surrounding Lanzhou-Xinjiang railway.

SHENGLI CAMPAIGN

China is targeting an ambitious program to find and develop more oil and gas reserves in the Yellow River delta area of Shandong province, where the Shengli complex is China's second major producing area.

China Daily reported a plan that calls for the Shengli petroleum administration to target reserve additions of at least 730 million bbl during 1991-95, pushing average Shengli oil production to 672,000 b/ d during that period. The Shengli administration will spend 4.6 billion yuan ($978 million) to drill 1,200 wells and explore 50 prospects as part of that effort.

Shengli produced an average 668,000 b/d during the previous 5 year plan. The 37,000 sq km area holds 61 oil and gas fields

Of special interest is the coastal plain bordering the Bohai Sea. Estimates of the ultimate potential oil resource is 46.7 billion bbl, China Daily reported.

In addition, a long term plan proposed by officials in nearby Dongying, on the Yellow River delta, calls for construction of "massive infrastructural facilities" there, along with oil treatment facilities and ethylene plants, China Daily reported.

As part of the plan, Dongying Mayor Li Diankui hopes to attain special economic zone status for his city, founded in 1983 to provide for delta area industrial development. "We're lobbying the central government to open the area to foreign investors," China Daily quoted Li as saying.

In another key coastal region, marine carbonate strata recently were found in the Yangtze River Valley, People's Daily said. More than 100 prospective structures have been identified in a 100 sq km area out of a total 1.5 million sq km area from east of Yunnan province to Shanghai at the Yangtze River mouth.

Of special interest are gas prospects in Sichuan province and the area along the lower Yangtze between Nanjing and Nantong.

OFFSHORE PROSPECTS

China's offshore region is still an area of strong interest.

Beijing Review said China oil agencies plan to accelerate development of nine oil fields discovered in the South China and Bohai seas during 1991-95. Cnooc is aiming for production of 100,000 b/d of crude and 116 MMcfd of gas from offshore fields within 2 years.

That calls for an investment of $1 billion, more than half of which will come from foreign partners, the magazine quoted Cnooc as saying.

Non-Chinese oil companies have spent about $2.8 billion in searching for oil off China to date, but that effort has fallen far short of expectations.

China's offshore oil production in 1989 averaged less than 18,000 b/d. Production from four fields was estimated at 24,000 b/d in 1990-exceeding plan by 20%-and is projected to climb to 60,000 b/d in 1991, 100,000 b/d by 1992 and 150,000 b/d by 1995, based on expected flow from fields under development.

Cnooc also hopes five other offshore oil fields will be producing by 1995. They include Shuizhong 36-1 in Bohai Sea and Liuhua 11-1 in the South China Sea. Combined resource potential of the two heavy oil fields is more than 7 billion bbl.

To utilize heavy crude from the two fields, Cnooc and Royal Dutch/Shell Group plan to build a $2 billion refining/petrochemical complex at Huizhou (OGJ, June 18, 1990, Newsletter).

Cnooc subsidiary Nanhai East Oil Corp. since 1983 has been involved in joint exploration ventures with 27 foreign oil companies in the eastern South China Sea, China Features' Xu wrote. They have found 18 hydrocarbon bearing structures in the area.

In the Beibu Gulf, Cnooc and France's Total Cie. Francaise des Petroles have placed a small oil field on stream.

To date, Cnooc has signed 43 agreements with 45 oil companies from 12 countries, resulting in discovery of 36 hydrocarbon bearing structures, Xinhua reported. More than 170 wells have been drilled offshore since 1979.

Cnooc estimates China's offshore potential reserves at 6.2 billion bbl of oil and 4.9 tcf of gas.

HUIZHOU AREA

The big jump in production off China by 1992 will stem from the industry's first oil field developments in the South China, in the Huizhou area.

Operators have spent about $1.5 billion to date in exploring for oil and gas in the South China Sea. About 100 wells have been drilled there since 1984.

Cnooc expects about 75,000 b/d in combined peak flow from Huizhou 21-1 and Huizhou 26-1 oil fields in the eastern South China Sea south of Hong Kong. The former started up in 1990, and the latter is to start up this fall (see map, OGJ, Sept. 24, 1990, p. 56).

The two fields are being developed by Cnooc in concert with ACT Operators Group, a venture of Agip (Overseas) Ltd., Chevron Overseas Petroleum Ltd., and Texaco Petroleum Mij. Nederland BV.

Chevron said the group will install an eight leg platform in 360 ft of water in May 1991 to develop Huizhou 26-1. It will be linked via subsea pipeline to Huizhou 21's four leg platform in 380 ft of water.

Handling production from the two platforms will be a 250,000 dwt, 1.5 million bbl capacity floating processing/storage/ offloading vessel anchored 1 mile from the Huizhou 21-1 platform.

After peaking within 1 1/2 years, production from the two fields will settle at a sustained rate of about 40,000 b/ d, Chevron said. The life of both is estimated at 7-1 0 years.

Huizhou 21-1 has 15 wells, and Huizhou 361 is planned for 20 wells, all predrilled through a subsea template. Huizhou 21-1 reserves are estimated at 35 million bbl. Combined cost of developing both fields is about $498 million, Chevron said.

Cnooc has a 51% interest in the Huizhou projects, with ACT splitting the remaining interests equally among partners.

BOHAI ACTION

In the Bohai Sea, Sino-Japanese operated oil fields produced about 22,000 b/d of crude in 1990, up from about 12,000 b/d in 1989.

Bohai oil production from all fields on stream and under development is expected to reach 50,000 b/d, China Features' Xu reported.

The most recent of those to go on stream is Bozhong 342 (OGJ, Aug. 6, 1990, p. 38).

Bozhong 34-2, about 180 km west of Tanggu Port near Tianjin, has reserves estimated at 168 million bbl and is expected to produce about 8,000-10,000 b/d, Xu quoted Cnooc Pres. Zhong Yiming as saying.

It is the third field to go on stream in the Bohai Sea area. Chengbei and Bozhong 28-1 started up in 1989.

Foreign oil companies have invested $1.14 billion for exploration in the Bohai Sea since China opened its continental shelf for international bidding in 1979, China Daily reported.

During the past 10 years, Cnooc's Bohai Oil Corp. (BOC) signed six contracts with companies from the U.S., Japan, France, and the U.K.

In all, BOC and partners have identified 77 structures, drilled 283 wells, 47 of which were discoveries.

BOC estimated Bohai reserves at 2.19 billion bbl of oil and 7 tcf of gas, China Daily reported.

BOC and Japan's Japan-China Oil Development Corp. have in 10 years drilled Bohai Sea 38 exploratory and development wells, finding 11 hydrocarbon bearing structures.

Meanwhile, BOC, operating alone, has found an oil field in the Liaodong Bay area of Bohai Sea, Xu reported.

The Jingzhou 21-1 discovery well flowed 734 b/d of oil, 223 b/d of condensate, and 10.5 Mcfd of gas. The structure covers 30 sq km.

BOC is developing Jinzhou 20-2 and Suizhong 36-1, both in Liaodong Bay. Jinzhou 20-2 production is targeted at 20,000 b/d of oil and 48 MMcfd of gas. Suizhong 36-1 reserves are pegged at more than 700 million bbl.

Both are expected to start up in 1992, Xu wrote.

Copyright 1991 Oil & Gas Journal. All Rights Reserved.