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Page added on March 15, 2018

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China Now Produces More Oil Abroad Than At Home

Production

China is among the most import-dependent large oil consumers, but imports, it seems, are not its only problem when it comes to oil. Apparently, production from assets the Chinese state oil companies own abroad now exceeds domestic production, increasing the country’s dependency on foreign oil.

That in itself is not the problem, writes Michael Lelyveld in an analysis for Radio Free Asia. The problem is that much of the oil produced by these foreign assets does not end up in China for various reasons, including shipping costs and the difference in revenues if it gets exported to another market rather than imported into China.

The problem with foreign oil dependence is aggravated by the fact that domestic production is falling and will continue to fall. In its latest five-year oil market forecast, the International Energy Agency estimated that China’s domestic production of crude oil will only be enough to cover 29.7 percent of demand this year, which will further slide to 25 percent by 2023.

This means that China will have to rely on imports and foreign production assets for as much as 75 percent of its demand. That’s too much for any country to feel comfortable with. Yet China does not have a lot of options, since the decline in local production is mainly a result of natural field depletion.

True, China has staked a major claim for the resources of the South China Sea, but in addition to facing territorial disputes from its neighbors there, these resources may not be as large as Beijing expects. China also has substantial shale oil and gas reserves, but these could prove to be too expensive to develop.

So, it’s back to the foreign assets and imports. China did good business during the oil bust, upping imports to fill its strategic reserves. But demand continues to grow and so do imports. China is now the biggest oil importer globally, but it has been lucky to reap the benefits from the escalated competition between OPEC and the United States, which has resulted in a diversification of imports as OPEC curbs production to prop up prices, not to mention a pumping rampage in the United States.

China’s oil expansion abroad is bound to continue, however. The country simply does not have many other options. China is already one of the biggest oil field operators in the North Sea, for example. It also has a significant presence in Kazakhstan, as well as in Latin America, most notoriously in Venezuela, where China is one of the two biggest lenders to the troubled South American nation, and it holds most of the debt in oil-for-cash deals.

Now, China is looking north as well. Together with Russia, the country is probing the potentially vast untapped hydrocarbon potential of the next frontier, made more accessible by climate change. It is precisely climate change that has sparked China’s interest in Arctic oil and gas: as the polar ice melts, new transport routes open up, making the commercial use of Arctic oil and gas viable for China.

Will that be enough to satiate the nation’s hunger for oil? Certainly not. Arctic oil and gas exploration is a long-term undertaking. But in the light of China’s dependence on foreign oil, it becomes a lot more understandable why Beijing is so eagerly pushing renewable energy and electric vehicles—anything to reduce its heavy dependence on oil.

By Irina Slav for Oilprice.com



2 Comments on "China Now Produces More Oil Abroad Than At Home"

  1. bobinget on Thu, 15th Mar 2018 10:25 am 

    IEA repore released today.

    Demand is expected to increase by 1.5 mb/d in 2018 to 99.3 mb/d, a 0.1 mb/d upward revision compared to last month’s forecast. Global oil demand is estimated at 97.8 mb/d in 2017, unchanged from last month.
    Strong early data contributed to an upward revision of 240 kb/d in our outlook for OECD growth in 2018. The switch to natural gas in Pakistan and Iraq’s power sectors is responsible for a downward revision of 150 kb/d to non-OECD demand.
    Global oil supply in February eased to 97.9 mb/d and was up by 0.7 mb/d on a year earlier due to higher non-OPEC output. Strong growth in the US is expected to boost this year’s non-OPEC expansion to 1.8 mb/d compared to 760 kb/d in 2017.
    OPEC crude oil production edged lower in February to 32.1 mb/d, led by losses in Venezuela and the UAE. The call on OPEC crude rises steadily to 32.6 mb/d in 2H18, 480 kb/d higher than current output.
    OECD commercial stocks rose in January for the first time in seven months to reach 2 871 mb. However, the 18 mb increase was only half the usual level. The surplus to the five-year averaged fell to 53 mb. Cushing crude stocks reached their lowest level in three years.
    Global crude oil prices fell in the first half of February, before stabilising later in the month. The ICE Brent futures curve remains in backwardation. However, spreads are narrowing. Brent prices have averaged close to $67/bbl this year.
    Global refining throughput in 1Q18 slowed from 4Q17’s record levels by 0.9 mb/d. It will ramp up to a new record in 2Q18 at 81.8 mb/d. We assume refining throughput will only partially meet the seasonal demand increase, with inventories filling the gap.
    On balance
    The past month has been relatively uneventful in terms of data changes, apart from an increase to our demand growth estimate. Crude oil prices are slightly lower than last month, and have generally been relatively stable for several weeks. Even so, the value of Brent crude oil is still averaging close to $67/bbl in 2018, which is about 20% higher than in the early part of last year.

