(John Kemp is a Reuters market analyst. The views expressed are
By John Kemp
LONDON, July 30 U.S. and European companies
dominate the global market in oil exploration and production,
especially projects requiring complex engineering and reservoir
management, but they will face increasing competition from China
over the next decade.
Western majors like Exxon, BP, Chevron, Shell, Total,
Statoil and ENI currently lead the international oil industry.
The only serious rivals from outside the OECD are Petronas
(Malaysia), Petrobras (Brazil) as well as CNPC and Sinopec
Western firms are even more dominant in the services
industry, where Halliburton, Schlumberger and Baker Hughes, plus
smaller specialists, handle most contracts for high-end
engineering and field development projects, with limited
competition from elsewhere.
Western, specifically North American, companies have a
complete monopoly on the expertise involved in developing shale.
Exploration and production companies like Whiting and
Continental Resources, as well as service companies like Frac
Tech, now known as FTS International, entirely dominate
unconventional oil and gas production.
The United States and the EU hope to use their technological
advantage as a source of leverage with Russia in the current
dispute over Ukraine. The latest round of sanctions will
prohibit U.S. and EU companies from transferring advanced
technology, including software, to help develop Russia's shale,
deep water and Arctic oil resources.
By prohibiting western companies from transferring advanced
technology, the United States and EU will attempt to prevent
Russia from exploiting its vast unconventional oil resources to
offset declining output from the country's aging conventional
fields, unless Russia's government "de-escalates" the conflict
But that technological advantage and the leverage it is
thought to confer could prove to be weaker than sanctions
advocates believe. Sanctions are more likely to accelerate the
development of an advanced petroleum industry outside North
America and Western Europe, especially in China, which will
emerge as an important alternative supplier of both capital and
knowledge over the next 5-10 years.
China's indigenous petroleum industry is robust and growing
stronger. The country remains the world's fourth-largest oil
producer (behind the United States, Saudi Arabia and Russia).
China's two large state-owned onshore oil companies, CNPC
and Sinopec, have successfully employed advanced secondary and
tertiary recovery techniques, including flooding oil fields with
polymers, steam and alkaline surfactants, to reverse declining
output from the country's ageing oil fields, putting them on the
cutting edge of complex technology ("Enhanced oil recovery:
field case studies" 2013).
CNPC and Sinopec have both struggled to develop shale gas in
the Sichuan basin, owing to complex geology, but have sought
international help from Shell and Chevron, and Sinopec recently
concluded a 15-year joint venture agreement to develop oilfield
services with FTS International, a leading technology supplier.
Crucially, China is producing an enormous number of
petroleum engineers and other oil industry professionals, who
will help grow the country's production base in future, and
potentially take their expertise abroad.
China is graduating more than ten times as many qualified
petroleum professionals each year as the United States, based on
university enrolments compiled by the U.S. Department of
Education. Even if the average quality of degrees is still
higher in the United States, which is arguable, the numerical
imbalance is striking.
China University of Petroleum (CUP), with branches in
Beijing and Huadong, is by far the world's largest institution
for research and learning about all aspects of the oil and gas
The University of Petroleum's Beijing branch alone has
almost 500 full and associate professors, and more than 12,000
registered students - including 744 doctoral candidates, 4,600
postgraduate students and nearly 7,000 undergraduates, according
to its website.
The University of Petroleum's Huadong branch, located at
Qingdao and Dongying, both in Shandong province, near to the
country's main oil fields, is even larger, with more than 800
full and associate professors.
Both branches have been identified as "Project 211"
institutions by the central government. The project was launched
in 1995 with the aim of developing around 100 elite research and
teaching institutions to boost China's economic and social
development in the 21st century (hence 211). National Key
Universities are funded directly by the central ministry of
Other Project 211 institutions graduating thousands of
students each year in disciplines relevant to oil and gas
include the Beijing and Wuhan branches of the University of
Geosciences, and several other technical and engineering
Engineers have dominated the upper levels of the Communist
Party and government in recent decades. Former premier Wen
Jiabao is the most famous alumnus from the Geosciences
University, while Zhou Yongkang, another former member of the
Politburo Standing Committee, now under investigation for
"serious disciplinary violations", is the most famous graduate
from the University of Petroleum. In fact, Zhou's last public
appearance in October 2013 was at a Petroleum University alumni
Developing shale oil and gas resources requires experience
and intelligent innovation more than super-advanced learning.
Hydraulic fracturing and especially horizontal drilling are
sophisticated techniques but do not require a Nobel Prize.
Offshore drilling is arguably more complicated, especially
for high pressure high temperature wells, but again the
technology is well within the capabilities of Chinese firms like
China National Offshore Oil Corporation (CNOOC).
Reservoir surveying, modelling and visualisation probably
require the most advanced technology, including powerful
software and supercomputers, but again they are within the
future grasp of Chinese companies.
There is nothing inherently difficult about petroleum
engineering that puts it beyond the reach of China's giant oil
companies and rapidly developing service sector.
And as China's oil companies, service companies and
universities grow, they are rapidly forging links with their
western counterparts that will accelerate the transfer of
technology and know-how.
For example, Frac Tech's joint venture with Sinopec is
explicitly designed "to bring FTSI's hydraulic stimulation
capabilities and expertise to China". While it will initially
focus on Sinopec's exploration plays in the Sichuan basin, it is
explicitly intended to create a specialist fracking firm that
will operate across the country on behalf of third parties.
For now, U.S. and European companies will remain undisputed
technology leaders in oil and gas, especially the development of
unconventional resources like shale and deepwater.
But that advantage will not necessarily last forever. If
exploration and production companies like Exxon and BP, and
service companies like Schlumberger and Halliburton, are
prevented from operating in countries like Russia by sanctions,
Chinese companies will eventually step into the gap.
Certainly it is not beyond the capabilities of Russian and
Chinese companies to master the pressure pumping and horizontal
drilling techniques needed to develop giant onshore resources
like the Bazhenov shale ("The Big One: Russia's Bazhenov shale"
Western firms are already barred by sanctions from operating
in Iran, another country with promising oil and gas resources,
and find it increasingly difficult to operate in a long list of
countries from Nigeria, Algeria and Libya to Egypt and Iraq,
while struggling to win permission to drill in the Arctic or
build pipelines across North America.
Sanctions on new investment and technology transfer can make
a difference to Russia's oil production - but only over the
medium and long term (in practice a horizon of 5-10 years). Over
that sort of time scale, alternative investors and technology
suppliers will likely emerge, most probably from China or from
within Russia itself.
For that reason, sanctions must be employed with care, or
they could end up harming western energy firms rather than
providing leverage over the Russian government.
(Editing by William Hardy)