China is poised to become a net importer of oil in 1994 95.
That sets the stage for China importing more than 1 million b/d of crude oil and refined products on a net basis by the turn of the century.
That development underpins a bigger story arguably the biggest story on the petroleum scene today.
The turnabout that is seeing the world's fifth biggest oil producer go from significant oil exporter in recent years to major oil importer by the turn of the century points to several other truisms in the petroleum industry:
- That an oil demand surge in the Asia Pacific region led by China will fuel overall world oil demand growth for years to come.
- That a refining and petrochemical boom in a country that accounts for about one fifth of the world's population has dramatic implications for those two industries.
- That privatization has gathered so much momentum in the global petroleum industry that even Communist China has embraced some form of it.
- That China's domestic crude supply shortfall is creating unprecedented opportunities for foreign upstream investors in one of the world's most prospective yet underexplored and underexploited regions.
- That the same new openness that is distinguishing China's petroleum industry today is turning some of its state owned companies into major competitors to be reckoned with on the international scene, upstream and downstream.
It all adds up to some of the hottest action in the world of petroleum today, albeit in a country that traditionally has been one of the most difficult for foreign operators to work in vet is showing signs of easing that path.
CHINA'S OIL EXPORT/IMPORT BALANCE
While China was a net importer of refined products in 1989 and during 1992 93, it retained its status as net exporter of oil in crude equivalent terms because crude oil exports far outstripped crude oil imports during most of the past 10 years.
The gap narrowed significantly in 1993, as imports of crude and refined products shot up while exports of crude and refined products plunged.
While it has been an article of faith among analysts that China would become a net oil importer during the 1990s, with some declaring that Likelihood as early as 1995. However, the rapidity of the rate in Chinese oil demand growth in 1993 led analysts such as East West Center to pr@dict China's net import status would come this year. Beijing now has acknowledged that likelihood.
Chinese imports of crude oil jumped to more than 300,000 b/d last year from zero as recently as 1987. At the same time, crude oil exports plummeted to a little less than 390,000 b/d from a peak of more than 600,000 b/d in 1985 (Table 1).
Domestic crude production has increased at a rate of only 1%/year in recent years, while crude demand growth has increase during the same period of about 5 6%/year. That points to China soon becoming a net importer of crude for the first time since the mid 1960s. Some analysts contend China's gross oil imports could approach 1 million b/d around the turn of the century.
With world demand for crude relatively weak and oil prices depressed in fourth quarter 1993, that was an optimum time for China to continue slaking its voracious thirst for crude. During the quarter, China imported 63,709,290 bbl of crude, 14.6 million bbl more than the first 3 quarters of 1993(see Table 3, p. 35).
Meanwhile, Beijing's austerity campaign aimed at slowing a runaway economy helped rein crude exports to only 40,375,570 bbl in fourth quarter 1993. The major buyers of Chinese crude today are North Korea, South Korea, Japan, Singapore, and the U.S.
As for refined products, Chinese imports have skyrocketed since 1985, when exports exceeded imports by a factor of 73:1. Products exports have since been halved, and products imports have risen almost two hundred fold. The turnabout in the refined products trade balance came in 1992, registering a trade deficit of $476 million (Table 2).
The trade deficit in products widened drastically last year as a result of the devaluation of the U.S. dollar on foreign exchange markets and falling prices on the international spot markets during the second half. As a result, China's imports of products more than doubled in the second half from first half volumes. Gasoline imports in the fourth quarter alone accounted for half of the year's imports of that product, during a seasonally slack period for the product.
SUPPLY/DEMAND OUTLOOK
With a relatively flat production outlook for the near term and big boosts expected from discoveries in Northwest China and improved oil recovery in mature basins resulting from foreign joint ventures, China's crude oil output is expected to be 2.9 million b/d in 1995 and 4 million b/d in 2000.
However, demand for crude oil is expected to grow during that period at a rate of 5 6%/year, assuming adherence to a planned growth rate in the gross national product of 8 9%/year. That's not a safe assumption. Sizzling consumer demand pushed the GNP growth rate to an officially pronounced 9.3 10% during 1992 93 while some estimates put last year's growth at as much as 12 13%. That in turn spurred oil demand growth closer to an average of more than 7% the past 2 years. At that rate, China's domestic oil supply shortfall is projected near term at 120,000 140,000 b/d and growing by an incremental 100,000 b/d/year during 1993 2000. Even optimistic officials doubt China can make up the supply shortfall without a significant discovery and resulting fast track development in the remote, daunting northwestern deserts.
China National Petroleum Corp. (CNPC) Pres. Wang Tao said, "China's oil industry is experiencing a period of readjustment and has yet to regain the momentum it enjoyed during the 1980s.
"As oil is vital for the national economy, it is only necessary and normal to import an appropriate amount of crude to keep up with the need."
CHINESE EXPORTS, IMPORTS
Despite the domestic supply shortfall, China will continue to export crude oil because of desperately needed foreign exchange earnings.
China got a big boost in foreign exchange earnings in 1990 with loss of Iraqi and Kuwaiti oil supplies stemming from the Persian Gulf crisis and accompanying price spike. At the time, China exported at peak almost 580,000 b/d of crude, exceeding its official target by 100,000 b/d.
No matter how tight the crude supply gets, China will continue to export crude to fulfill contracts for example, the 100,000 b/d it ships to Japan.
The trend is to export less and import more crude until imports exceed exports by 1995, a major step back from China's long cherished goal of oil self sufficiency. China's imports of crude may climb to as much as 400,000 b/d to keep its refineries operating and its economy humming this year. A conservative estimate has crude exports and imports offsetting each other for the overall year at 360,000 b/d each.
China's crude imports are projected to climb to 456,000 676,000 b/d in 1995 and 980,000 1.08 million b/d in 2000.
China's crude exports are expected to fall to 300,000 b/d in 1995 and 200,000 b/d in 2000.
About 65% of China's crude imports are 30 45 gravity, low sulfur crudes from Indonesia, Oman, and Malaysia. The balance comes from Viet Nam, Russia, Iran, and Dubai. As traditional suppliers such as Indonesia face the prospect of becoming net oil importers themselves, China is looking to Middle East countries for crude supplies in the years to come. Emblematic of that change is the scramble to revamp, upgrade, and expand domestic refineries to process the Middle East's medium to low gravity, sour crudes (see following related story).
POLICY CHANGES
Also as part of its changing stance on oil imports is China's recent decision to cut tariffs on imported crude and refined products beginning this year.
That makes the second time since 1992 Beijing has trimmed import duties on crude and products and presages the country's reentry into the General Agreement on Trade and Tariffs. The tariff on imported crude was sliced to 1.5% from 2% and naphtha to 6% from 10%. Tariffs on other refined products were pared to 12% from 15%.
Along with abolition of the crude import licenses, tariff cuts will spur further efforts by state trading companies China National Chemicals Import & Export Corp. (Sinochem), China Interational United Petroleum & Chemical Corp. Ltd. (Unipec), and China National United Oil Corp. (Sinoil) to import crude and products. China sought to broaden channels for crude supplies by establishing Unipec and Sinoil in 1993. However, Sinochem still dominates China's oil trade (Table 4).
SINOCHEM PROFILE
Sinochem imports crude from Indonesia, Malaysia, Pakistan, Brunei, Viet Nam, Libya, Angola, Nigeria, Australia, Canada, Argentina, and Papua New Guinea. Middle East nations account for half of Sinochem's crude supplies and Indonesia one third. Of its crude supplies designated for reexport, Sinochem allocates 50% for Japan, 15% the U.S., and the balance to South Korea and Singapore.
Of the more than 300,000 b/d of crude China imported in 1993, Sinochem imported 140,000 b/d. Sinochem imports more than half of its refined products from Singapore, with 20% coming from South Korea and 30% from Japan and the U.S. West Coast.
More than 70% of Sinochem's refined products are exported to other Asia Pacific countries.
