china and the global energy crisis

China and the Global Energy Crisis

China and the GlobalEnergy CrisisDevelopment and Prospects for China’s Oiland Natural Gas

Tatsu Kambara

Petroleum Consultant (Independent)

Christopher Howe

Research Professor, School of East Asian Studies, Universityof Sheffield, UK

Edward ElgarCheltenham, UK • Northampton, MA, USA

© Tatsu Kambara and Christopher Howe 2007

All rights reserved. No part of this publication may be reproduced, stored ina retrieval system or transmitted in any form or by any means, electronic,mechanical or photocopying, recording, or otherwise without the priorpermission of the publisher.

Published byEdward Elgar Publishing LimitedGlensanda HouseMontpellier ParadeCheltenhamGlos GL50 1UAUK

Edward Elgar Publishing, Inc.William Pratt House9 Dewey CourtNorthamptonMassachusetts 01060USA

A catalogue record for this bookis available from the British Library

Library of Congress Cataloguing in Publication Data

Kambara, Tatsu, 1936–China and the global energy crisis : development and prospects for China’s

oil and natural gas / Tatsu Kambara, Christopher Howe.p. cm.

Includes bibliographical references and index.1. Energy policy—China. 2. Petroleum industry and trade—China. I.Howe, Christopher. II. Title.

HD9502.C62K347 2007333.8�230951—dc22 2006018305

ISBN: 978 1 84542 966 9

Printed and bound in Great Britain by MPG Books Ltd, Bodmin, Cornwall

Contents

List of figures viList of tables viiList of photographs viiiAbout the authors xPreface by Ron Oxburgh xiAcknowledgements xiv

Introduction 11 The origins and modern development of China’s

oil and gas industry 72 The geological basis of the onshore oil and gas industry 363 Oil and gas administration and the evolution of

exploration and development 444 Natural gas: China’s new energy source 685 The Tarim Basin: solution or problem? 816 Refining and distribution 967 Summing up and looking ahead 107

Appendix: The background to China’s energy planning 128

Bibliography 134Index 137

v

Figures

Oil and gas map of China xv1.1 The geographical distribution of China’s oil industry

before 1949 91.2 The main fields in Daqing oil field 151.3 Crude oil and natural gas production in China, 1971–2005 301.4 Crude oil production in the Daqing oil field, 1960–2005 322.1 The main sedimentary basins in China 382.2 Crude oil production in China, actual and projection 423.1 Organization chart of China’s petroleum companies 483.2 Daqing and Jilin oil fields 493.3 Shengli oil fields 573.4 Oil and gas fields and pipelines in offshore China 664.1 Gas fields and pipelines in the Sichuan Basin 694.2 Oil and gas fields and pipelines in the Ordos Basin 724.3 Oil- and gas-related map of north-west China 734.4 East China Sea conflict 764.5 LNG receiving terminal and planned gas pipelines

in Guangdong Province 785.1 The Kucha–Tabei gas area in the Tarim Basin 875.2 Oil and gas fields in the Tarim Basin 887.1 Annual discoveries of crude oil proven reserves

in place in China 1087.2 Chinese sea-lane for oil tankers: the ‘pearl necklace’ 124

vi

Tables

1.1 China’s oil supply, 1949–60 131.2 The long-run output of crude oil at Daqing and its

share of national production, 1960–2005 192.1 China’s major sedimentary basins: size, geological

resources, proven oil reserves, 1994 402.2 China’s major sedimentary basins: geological resources

of natural gas, 1994 412.3 The relation between the different measures of resources 413.1 Activities in oil and gas performance 453.2 Oil and natural gas output in Daqing and their

share of China’s total output, 1991–2005 503.3 Oil and natural gas output in the Liaohe field, 1978–2005 533.4 Crude oil and natural gas output in the Xinjiang field,

1956–2005 553.5 Oil and natural gas output in the Shengli field, 1978–2005 583.6 Crude oil and natural gas production by major fields,

2003–2005 603.7 The results of offshore exploration, 1984–98 645.1 Oil and gas fields in the Tarim Basin 875.2 Natural gas demand estimates and share by principal users 935.3 Natural gas demand forecasts by China’s major

geographical regions 936.1 Oil refineries in China 987.1 China’s oil balance in 2004 and in 2005 1077.2 Demand for crude oil and oil products, 2004–10 1127.3 China’s crude oil imports by country 114A1 Output and energy annual growth rates and elasticity

coefficients, 1980–2000 130A2 Output, energy and electricity annual growth and elasticities,

2000–2003 131A3 Sectoral shares of energy consumption, 2000 and 2020 132A4 Shares of primary energy consumption, 1980–2004

and central forecast for demand in 2020 132

vii

Photographs

1.1 The first known reference to shiyou (oil) appears inMenqi bitan (‘Jottings from a stream of dreams’) an11th century Song dynasty text on natural philosophy 8

1.2 The Yumen field in the 1950s. The basic drilling rig hereis of the type common in China in this period 10

1.3 Labour hero Wang Jinxi employing his mud-stirringtechnique as depicted in the Chinese film ‘The DevelopmentBattle of the Daqing Oilfield’ 16

1.4 The Yanshan refinery in Beijing. Like other refineries in the1960s, this was placed close to mountains thought ableto provide some protection from a Soviet attack 17

1.5 Daqing pipelines constructed in the 1970s. Prior to this Daqing crude was transported by long fleets of railway tankers 20

1.6 Two Daqing tankers loading crude at Qinhuangdao inthe Bohai Gulf, probably en route to southern China 21

1.7 Celebrations in June 1973 on the occasion of the departureof the first rail tanker carrying Daqing oil exports toJapan. In the following 30 years Daqing exportedsome 200 million tonnes of crude to Japan 22

