China delivers as non-OPEC output disappoints

By Emma Graham-Harrison - Analysis

BEIJING (Reuters) - China, often blamed for fuelling oil's five-year rally, is also doing more than many big producers to temper the rise by driving its state-owned oil companies to pump more crude -- at almost any cost.

Oil's rise from $30 in 2003 to $115 this week has certainly been aided by surging Asian demand, but lately traders have also taken notice of flat or declining output from non-OPEC producers like Mexico and Britain, a worrying sign for future supplies.

In Russia, the world's number-two producer, output failed to grow for an alarming third month in March.

But in China, where you might expect a decline from aging elephant fields like Daqing, which has been pumping for nearly half a century, growth has been small but steady. Output climbed 2.2 percent in the first quarter, data showed Thursday.

Defying gloomy predictions that their fields would follow the offshore North Sea or Mexico's huge Cantarell into decline, China's oil firms have channeled vast amounts of cash into high and low-tech methods of extracting extra barrels.

While China's surging oil demand grabs the headlines, its upstream sector has quietly become the world's fifth biggest at 3.76 million barrels per day, displacing Mexico and closing in on OPEC member Iran, which pumps just under 4 million bpd.

"It's probably a bit surprising that they've been able to grow output," said Mike Wittner, Societe Generale's global head of oil research. "But then, in most countries in the world it's about investment and production costs, is it worthwhile making the investment... In China it's a national security issue."

With its reliance on imported crude heading towards 50 percent, Beijing has urged its state owned firms Sinopec , PetroChina and CNOOC to pump out every possible drop of oil.

At onshore east coast fields like Daqing or number two producer Shengli, low labor costs, easy access and pipelines for transporting oil onwards also help make more intensive exploitation not just practical but attractive.

"China is much more aggressive in terms of deploying advanced technologies, while other oil companies are more cost conscious and you can see that in the cost per barrel. In China that has gone up a lot more over the last five years," said Gordon Kwan, analyst at CLSA in Hong Kong.

"It's good timing because this strategy obviously would not work if oil prices were declining," he added.

Much of the cash goes into drilling wells, closer together than many Western firms would, and continuing production at those with minimal output that earn money but eat into margins.

Chinese majors are also experimenting with techniques like horizontal wells and polymer injections to enhance recovery.

"There continues to be a significant decline in the production per well, they are drilling a lot more wells and getting a lot less out of them," said one analyst who declined to be named because he is not authorized to speak to media.

PUTTING OFF THE PEAK