COLUMN-China must look to its own oil and gas resources: Kemp

Fri Jan 18, 2013 9:34am EST

By John Kemp

LONDON Jan 18 (Reuters) - China's petroleum resources are roughly comparable to the United States'. There is no reason for the country to become increasingly reliant on imported crude and natural gas, provided it can successfully explore and develop its enormous natural endowment.

For China's top policymakers, the prize is huge. Boosting domestic oil and gas output would significantly reduce the country's economic and military vulnerability. China could emulate the success of the United States following the shale revolution and achieve a greater measure of energy security.

The penalty for failure, however, is equally large. China would be left with a growing dependence on unstable sources of supply, entangled in the difficult politics of the Middle East and Africa, and struggling to defend long supply lines against potentially hostile powers.

ENERGY INSECURITY

China's growing reliance on expensive oil imports, mostly from unstable countries in the Middle East and Africa, transported via long and vulnerable sea lanes through some of the world's most hazardous choke points in the Straits of Hormuz and Malacca, suffuses every aspect of the government's thinking about energy and foreign policy.

China is vulnerable to any disruption of global supplies and energy blackmail. In the event of a military conflict, the umbilical cord which connects China with its major crude suppliers in the Middle East would be targeted by any opponent. Even in peacetime, the rising cost of oil imports presents an increasing challenge to the country's economic competitiveness and ability to raise living standards.

China is already the world's second-largest crude oil importer, consuming 4.5-5.0 million barrels of foreign crude a day in 2010 and 2011, and will overtake the United States as the world's largest importer by the end of the decade as a result of the shale revolution.

Until 1993, China was actually a net oil exporter. But while production has grown from just under 3 million barrels per day to a little over 4 million, consumption has soared to 9 million.

To reduce the country's economic and military vulnerability, the government has made improving energy efficiency and the development of its own strategic petroleum reserve major goals. It has also ordered the construction of an ocean-going navy to protect the supply lines and is intensifying its diplomatic engagement with the main overseas supply areas.

But the country can almost certainly find and develop much more oil and gas from domestic sources.

12TH FIVE YEAR PLAN

MIT Professor Morris Adelman explained that oil reserves are not a gift of nature; they are won by hard work and heavy investment ("Genie out of the bottle: world oil since 1970" 1995).

In the twelfth five year plan, covering the years from 2011 to 2015, China's government committed itself to "strengthen the exploration and development of petroleum and natural gas resources, stabilise domestic petroleum output, and the development and utilisation of unconventional oil and gas resources, such as coal-bed gas and shale gas."

Specifically, it promised to create five large-scale oil and gas producing areas in the Songliao, Ordos, Bohai, Sichuan and Tarim/Junggar basins, as well as speeding up the exploration and development of offshore and deep-water oil and gas fields.

The government also made it a priority to boost the offshore industry by accelerating the independent design and construction of mobile marine drilling platforms, floating production systems, marine engineering work ships and supporting equipment and systems.

Some of these exploration efforts are already paying off. China discovered more than 1.4 billion tonnes of new proven oil reserves last year, its third-highest annual haul ever, as well as a record 900 billion cubic metres of natural gas, according to the Ministry of Land and Resources.

PETROLEUM BASINS

China's onshore and offshore fields produced 4.3 million barrels per day in 2011, making it the fourth largest oil producer in the world, after Saudi Arabia, Russia and the United States, according to the Energy Information Administration (EIA), the statistical arm of the U.S. Department of Energy.

The country's largest complex of oil fields, the super-giant Daqing in the Songliao basin in the northeast, was discovered in 1959 and has since produced over 2 billion tonnes (around 15 billion barrels), about 40 percent of the country's entire production. But Daqing shows increasing signs of exhaustion. By the 1980s, its wells were producing 9 barrels of water for every barrel of oil.

Since the 1990s, China National Petroleum Corporation (CNPC) has relied on polymer flooding, a form of tertiary recovery, to drive the remaining oil in the field towards the wells.

CNPC has stabilised production at more than 40 million tonnes a year (300 million barrels) for the last ten years, through careful control of waterflooding, polymer injection, and the development of new areas on the periphery of the old reservoirs, according to the company's website.

But China almost certainly has many more oil resources, both conventional and unconventional. China's large land mass and neighbouring sea areas contain a large number of sedimentary basins that are likely to contain substantial volumes of oil and gas.

On land, the six massive sedimentary basins which are thought to contain substantial shale gas deposits are also prospective for shale oil, and probably contain many undiscovered conventional fields as well. Off the southern and eastern coasts lies a further string of massive basins that are highly prospective for petroleum ().

ABUNDANCE OF OIL

According to the U.S. Geological Survey (USGS), the six main onshore basins contain almost 15 billion barrels of undiscovered but technically recoverable conventional oil, 88 trillion cubic feet of conventional gas, and 1.4 billion barrels of natural gas liquids ("Assessment of Undiscovered Conventional Oil and Gas Resources of Six Geologic Provinces of China" Sep 2012).

The same six basins contain a further 1,275 trillion cubic feet of unconventional shale gas, according to the U.S. EIA. Presumably they also contain substantial volumes of unconventional shale oil, though shale oil was outside the scope of the EIA gas study ("World Shale Gas Resources: An Initial Assessment of 14 Regions Outside the United States" Apr 2011).

Billions more barrels of both conventional and unconventional oil and gas are likely to be found off the southern and eastern coasts of China, according to USGS ("Assessment of Undiscovered Oil and Gas Resources of Southeast Asia" June 2010).

The possibility of huge oil and gas deposits off the southern and eastern coasts helps explain why China is so determined to press its historical claims to the Diaoyu/Senkaku islands in the East China Sea (disputed with Japan) as well as the Xisha/Paracel and Spratly islands in the South China Sea (disputed with Vietnam, the Philippines and Malaysia).

These rocky and uninhabited outcrops and reefs could all come attached with claims to some enormous oil and gas resources in the neighbouring sea areas.

Even without these claims, China has enormous oil and gas resources. The technical and political challenge is to turn them into reserves and production.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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