1.8 Daqing city today – a prosperous city of high rise apartmentsand a population of more than one million 31

1.9 Oil fields in contemporary Daqing with extraction now at anadvanced stage of automation 31

5.1 Dynamiting in the Taklamakan desert in the Tarimfor seismic information 83

5.2 Well head assemblies in close proximity to the Karamaioil field 84

5.3 The huge monument is the ‘Black Oil Mountain’ built on thenatural bitumen deposits on the Karamai field 85

5.4 Exploratory and extension wells in Karamai 855.5 Pipeline construction work in the Qaidam Basin, near Xining

City. The pipeline technology in this case was probablysupplied by the Italian firm Saipem 91

5.6 Road construction for oil field developmentin the Junngar Basin 91

viii

5.7 Crude oil production at Tazhong 4 in the Tarim.A ‘Christmas Tree’ well head assembly and a lookout platform 92

6.1 A modern refinery at Maoming, Guangdong Province 1056.2 Most retail petroleum outlets belong to either

SINOPEC Corp. or PetroChina. The station shown here,however, is an independent 105

Photographs ix

About the authors

Tatsu Kambara has been studying the Chinese petroleum industry since the1960s and is widely regarded as Japan’s leading authority on the subject. Hehas published widely in Japanese and English and in the 1970s was one ofthe first specialists to use fragmentary Chinese information to build up apicture of China’s oil industry. His study in Japanese ‘Chugoku no sekiyuto tennengasu’ (Oil and natural gas in China) published in 2002 has beenwidely commended.

Dr Kambara worked for many years at the Japan National OilCorporation, the Institute of Developing Economies in Tokyo and theInstitute of Energy Economics of Japan. He has unrivalled first-handexperience of China’s oil and gas resources and was a member of many ofthe Japanese oil delegations that have visited China.

In the early 1970s Dr Kambara worked with the late Professor EdithPenrose in London and has collaborated with the co-author of the presentwork since that time.

Christopher Howe, FBA, joined the School of Oriental and African Studiesas an economist in 1963 where he studied the Chinese and Japanese lan-guages. He has published many studies on the Chinese and Japaneseeconomies, specializing in recent years on issues of industrial technologyand international economic relations in the Far East.

In 2001 he was appointed London University’s first Professor of ChineseBusiness Management. He is now Research Professor at the School of EastAsian Studies at the University of Sheffield and is currently Chair of theBritish Academy’s China Panel.

x

Preface

For more than 15 years China has maintained a breathtaking rate of eco-nomic growth, averaging almost 10 per cent per annum. This growth haspropelled China’s energy demand to the point where a country that was anet exporter of oil in the 1970s cannot now meet its domestic needs fromits own natural resources. Indeed, today’s price of a barrel of oil ($60+) isattributed by some, perhaps unfairly, to the unanticipated demands thatChina has been making on the world oil market in recent years.

China is a country that in some respects is today not unlike the USA ofthe 1850s – it has a sophisticated and prosperous east coast and an interiorand western region that lags a long way behind, with a much lower stan-dard of living and heavy dependence on agriculture and mining. The inte-rior is also still somewhat remote from the writ of Beijing, as the saying goes‘The mountains are high and the emperor is far away’.

Tens of thousands of towns and villages in western China are stillwithout mains electricity and the benefits of communication and quality oflife that they bring. These internal disparities have led to varying degrees ofcivil unease. For these reasons it is hardly surprising that the priority of thepresent government is to redress the balance. In part this is being done bya programme of power-plant construction on a scale that has probablynever been matched. Currently the equivalent of a large (1Gigawatt)capacity power station is being commissioned every five days. These plantsare, however, not being fuelled by oil or gas, but by coal, the one fossil fuelthat China has in abundance. Although this choice of fuel would probablyhave been made in any case, the high world prices of oil and gas haveeffectively ruled them out as alternatives for power generation. This choice,however, carries a major penalty, namely that of air pollution. Particulatesand acid rain continue to pose a major respiratory problem in industrial-ized cities and as recently as November 2005, Chinese government officialswere estimating a cost to the country of around 3.5 per cent of GDP. Bothoil and gas can be significantly lower in both local pollutants and green-house gas emissions.

The greater part of China’s energy resources lie in the west of thecountry, while the bulk of current demand arises in the urban and indus-trial east. For that reason the new west–east gas pipeline is of great import-ance. This is one of the largest and most rapidly completed projects of its

xi

kind in the world. For the future it is worth remembering that the nearestunexploited or underexploited oil and gas reserves in China’s immediateneighbourhood lie to the north-west, in eastern Russia. These are currentlybeing explored by consortia comprising Russian and foreign oil companies.When they are fully assessed it may prove that access to these resources bypipeline could be an important way for China to strengthen and diversifyits energy supply.

The rate of growth of Chinese oil consumption is matched by thegrowth of the demand for transport fuels. Perhaps the most visibleindication of this growth is the increase in private and other forms of carownership. China’s new middle class and the growth of its corporate activ-ities now create rush-hour congestion equal to any found in majorcities in the East. However, it would be wrong to think that vehicles arethe only problem. Increase in both internal and international aviationand increases in the energy demands for shipping have both played amajor role.

For transport there is no generally available alternative to oil. As theauthors show, although China has some reserves of oil and a reasonablyeffective oil industry, there is no prospect of demand for transport fuelsbeing fully met from internal resources, and hence imports can only rise.This has several consequences. The most obvious are the attempts tosecure resources overseas either by direct acquisition or by partnershipdeals. In recent years China has completed deals in Sudan, Venezuela,Angola, Kazakhstan, Algeria and Indonesia (and has been rebuffed inthe USA). It will be surprising if securing additional resources overseasdoes not remain a major objective of Chinese foreign policy for many yearsto come.