Sinochem also is expanding its domestic business. The company is participating in construction of or plans to construct two large grassroots refineries in China. One is a 100,000 b/d refinery at Dalian, a port city in Northeast China, involving a joint venture with Total. That project is scheduled to go on stream in 1995. The other project is a 200,000 b/d refinery to built at Huangdao, Shandong, province, with equity participation by Saudi Aramco and South Korea's Ssangyong.
Sinochem also has 20 storage facilities and oil terminals, the biggest being Aoshan oil terminal in coastal Zhejiang province, which typifies the trend in China toward building major, modern new oil tanker terminals (see related story, p. 54). Aoshan terminal, which started up in October 1993, can handle tankers of more than 200,000 dwt capacity and is the first commercial oil transshipment facility in China, with an oil handling capacity of 60,000 b/d.
Further downstream, Sinochem plans to install its first gasoline service stations under a cooperative agreement with a Hong Kong partner. The 600 b/d of product the stations will require will come from the Dalian refinery and Yanshan refining/petrochemical complex in Beijing. Part of the supply is to be provided via third party processing by Tianjin refining/petrochemical complex.
UNIPEC, SINOIL
Unipec is a 50 50 joint venture of Sinochem and China National Petrochemical Corp. (Sinopec). Its business includes crude import; export and import of refined products, petrochemicals, equipment, and technology; project financing; and overseas investments.
Unipec imported 100,000 b/d of crude into China in 1993, mostly from Oman, Indonesia, Malaysia, Angola, and Papua New Guinea. It also exported 19,800 b/d of refined products, about 4,000 b/d short of target. Its 1993 revenues were $1.3 billion, about $200 million short of target.
Unipec was unhappy with its performance in fourth quarter 1993, blaming a weakened crude market. It also claims the government's austerity policy has since dampened the demand for refined products. The new state company contends its financial results won't improve until the second half of this year, when Beijing will provide Sinopec refineries a 3 billion yuan loan to purchase crude.
Sinoil is an independent government owned oil trading company with a 50 50 equity split by Sinochem and CNPC. Sinoil was established in March 1993 with a registered capital of 100 million yuan ($17.24 million). Its business covers import and export of crude, refined products, and petrochemicals, as well as exploration and development in foreign countries.
Sinoil exported 180,000 b/d of crude in 1993, including 143,400 b/d that generated profits earmarked for plowing back into foreign exploration investment, 31,200 b/d earmarked for repaying CNPC's foreign loans, and 4,600 b/d standing as CNPC's above quota production.
Japan is Sinoil's biggest customer, accounting for 70% of the company's crude exports. Other export customers are South Korea, U.S., and Philippines.
NEW RULES
Beijing recently issued new regulations governing export of crude and products to clarify responsibilities among importing and exporting companies.
The rules, issued by the Ministry of Foreign Trade and Economic Cooperation, have taken some market share away from Sinochem. While crude designated for export by the State Planning Commission continues to be handled by Sinochem, 37% of that total export volume is to be exported by Sinoil with the proceeds going for repayment of foreign loans.
Refined products allocated to Sinopec and its affiliated refineries for export are to be handled jointly by Unipec and Sinopec unit Sinopec International.
Meanwhile, four refineries under Sinopec Guangzhou, Maoming, Zhenghai, and Gaoqiao have been given the right to import crude oil and export refined products. However, even with the import licenses, these refineries obtained 50% of their imported crude supplies from Unipec in 1993.
Although Sinochem, Unipec, and Sinoil ostensibly are independent companies placed on an equal footing, Sinochem still assigns oil import quotas, giving it a competitive advantage over Unipec and Sinoil.
Even so, the creation of competing oil supply companies given more autonomy and a reduced regulatory oversight presages a sea change in China's petroleum outlook. And that offers a brightening outlook for foreign companies seeking a foothold in what is perhaps the most dynamic petroleum scene in the world today.
Copyright 1994 Oil & Gas Journal. All Rights Reserved.