    Looking at demand, our estimate for global growth in 2018 has increased by 90 kb/d taking it up to 1.5 mb/d. Although this is a modest revision, it is interesting that provisional data suggests very strong starts to the year in China and India, which, taken together, accounted for nearly 50% of global demand growth in 2017. Cold weather in some parts of the northern hemisphere in January-February saw an increase in heating demand.

    On supply, new and revised data shows very little change in the outlook versus last month. Although US production was lower than expected in December, there is no change to our overall 2017 number neither to our outlook for 2018 that expects crude output there to grow by 1.3 mb/d. We retain our view that total non-OPEC production grew by 760 kb/d last year and that it will surge by 1.78 mb/d this year. Within the OPEC countries, the biggest risk factor is, and will likely remain, Venezuela. Our estimate for February shows output down again, by 60 kb/d. Other countries with a risk factor include Libya, and, to a lesser extent, Nigeria. In Libya, we saw another modest supply gain in February to 1.02 mb/d and, although stability cannot be taken for granted, it appears that the frequency and severity of production interruptions is declining and higher rates of output are being maintained. Taking OPEC as a whole, quota compliance in February was 147%, but even if Venezuela’s production were at its allocated level, the group’s compliance would still be close to 100%.

    Stocks, and specifically OECD stocks, remain the most-cited indicator of oil market re-balancing. In this Report, we note that in January they increased month-on-month for the first time since July. However, the increase of 18 mb was half the average level for January seen in the past five years. Indeed, the surplus of total OECD stocks against the five-year average fell for the ninth successive month to 50 mb, with products showing a very small deficit.

    In the meantime, market re-balancing is clearly moving ahead with key indicators – supply and demand becoming more closely aligned, OECD stocks falling close to average levels, the forward price curve in backwardation at prices that increasingly appear to be sustainable – pointing in that direction. In our chart, we assume for scenario purposes that OPEC production remains flat for the rest of 2018, and on this basis there will be a very small stock build in 1Q18 with deficits in the rest of the year. With supply from Venezuela clearly vulnerable to an accelerated decline, without any compensatory change from other producers it is possible that the Latin American country could be the final element that tips the market decisively into deficit.

    Moving further into the future than is usual in this Report, in the IEA’s five-year outlook, published in Oil 2018 – Analysis and Forecasts to 2023, we highlighted how in 2017 discoveries of new resources fell to a record low of only 4 bn barrels while 36 bn barrels were actually produced. We also pointed out that in 2018 investment spending is likely to grow only by 6% having barely increased at all in 2017. To 2020, production increases from non-OPEC countries are by themselves enough to meet demand growth. After that time, the pace of growth from these countries is less certain, and the market might well need the supplies currently being held off the market by leading producers

  2. BobInget on Thu, 15th Mar 2018 11:19 am 

    As it happens, peakoil.com turns out to be an ideal location, tracking peak oil period we are experiencing rat now.

    Investing in ‘new’ oil or pipelines today is like
    buying Phillip Morris two decades ago.

    Simple like borscht, less investment, fewer barrels available to export or to dispose of domestically.

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