Iron Man Wang Jinxi, a heroic Chinese oil pioneer, famously jumped into a pit of drilling mud to stop a well blowout. A key figure in the discovery of Daqing, China’s biggest oilfield, Wang died in 1970. Less dramatically, but importantly, the Chinese oil industry has been revived and, since 2018, turned around years of decline.
China is probably the biggest oil producer people don’t think of. Only five countries currently surpass the 4.16 million barrels per day it extracted last year. Yet it is far less-watched than smaller but more celebrated producers including Brazil, Norway, Libya and Nigeria.
The outlook for China's oil industry is important for global energy balances, for its national security and for the fortunes of its major state oil companies, Sinopec, the China National Offshore Oil Corporation (CNOOC) and the big cheese, the China National Petroleum Corporation (CNPC).
Despite its substantial land mass, China seemed to be nearly devoid of oil until it found Daqing in 1959, Shengli in 1961 and other fields in its north-east, and production boomed during the 1970s. Remarkably, China was a net oil exporter as late as 1992.
But then its own massive appetite outstripped domestic resources. Although production kept creeping up until 2015, it became by far the world’s biggest oil importer.
Output dropped for the next three years, as oil prices fell and the Chinese majors cut back investment. But in the summer of 2018, China’s President Xi Jinping, concerned about domestic energy security amid the emerging US-China trade war, demanded priority for self-sufficiency over commercial returns.
The three major national oil companies released seven-year action plans and raised their upstream investment budgets substantially.
Since then, growth has been solid, with almost 100,000 barrels per day added each year on average, and this year has begun strongly. Opec’s outlook sees Chinese production only creeping up by 10,000 barrels per day this year and next year, but this seems pessimistic.
It is possible that China might exceed its all-time annual high, 4.3 million barrels per day, this year or next year. Every drop at home is a drop not imported, and its impact will be magnified if, as expected, China’s oil demand peaks some time this decade.
Conversely, the big state companies’ international upstream investment has been quite minor, in contrast to the previous boom period from 2005 to 2013, when they made aggressive acquisitions and won bidding wars in countries from Kazakhstan and Iraq to Canada and Colombia.
Recently, they have concentrated on liquefied natural gas rather than oil. Iraq’s latest bid round, in May, was dominated by Chinese companies, but smaller private or quasi-private entities, not the state giants.
The domestic growth has been hard-won. China’s geology is complex and its existing fields have been heavily exploited already. Last year, the three state majors invested about $78 billion, compared with $65 billion between their three biggest international competitors, Shell, ExxonMobil and Chevron.
But Opec’s production restrictions and push for higher prices give the Chinese companies solid cashflow, and allow them to go after higher-cost resources.
The majority of production growth comes from offshore fields, led by CNOOC. This month, it debuted Asia’s first circular floating production platform, used to develop fields in moderate water depths but harsh weather. The South China Sea is prone to strong typhoons.
China has also aggressively pushed out exploration in this area, and sought to deter neighbours, notably Vietnam and the Philippines, from developing fields in contested waters.
In the scrubby deserts of the far western Tarim Basin, Sinopec is drilling some of the deepest wells in the world. In March, the Shendi Take-1 well passed 10,000 metres, only the second well globally to go so deep. It encountered temperatures more than 200°C.
The company is developing the Shunbei field in this area. At about 8,000 metres, it is one of the world’s deepest commercial deposits.
Coaxing the last drops out of mature oilfields requires enhanced oil recovery (EOR) – a suite of techniques that inject carbon dioxide, steam, chemicals or other substances. While only about 40 per cent of the oil in the ground may be recoverable conventionally, EOR can boost that to 60 per cent.
Shengli and Daqing both use extensively the injection of polymers, which thicken water so that it pushes out the oil more effectively.
Carbon dioxide EOR has the additional advantage of trapping some of the global warming gas underground permanently. It can also reduce the need for water injection to maintain pressure, which is helpful in often water-stressed areas of China.
Sinopec is using the technique at its Shengli field, capturing carbon dioxide from petrochemical facilities and, in future, power plants. As much as 3.6 billion barrels of oil could be produced economically in China in this way.
Finally, what about the prospects of China replicating the US’s shale boom? China does have shale oil resources, with CNPC reporting from 20 billion to 35 billion barrels in place in its basins.
But the shale reservoirs are complex, often deep, low-permeability and frequently with rather heavy oil. China has also not advanced as far technologically in shale as the US.
Last year, it produced about 80,000 barrels per day, a far cry from the US, which extracts more than a hundred times as much. Even if it reaches an ambitious target of 200,000 barrels per day by 2035, this would not change the overall picture much.
It has been more successful in shale gas, mostly in the south-western Sichuan region, but still falls short of its trans-Pacific competitor.
In 2020, the Chinese government decided to open upstream participation to other companies beyond the big state-owned ones. International companies previously had some joint ventures with their Chinese counterparts, but with underwhelming results.
Western capital isn’t likely to pour in this time, given political tensions, but China’s own smaller companies, so prominent in Iraq, might play a bigger role at home and bring some more innovative approaches.
So petroleum production in China looks like an increasingly steep uphill climb. Nevertheless, it probably will keep ascending for some years, given the resources, the intensity of investment and the importance to its national mission.
The days of Iron Man Wang are over – today the diligent toil of Chinese geologists and engineers tackles its tricky oilfields.
Robin Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis
