LONDON: US 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 (China).
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 O&G production.
The US 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 US and EU companies from transferring advanced technology, including software, to help develop Russia's shale, deep water and Arctic oil resources.
The US and EU hope 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 in Ukraine.
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 US, 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.
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 10 times as many qualified petroleum professionals each year as the US, based on university enrolments compiled by the US Department of Education. Even if the average quality of degrees is still higher in the US, 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 O&G industry.
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 education.
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 schools.
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 reunion.
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, US 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.
Western firms are already barred by sanctions from operating in Iran, another country with promising O&G 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 – Reuters
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