Another consequence is the search for direct oil substitutes. With worldoil prices at their present levels, technologies that a decade ago were ofresearch interest only are now attracting urgent attention. In particular,the possibility of new techniques to exploit coal reserves must be of greatinterest to China. If coal is heated under appropriately controlled condi-tions, new gases are evolved that may either be used directly, or used tomake vehicle fuels. Some work of this kind is going on in collaborationwith foreign companies, but so far there does not appear to be any pro-duction. If current world prices remain above $50, this may prove to be acost-effective way of improving supply security for vehicle fuels. As wellas being in the world market for conventional oil, China may also havean interest in the ultra-clean vehicle fuel that is being produced by themultinationals in the Middle East from natural gas (GTL – gas to liquid).This would make a welcome contribution to improving air quality inmajor cities.

xii China and the global energy crisis

This is a timely volume. Understanding the oil and gas industry thatChina has at home is essential to understanding Chinese foreign policy andthe future role of China in world oil and gas markets. It is certain to be amajor one.

Ron Oxburgh,Lord Oxburgh of Liverpool,

Climate Change Capital

Preface xiii

Acknowledgements

The authors are grateful to the following persons and corporations forgiving us permission to reproduce the photographs in this book.

Professor Katsuhiko Hama, Soka University, Japan for Photograph 5.5.

Institute of Energy Economics, Japan for Photograph 1.8.

Japan Energy Development Co., Ltd for Photographs 5.3, 5.6 and 5.7.

Petroleum Industry Publishing House in Beijing for Photographs 1.1–1.7(published in Petroleum Industry in China, 1949–1989, Photo issue, 1989,Beijing).

Chinese Oil Industry Journal, published in China, for Photographs 1.9, 5.1,5.2, 5.4 and 6.1.

The author (Tatsu Kambara) for Photograph 6.2.

xiv

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Introduction

The rapid economic development of China during the past two decades isproving to have profound implications for China’s energy situation. China’sGDP increased fourfold between 1980 and 2000, while primary energy con-sumption approximately doubled in the same period. By 2004, China’sprimary energy consumption had risen to 1386.2 million tons of oil equiva-lent (mtoe). Of this, coal supplied 68 per cent and oil 23 per cent. In the sameyear, while China’s domestic output of crude oil had reached 174 millionmetric tons (mmt), consumption of petroleum products was reported to be300 mmt – a huge gap that has had to be filled by imports.

According to official statistics, net imports of crude oil in 2004 reached117 mmt and oil products imports were an additional 26.4 mmt. In globalterms, therefore, China produced only 4.5 per cent of the world’s oil butconsumed 8.2 per cent.1 Bearing in mind that at present Chinese per capitaenergy consumption levels are less than one-tenth of those in the USA andone-seventh of those in Japan, the scale of the future potential of Chineseconsumption and its world impact are both obviously important.

On present estimates, energy consumption in China is likely to increaseby two- to threefold between 2000 and 2020. Within this total, if oil is tomaintain its recent share of energy supply, it is likely that more than 60 percent of all oil will have to be imported.

This far-reaching transformation is all the more remarkable when weremember that when China’s economic reforms began in the late 1970s,China was a significant energy, and especially oil, exporter. Further,whereas before reform China’s economic system enabled the planners tocontrol many of the parameters of demand and supply, this is increasinglyno longer the case. Firms and householders, now driven by prices, incomesand profit criteria, make choices that the economy has to respond to. Whatthis means is that while energy issues are bound to remain an importantconcern of government, both the technical and economic feasibility ofsolutions to China’s energy problems will, increasingly, have to be consist-ent with changing market realities.

In the days of the planned economy, calculations were largely in realterms, and cost considerations were not decisive in either the planning ofthe energy supply or in decisions by the major consumers. Today, this hasall changed, not least as a result of the internationalization of China’s

1

economy. International participation in the Chinese energy sector means,first, that foreign participants weigh China-related decisions in the balanceof a worldwide range of alternatives and, second, that consumers areincreasingly able to make choices between both types of fuels and betweendomestic and foreign suppliers all based on price, reliability of supply, andother conventional market factors. The implications of this are alreadybecoming apparent as a result of the arrival of ‘West to East’ gas suppliesin the eastern provinces. These supplies are clean but expensive and have tocompete with both coal and imported liquid natural gas.

Understanding China’s current and prospective supplies of oil and gasand their international significance is, therefore, a complex problem. Tounderstand it we need to consider four distinct sets of issues. These are:

1. China’s natural resource endowment for these industries.2. The technological and business capabilities available domestically to

develop this.3. The organizational structure of the sector and the extent to which

market-type incentives are operating within it.4. The role of foreigners in China’s energy sector.

Foreign involvement can now take several forms. These include: supply-ing energy imports; supplying the technology for exploiting domesticresources; and, increasingly, entering into partnerships for on- and offshoreexploration and development both in China and overseas.

From this last point we can see that, even in an age when economicgrowth and reform are so high on the national agenda, China’s thinkingabout energy policy is bound to be coloured by international politics,strategic and security considerations.

We believe that this is an opportune moment at which to reappraise thepresent and prospective oil and gas situation. One reason for this is thatChina’s transition to an oil-importing status is relatively recent and its impli-cations are only beginning to be fully appreciated both within and outsideChina. Second, in the post-Iraq-War situation oil and gas prices have beguna trajectory that is certainly upward but very possibly unstable. It remainsunclear what the prospect for long-term price trends really is. Pessimistsare convinced that the high prices of summer 2005 represent the future,but some dimensions of the supply situation remain potentially highlyfavourable. Strong development in Russia and a renewal of stability in Iraqcould, for example, transform the supply situation. Also, the events of thepast two years have renewed pressures for technical innovation and also forinvestment and policy measures to constrain demand and improve supply.Thus the post-crisis history of rapid market adaptation that took place in

2 China and the global energy crisis

the 1970s and 1980s may be repeated. However, for the immediate future,world energy price trends remain crucial to China because the viability ofseveral of China’s current plans and options is critically dependent on them.

