Energy security: An oil terminal in Zhejiang, China. The country consumes more oil and gas than it currently produces and is working to secure its energy independence. — Reuters
Beijing: Some 20km out from the port of Tianjin, in the jade waters of the Bohai Sea, a vast metal structure rises above the surface.
This hulking offshore platform, 11-1 CEPJ, is the beating heart of the Caofeidian oil and gas field – and a monument to China’s multi-billion-dollar efforts to insulate itself from the whims of its rivals.
China has long sought to reduce the risk that comes with being both the world’s top consumer and its largest importer of energy.
But the urgency and scale of that ambition have increased dramatically in recent years and months, along with geopolitical tension and the ascent of a mercurial Donald Trump to helm a US administration unafraid to use trade as a weapon.
Last month, Washington also blacklisted Russia’s top two oil producers, prompting Chinese refiners to cancel some cargoes.
Since 2019, when the latest output expansion drive began in earnest, China’s majors have spent US$468bil on drilling and exploration – that’s up by almost a quarter from the previous six years, and enough to make PetroChina Co the world’s biggest spender during that period, outpacing even heavyweights like Saudi Aramco.
Production is already rebounding, and with Beijing likely to double down on self-reliance, there is no indication that pace of investment will slow in the coming years.
“In the last few years, we have seen an energy crunch all around the world,” Huang Yingchao, vice-president of natural gas at PetroChina International (Singapore) Pte, the energy giant’s trading arm, said at a conference last week.
“Gas and liquefied natural gas (LNG) are like tap water and bottled water. Tap water is cheaper and is more reliable, and the logistics are easier. So we push for domestic production.”
All of this is becoming a huge, unspoken headache for the world’s largest oil and gas producers. From Exxon Mobil Corp to BP Plc, sprawling corporations have grown used to having China as the engine for the world’s fossil-fuel demand.
Indeed, for much of the last decade, it accounted for more than 60% of global oil demand growth.
Take Shell Plc, one of the world’s largest LNG suppliers. It is investing billions into new LNG supply on the expectation that global demand will expand 60% by 2040, driven largely by China.
Its boss, Wael Sawan, told a conference in June that gas could make up 20% of China’s energy mix, compared with single digits today.
But the past may no longer be a good way of predicting the future. Domestic output is increasing just as demand growth slows, with the economy sputtering and cleaner cars beginning to rule the roads.
This year has already seen competition from other fuels, and Sanford C. Bernstein analysts expect domestic gas production to begin outpacing demand growth by the end of this decade, a moment when China may also be taking more pipeline gas from Russia, further cooling appetite for imported LNG.
Trump has said China will buy more US energy and even potentially invest in Alaska as part of a wider trade truce. But, as with other key areas, like agriculture, it will not be for lack of alternative options.
“China is coming in with increased production.
“With oil demand falling or plateauing, that serves to neutralise – or to provide China with a buffer against – the Trump administration’s push for energy dominance,” said Erica Downs, senior research scholar at Columbia University’s Centre on Global Energy Policy. “They’re in a completely different world and an even better position than during Trump 1.0.”
China still consumes far more than it produces, and that is unlikely to change any time soon. But today it ranks No. 7 in crude production, ahead of many members of the Organisation of the Petroleum Exporting Countries (Opec), and in natural gas it is No. 4.
That clout speaks to the evolution of China’s oil majors, all of which have expanded dramatically in size and sophistication this millennium.
PetroChina, Cnooc Ltd and Sinopec, have become giants in terms of output, refining and oil trading, alongside rivals Chevron Corp and Shell Plc.
PetroChina’s annual production has risen by nearly a quarter in the past decade to 1.8 billion barrels of oil equivalent.
“The Chinese oil majors have surprised not just the market, but they’ve surprised themselves by exceeding production targets,” said Michal Meidan, director of China research at the Oxford Institute for Energy Studies. “It gives China a sense of control, especially as oil demand is declining.”
Under the first Trump administration and during the first trade war, President Xi Jinping called for a renewed effort to boost domestic output.
Since, oil production has risen 13% and gas has climbed by more than half. Both are on track to set all-time records this year – the equivalent of adding nearly an Indonesia worth of oil and an Algeria worth of gas to the balance of global supplies.
Government officials haven’t made specific future targets public – at best, an indication could come early next year, when the 15th Five-Year Plan is approved by China’s annual Parliament.
But they’ve made it clear they want the drilling boom to continue. That new economic blueprint is expected to make upstream expansion a priority, according to a person familiar with the government’s thinking.
The person asked not to be named as the goals have not been published.
Beijing’s focus on hydrocarbon security arguably dates back to the late 1950s, to a period around China’s split with the Soviet Union – and with its engineers – that ingrained in officials the need to avoid leaning too heavily on others.
The country’s very first oilfield, Daqing, was already a model of self-reliance, expanding rapidly as technology, engineers and construction equipment were funnelled toward it.
Those concerns resurfaced in earnest a decade ago, when Opec launched a price war to halt the growth of US shale oil and combat a plunge in value.
China was caught in the crossfire, saddled with costly, ageing fields that the head of PetroChina in 2016 said had “no hope” of making a profit, even as prices recovered. Output tumbled 12% over the following three years.
Under Xi, Beijing has set out to change that.
In the midst of a trade war with the United States, he underlined in 2018 the need to boost domestic oil and gas exploration and production – at any cost. — Bloomberg