The new factor in the global situation, not present in the 1970s, is theemergence of China, India and other developing nations as major con-sumers of energy. The problem of the two oil price crises of the 1970s wasessentially the conflict between producers and consumers – largely a conflictbetween the interests of Middle Eastern producers and the big net importersin America, Japan and Europe. The contemporary problem looks increas-ingly like a competition between consumers, whose numbers have beenenlarged by the rapidly growing demand of Asian potential superpowers.

Some of these issues have been vividly illustrated since 2002, the year inwhich China entered an open electricity supply crisis. This reflected a plan-ning failure of the late 1990s: in the first quarter of 2004, 24 of China’sprovinces had power shortages and one-third of all the Chinese provinceshad serious power deficits in the summers of 2003 and 2004.2 So severe wasthis crisis that the national planners had to make emergency changes to thecurrent five-year plan and at the local level, in the summer of 2004 the Beijingauthorities had to decide whether to keep the air conditioning in the city’soffices and hotels functioning, or to interrupt for weeks on end the powersupply to local industrial consumers. (They chose the former.) The knock-oneffect of these shortages was a jump in China’s demand for imported oil asconsumers fell back on small-scale diesel-driven generators to make up forthe deficiencies of the grid supply. Then, in the summer of 2005, there wereyet more manifestations of China’s energy problems, first in the form of ashortage of gasoline in southern China caused by a refiners’ ‘strike’. Thisarose because crude prices (linked to international prices) reached levels thatforced losses on Chinese refiners who were required to sell at the regulatedprices of refined products. As a result, long queues of unhappy consumersappeared on the petrol forecourts in Guangzhou. Meanwhile, up the coast inShanghai, taxi drivers caught between rising fuel prices and regulated farelevels were also in uproar. Events of this kind would have been unimaginablejust a few years ago and the energy flexibility of China and other developingeconomies is, therefore, something that we must urgently seek to understandif we are to think sensibly about the global energy future. In China, suchflexibility is very much a matter of both physical resources and of the systemsand efficiency with which these are used.

One other new factor in the Chinese situation is political. Since March2003 a new ‘fourth-generation’ leadership has come into power. By springof 2006 and the announcement of China’s Eleventh Five Year Plan(2006–2010) at the National People’s Congress, this change had alreadybrought a great deal of new thinking to economic policy generally and, if

Introduction 3

words are turned into action, may be important for strategic aspects ofenergy development as well. There is, for example, new emphasis on achiev-ing a better balance between industry and agriculture, between industrialand trade growth and the claims of environmental factors, and betweencoastal and inland development. All of these changes have energy implica-tions. Further, the future of the economic reform itself remains at animportant juncture as the Chinese wrestle with the problems of reconcilingdevelopment of a market economy with the maintenance of a society withdistinct Chinese and socialist characteristics.

China’s organizational capability to handle energy problems is one of thelarge unknowns of the sector at the present time, but such capability isclearly critical. It is essential that both household and commercial con-sumers have strong incentives to economize energy consumption and thatsuppliers of energy work in an effective and coordinated way to satisfy themarket. The success or otherwise of the continuing drive to economicreform is bound to be a key factor determining China’s energy future.

The purpose of this book is to provide a concise introduction to China’senergy problems by focusing on the growth and development of the oil andgas sector. These realities provide a starting point for all other dimensionsof China’s energy situation. Important as the subject is, we find it remark-able how limited is knowledge of these issues outside China and outside avery small group of foreign specialists. This is a serious issue, particularlybearing in mind the growing tendency among some politicians and com-mentators to blame the world’s economic ills on the Chinese. The graphthat appeared in the press in 2005 showing a close fit between the trend ofChinese oil imports and world oil prices was a good example of this typeof misleading and alarmist analysis. We hope that this book will do some-thing to remedy this situation.3

We start our study by analysing the historic trajectory of the oil and gassector. Present energy resources and the infrastructure to exploit them arevery much a product of history and, in Chapter 1, we briefly review theChinese development of oil and gas from the earliest times to the present.In particular we examine the changing emphases between the eastern andwestern phases of exploration and the story of the offshore oil mini-boomof the 1980s. In Chapters 2 and 3 we discuss the geological basis for thisprogress and the record of exploration and development. Chapter 4 focuseson the role of natural gas and in Chapter 5 we look at the development andprospects for the Tarim Basin – often seen as China’s new energy Klondike.In Chapter 6 we examine the infrastructures of refining and transportation.These are both topics critical to oil and gas development but about whichrelatively little is known outside China. In the last chapter we sum up andanalyse the prospects for longer-term supply and discuss some of the policy


options confronting the Chinese authorities and the implications for theglobal energy future. Finally, while the main emphasis of this book is on ouranalysis of the issues, in the Appendix we outline what appear to be thecurrent Chinese perspectives and approach to their country’s energy future.

NOTES

1. International date for oil and gas are from BP Statistical Review of World Energy, June2005.

2. This crisis is described in The State Grid Corporation of China, Zhongguo dianli shichangfenxi yu yanjiu 2004 chunji baogao (Research and analysis of China’s electricity market.Report for Spring 2004), Beijing: The China Electricity Publishing House, 2004,pp. 25–35.

3. The Worldwatch Institute has suggested parallels between China’s search for resourcesand that of Japan in the 1930s: Worldwatch Institute, The State of the World 2006,Washington, 2006. The graph appeared in The Economist, 17 February 2005.

Introduction 5

1. The origins and moderndevelopment of China’s oiland gas industry

OIL AND GAS BEFORE THE ESTABLISHMENT OFTHE PEOPLE’S REPUBLIC OF CHINA

Although small and economically insignificant, oil and gas were known inpre-modern China. Both oil and gas seeped or even gushed through theearth and the Chinese found ways to use them. For example, along theYanshui River in Shanxi Province crude oil was used for fuel and othertraditional uses included the lubrication of axles and the making of pitchto seal ships’ hulls.1 Even more remarkable was the development of naturalgas in Sichuan Province. This was transported through bamboo pipes andburnt in the process of extracting salt from underground wells of salt water.

The first known use of the term we now use for oil – shiyou – was over900 years ago, since when the term has been common usage in both Chinaand Japan (see Photograph 1.1).

In the modern age oil became of major importance when, in the form ofkerosene, it began to be widely used as a lighting fuel. Western oil com-panies rushed to this new Asian market, importing large quantities ofkerosene into both India and China. Shell oil company (Royal Dutch Shell)had a large oil market in Asian countries. From less than half a milliongallons in 1870, imports from the USA alone to China reached 165 milliongallons by 1920 as consumption rose, boosted by marketing campaignswhich even included the free distribution of kerosene-burning lamps by theStandard Oil Company.2 This new industry was based mainly in Shanghai,where American and European major oil companies established largestorage facilities.

Drilling for oil in China using modern technology began at the turn ofthe century. Qing government officials invited Japanese engineers toprospect for oil at Yanchang in Shanxi Province, where its presence wasalready known from surface seepage. Although we now know that oilreserves of significant magnitude were indeed there, at the time theJapanese technology and the financial constraints on the prospecting firms

7

were major limitations on what could be done. The result was that little oilwas ever produced. The Standard Oil Company also undertook some workat Yanchang, but it too was disappointed.

In spite of these setbacks, rival domestic political interests remainedinvolved with the site. Both the Guomindang and the Chinese CommunistParty sought to exploit any resources that could be found, and in 1935 the RedArmy took control of the field, establishing the Yanchang Petroleum Factory.This establishment achieved some success, producing an estimated 3000tonnes of crude oil between 1939 and 1946. This was refined at a small andunsophisticated refinery on site, and the products were consumed locally.3

The first major success in the modern history of China’s oil explorationwas development and production in the Yumen oil fields in China’s north-western province of Gansu. Again, the region of the Hexi Corridor hadlong been thought to have promise, and a geological survey was made bythe government as early as 1906. But it was not until the arrival of moderntechniques and equipment in 1937 that serious progress could be made. In1937–38, the Nationalist government established a Preparatory Office forEstablishing Gansu Petroleum Exploration and the Red Army’s equipmentwas used to drill four test wells. In 1939, oil was struck at Laojunmiao andthe Yumen fields began their important history. Between 1938 and 1944, 44wells produced a cumulative total of 455 000 tonnes of oil and by 1949 thefield was producing 80 000 tonnes annually. This was refined at the city ofLanzhou into a variety of products, including gasoline for vehicles, fuel oiland lump kerosene. Lanzhou thus became the centre of the Chinese oil


Photograph 1.1 The first known reference to shiyou (oil) appears inMenqi bitan (‘Jottings from a stream of dreams’) an 11thcentury Song dynasty text on natural philosophy

industry and this fact was marked by the establishment there of theAcademy of Petroleum (see Figure 1.1 and Photograph 1.2).

Another location for early oil development was the province of Xinjiang.Again oil seepage had been observed at Dushanzi, and the Karamai field(as it became known) took its name from a small hill actually created by theaccumulation of oil pitch formed on the surface from underground sources.In 1933, after initial exploration, the Nationalist government formed ajoint venture with the Soviet Union to develop these fields. Altogether 33wells were drilled before the joint venture was terminated in 1943.Production peaked in 1942 at just under 7000 tonnes per annum. It was notuntil 1950, therefore, that full-scale exploration of the Xinjiang JunngarBasin field began.

Another place where pre-Liberation development occurred was Taiwan.Some early American exploration had been undertaken by American engi-neers at Miaoli as early as 1878. But it was not until the Japanese period(1895–1945) that a major effort was made in both oil and gas exploration.At Jinshui and Chukuangkeng, oil and gas fields were identified andexploited. Between 1904 and 1948 over 168 000 tonnes of crude were pro-duced. Small refineries were established at Miaoli and Gauxiong.

Japanese initiative was also responsible for one other importantenergy development in pre-Liberation China. This was the establishment of

Origins and development of the oil and gas industry 9

Figure 1.1 The geographical distribution of China’s oil industrybefore 1949

UrumuqiDushanziOil field

Lenghu

Lhasa

Yumen Oil field

YinchuanXining

Hong Kong

Chengdu

Xi’an

Bengal Gulf

Chongging

Beijing

Tianjin Bohai

YellowSea

Shanghai

East China Sea

South China Sea

Wuhan

GuangzhouKunmingGuiyang

Nanning

Changsha Fuzhou

YanchangOil field

Taiyuan

Zhengzhou

Nanjing

Haerbin

Changchun

Shenyang

Oil Shale FactoryDalian

Lanzhou Oil Centre

Hefei

Taiwan

shale-oil distillation at Fushun in Liaoning Province, Manchuria. TheFushun open-cast coal mine (the largest in the world at that time) wascovered in oil shale. Starting from a test plant, Japanese companies devel-oped facilities that by 1942 were producing 250 000 tonnes of shale oil.4 Inthe same year, the Japanese also produced 24 000 tonnes of coal-based syn-thetic petroleum from plants at Jinzhou, Jinxi and Jilin. By that time, aswell as small refineries at Lanzhou, Yanchang and Dushanzi, the refineryat Dalian run by the Manchuria Petroleum Company of Japan had acapacity of 680 000 tonnes per annum.

In spite of these domestic developments, China remained heavily depend-ent on imports. In the 40 years to 1948 a total of 28.8 mmt of petroleumproducts were imported, which meant that the domestic share of supply wasonly approximately 10 per cent. Domestic supply in fact was inadequate tomeet even the demand for gasoline, gas oil and lump kerosene.

THE PETROLEUM INDUSTRY DURING THEPERIOD OF SOVIET SUPPORT

The problem of energy development was one of the most urgent tasks ofthe PRC after 1949. Immediate measures were taken to prospect and makeplans for the production of oil and coal. In April 1950, the first NationalPetroleum Congress took place and the Ministry of Fuel Industry (ranliaogongyebu) was given the overall responsibility for petroleum. In 1955, thePetroleum Administration Department of that Ministry was upgraded to


Photograph 1.2 The Yumen field in the 1950s. The basic drilling rig hereis of the type common in China in this period

the rank of Ministry of the Petroleum Industry (MPI). The MPI initiatedand supervised all activities relating to exploration, oil-field development,and the construction of refineries.

During the First Five Year Plan (1953–57) a variety of programmes ofgeological investigation, geophysical surveying and exploratory drillingwas undertaken. The location of these efforts was basically those regionsthat had been found to have oil in the pre-Liberation period. In particular,efforts were focused on the Junngar Basin in Xinjiang, the Jiugan Basin inGansu (where subsequently the Yumen field was developed), and the OrdosBasin in Shanxi, where the Yanchang fields were confirmed. Of theseefforts, it was the work in the Junngar Basin that achieved the earliestsuccess. In October 1955 what proved to be the huge oil fields of Karamai–Uruho were discovered in the Junngar Basin.5

The successful exploration and subsequent development of the Karamaifields depended heavily on Soviet technical support. The Dushanzi oil-fielddevelopment had already been undertaken as a Sino-Soviet joint ventureand in the development of the Karamai field, the Soviet contribution wasenormous. A decision to develop on the basis of a further joint venture wasmade in 1959. Under this arrangement the early geophysical survey and thetest drilling programmes were undertaken with engineers, materials andequipment supplied by the All Soviet Institute of Petroleum Engineering.These efforts enabled the field to come on stream on a provisional basis asearly as 1959.

Without this Soviet support the Chinese would have had the greatestdifficulty in developing their oil and gas resources in the 1950s, although inthe cooperative process, the Chinese specialists undoubtedly acquiredknowledge and experience with great speed. As in other aspects of eco-nomic work, however, technical dependence on the Russians went hand inhand with the adoption of Soviet-style administrative arrangements.Planning was highly centralized, and under the MPI, an OilfieldsAdministration Department and an Exploration Supervision Departmentwere formed. Meanwhile the Ministry of Geology (MOG), also modelledon Soviet practice, took charge of geological surveys.

The Soviet specialists were engaged in every aspect of oil development,extending not only to geological and geophysical surveys and the drillingof test wells, but also to extraction technology, transportation by pipeline,lorry and rail, storage establishment, refining and so on. In addition tothese practical forms of support, the Soviets also helped the Chinese byaccepting Chinese students to undertake advanced study in all the relevantacademic fields in Russian colleges and universities. These students laterformed the backbone of the new Chinese industry on their return from theSoviet Union.6


Progress in the 1950s, in addition to the new oil fields in the Junngar andQaidam Basin fields at Karamai and Lenghu, also took the form of theopening of new natural gas fields in the Sichuan Basin. The Sovietsalso helped revitalize the older Yumen and Yanchang fields in Gansuand the Ordos Basin. By 1959, production from the latter fields reached2.76 mmt. Downstream, the Russians installed new refinery capacity atLanzhou, which in 1959 refined 2.349 mmt of gasoline, kerosene, fuel oiland lubricants.

Further development of shale oil was also undertaken. Plant and equip-ment left by the Japanese at Fushun were brought back into operation andexpanded, producing over 1 mmt by 1960. Meanwhile, at Maoming inGuangdong Province, a further shale-oil reservoir was discovered and a dis-tillation plant built on site.

In spite of all these developments, China’s energy demand during the1950s substantially exceeded domestic supply for crude oil and petroleumproducts. The gap was filled by imports from the Soviet Union. During the1950s, these amounted to 14 mmt, with a peak in 1959 of 3.048 mmt, ofwhich 2.412 mmt were petroleum and the balance was crude oil. Initiallythese supplies came from fields on the Sakhalin Islands, but later Caucasianoil from the Baku fields was transported to China via the Black Sea and theSuez Canal. These flows continued even during the Sino-Soviet disputesand, in total, China imported more than 24 mmt at a cost of over 1 billionUS dollars (see Table 1.1).7

THE DAQING FIELD: DISCOVERY, DEVELOPMENTAND THE SIGNIFICANCE OF THE ‘DAQINGMETHOD’

In the late 1950s China’s oil development effort began its fundamental shiftfrom the west to the eastern side of the country. Behind this shift laycomplex geological realities and a history of expert debates. The questionas to whether oil and natural gas reserves might be held below the SongliaoPlateau in north-eastern China had long been a contentious issue. LiSiguang, a prominent geologist and the first minister in charge of geologi-cal prospecting at the Ministry of Geology (MOG), had long beenconvinced of this possibility. Li recommended to Mao Zedong that indeveloping domestic resources, the prospecting effort be transferred fromthe older fields in the western areas to new potential fields in the east. Li’sargument was that China’s principal oil and gas reserves were not held bymarine sediments but were in lacustrine (terrestrial) sediments of the kindformed beneath sandbars of lakes and rivers. Li considered that such


deposits were probably widespread but he advocated that search should beintensified in the depressions of the so-called Xinhuaxia structural systemfound in eastern China.8

This argument was discussed in detail in 1956 at the First PetroleumExploration Conference and it was then decided that, in addition tofurther work in the western regions, a major effort would be made toexplore the huge sedimentary basins of eastern China. The MPI and theMOG jointly organized a major effort in the Huabei and Songliao Plains,which extended through the provinces of Shanxi, Gansu and the NingxiaOrdos Basin. Thirty-nine special exploration teams were formed and theirplanned programme included geophysical surveys and strategic drillings toidentify the geological formations in these places. As a first step, magneticand gravity investigations were conducted from the air covering these vastregions.

In 1959, the first test well was drilled in the central area of the SongliaoBasin and, on 26 September of that year, crude oil gushed from the SongjiNo. 3 well at Datongzhen. This result suggested that further explorationand development might well find economically feasible fields, with threeother areas of north and north-east China looking favourable. However, itwas the stunning result in the Songliao Basin that was so remarkable,and the No. 3 Songji well and its field were renamed Daqing (Great Joy).


Table 1.1 China’s oil supply, 1949–60 (000 tonnes)

Crude oil Shale-oil Total Crude oil and Total oil National self-production production refined products supply sufficiency

imports rate (%)

1949 70 51 121 – 121 –1950 110 90 200 281 481 41.61951 154 151 305 729 1134 26.91952 196 240 436 608 1044 41.81953 306 316 622 834 1456 42.71954 382 407 789 904 1693 46.61955 423 543 966 1582 2548 37.91956 589 574 1163 1732 2895 40.21957 861 597 1458 1803 3261 44.71958 1472 792 2264 2507 4771 47.51959 2763 971 3734 3294 7028 53.11960 4196 1016 5212 3273 8485 61.1

Source: Data calculated from source gathered in, T. Kambara, ‘Petroleum Industry inChina’, Sekiyu kaihatsu jihö (Oil Development Review), No. 24, December 1974, pp. 15–41,table 2.

Minor corrections made later from official Chinese and Russian sources.

The fact that this discovery coincided with the tenth anniversary of theestablishment of the People’s Republic of China (PRC) was regarded asboth fortuitous and highly symbolic.

THE ‘DAQING METHOD’

By 1960 the Sino-Soviet dispute was making the question of Chinese oilself-sufficiency an immensely important one. Also, the dispute itself wasabout a whole range of issues, including the correctness and relevancefor China of the entire Soviet approach to development and economicplanning. This approach embodied both a strategy for resource allocation(heavy industry priority) and a method of economic administration(centralized bureaucratic planning). By the late 1950s Mao was con-vinced that the Soviets had got the fundamentals of both of these wrong.With Chinese agriculture failing towards the end of the First FiveYear Plan and the inapplicability and inefficiency of Soviet planningmethods in the Chinese environment becoming ever more obvious, Maoturned the whole Daqing enterprise into a showpiece for new, ‘Maoist’,methods of development. The new Maoist model of economic develop-ment put the emphasis on self-reliance rather than any form of foreigntechnological dependence, on labour rather than the scarcer capitalresources, and it required political education to take the place of materialincentives.

None the less, after the loss of Soviet support the technical and humanresource challenges of the Daqing field were truly enormous and histor-ically unprecedented. Quite apart from skill shortages, inexperience andlack of equipment, the physical environment of Daqing was itselfappalling. The site was basically a swamp in a bleak plain, remote fromsecure food supplies, and lacking transportation and other basic infra-structural support. Winter temperatures brought by blizzard conditionswere typically in the range of minus 30 to 40 degrees Centigrade.

It was in these conditions that the Party decreed that capital shortagesand technical shortcomings should be overcome by the mobilization ofthousands of men in ‘battle’ formation, controlled by military workmethods, and driven forward by Maoist ideology. To implement this strat-egy the State Council gave supreme priority to the Daqing project, requir-ing all relevant ministries (transport, machinery, construction, railroads,agriculture and forestry) as well as the Heilongjiang provincial government,to cooperate under the umbrella control of the MPI. For the CommunistParty, too, the Daqing project became a supreme test of political strengthand of its ability to weather the crisis of the post-Soviet years.


At any one time up to 40 000 workers were mobilized in the Daqingdevelopment. These performed every task, from basic land construction,drainage and the construction of living accommodation, to the trans-portation of machinery, often by means of long human chains.

As its development unfolded, the Daqing field proved to be an agglom-eration of many individual fields. The Songji No. 3 well became part of thelarger Gaotaizi field and this discovery led directly to discovery of thePutaohua and other fields in the main Daqing central field (see Figure 1.2).In the northern part of this field was the largest discovery of the entireDaqing complex, the Saertu field. On the basis of this series of preliminarydiscoveries, a full Daqing ‘battle line’ was put in place.

In 1960–61 the priority was exploration activity, with the main focus onthe area adjacent to the Saertu field. This had the advantage of proximity toa railway station at Saertu – subsequently named the Daqing station.Thousands of wagons laden with equipment were despatched to this station.The geological character of this region was such that individual wells wererelatively small; hence in a frantic socialist competition, the plain was sooncovered by hundreds of individual drilling rigs. A particular problem of thesesmall adjacent wells was that as they were opened up and air let in, they hada tendency to explode. This phenomenon could only be prevented if large


Figure 1.2 The main fields in Daqing oil field

Lamadian

Saertu

Xinshugang

Gaotaizi Taipingtun

Putaohua

Aobaota

quantities of muddy water were injected at high speed. The solution to thisproblem was found by ‘Iron Man’ Wang Jinxi – the greatest and archetypallabour hero of the Daqing enterprise. Wang typically leapt right into thehuge containers of muddy water, swirling it around with his body so that itwas circulated at high speed, thus avoiding the danger that it might ice over.To maximize production from these small wells, water injection – a technol-ogy normally associated with enhanced recovery towards the end of the lifeof a well – was used at the outset of the well’s life. The Chinese called thismethod ‘early water injection’ (zaoqi zhushui). This was originally a Soviettechnique which, after the Russians left, the Chinese developed to the pointwhere it could be employed to develop large numbers of small wells, each 900to 1500 metres deep9 (see Photograph 1.3).

The development of the Daqing field proceeded with extraordinaryspeed. In 1960, the output of crude oil produced on an experimental basisreached 970 000 tonnes. Most of this was refined at a simple distillationtower and used for local purposes. The balance was transported as crudeto other parts of China. By 1963, nearly 1200 wells had been drilled andfacilities at Saertu were sufficient to produce 9 mmt per annum althoughactual production in that year was only 4.393 mmt, most of which wastransported to refineries in north China (see Photograph 1.4).


Photograph 1.3 Labour hero Wang Jinxi employing his mud-stirringtechnique as depicted in the Chinese film ‘TheDevelopment Battle of the Daqing Oilfield’

‘SELF-RELIANCE’ AND DAQING’S TECHNIQUEAND PERFORMANCE DURING THE CULTURALREVOLUTION

During the 1960s and for most of the 1970s Daqing was the pre-eminentexample of Mao’s nationalistic policy of ‘self-reliance’ and the beneficiaryof every priority that the political and administrative system had power tomake available. The planning environment of the Great Cultural ProletarianRevolution was of course chaotic and while Daqing could not avoid beingaffected by this, its performance was none the less remarkable. The applica-tion of Maoist Party styles of work was universal and the Little Red Bookand armfuls of slogans were developed, not only to urge the Daqing workersto ever greater efforts, but to use the Daqing example to spur industry, con-struction and agriculture throughout China as well. However badly thesemethods worked in less favoured sectors, for most of the time the combin-ation of enthusiasm, military work style and administrative priority worked


Photograph 1.4 The Yanshan refinery in Beijing. Like other refineries inthe 1960s, this was placed close to mountains thought ableto provide some protection from a Soviet attack

for oil and gas, and both upstream (exploration and development) anddownstream (refining and supply) sectors of the industry grew rapidly.

The key Saertu field was brought fully on stream by between 1964 and1966, with annual output reaching 13 mmt. The crude oil produced wastransferred by pipelines to gathering stations, stripped of gas and water,and then piped to storage tanks to await final shipment. The chemicalproperties of Daqing oil, however, created some serious problems for itshandling. One property of this oil is that when the ambient temperaturefalls below 32.5 degrees Centigrade the oil solidifies and cannot be handled.As a result, Daqing crude has to be heated year round except for a shortspell in the summer months. Another problem arises from the fact that theoil has a high wax content, requiring that production, transportation andstorage facilities be continually de-waxed to keep them working efficiently.

As Daqing experience accumulated, the ‘battle front’ techniques maturedand improved. If we take a bird’s-eye view of the Daqing field, what we seeare hundreds of wells, all employing water injection techniques. These wellsare arranged in square, grid-type arrangements and each is capped by asmall tree-like structure known in the industry as a ‘Christmas tree’. Thestructure consists of a shelter made from mud bricks, and inside this areyoung, usually female, workers collecting data on the stream of output. Theshifts cover 24 hours of the day. These data are critical for controllingthe water pressure in the system. An excess of water dilutes the oil andthe changing characteristics of the crude require other adjustments to theinjection process as the well breaches the changing strata of sediment.Although the engineers understood the basic principles of water injectionunderlying these procedures, the application of them to Daqing was onlyaccomplished by lengthy and exhausting processes of trial and error.

In 1966 Daqing development moved on from Saertu to other new fields.Xinshugang was the next to be opened, but by now the disruption caused byfactionalist fighting and disruption in the Cultural Revolution were seriousproblems. Led by activists such as Chen Boda, the Cultural Revolution wastaken right into the Daqing field. Iron Man Wang Jinxi was ridiculed, wellsand equipment were sabotaged and damaging attacks were made on engi-neers and white-collar specialists labelled as ‘bureaucratic’ enemies. For awhile, there was a complete breakdown of leadership. However, when ZhouEnlai heard of these developments he was ‘extremely upset’ and movedimmediately to reinstate Wang and restore order to the field, which heinsisted was a good and successful development, vital to China’s interests. Inspite of Zhou’s powerful patronage, there was some disruption and delay,and the Xinshugang field did not come on stream until the late 1960s.10

The third Daqing field to be developed was Lamadian, a field close to theDaqing rail terminal. Again water injection methods were applied from the


outset, and output from the whole Daqing field rose from 10.6 mmt in 1966,reaching 17.67 mmt in 1970 and 50 mmt in 1976 (see Table 1.2).

These levels of output required a major transportation infrastructure,especially pipeline facilities. The long-distance pipeline from Daqing toFushun was completed in 1973 and this was later extended to the port ofQinhuangdao and to Beijing. This pipeline replaced the older system of railtransportation, and pipelines are now used to move crude to refineries inall the major industrial centres in north-east China. In most cases, refiningincludes a variety of products, with petroleum being refined and distributedfor local use. Eventually, Daqing crude also made its way by sea not only


Table 1.2 The long-run output of crude oil at Daqing and its share ofnational production, 1960–2005 (000 tonnes)

Commenced Daqing crude Total China Daqing’s share ofproduction oil production crude oil national output

(A) production (B) (%) (A)/(B)

1960 971 5 200 18.61961 2 743 5 310 51.61965 8 342 11 310 73.71966 10 600 14 541 72.91970 17 670 30 646 57.61975 46 260 77 060 60.01976 50 305 87 160 57.71978 50 375 104 050 48.41980 51 501 105 950 48.61982 51 940 102 120 50.91984 53 560 114 610 46.71985 55 289 124 890 44.31986 55 552 130 610 42.51987 55 553 134 140 41.41988 55 703 137 050 40.61989 55 556 137 650 40.31990 55 622 138 450 40.21995 56 010 149 060 37.62000 53 000 162 300 32.62001 51 500 164 830 31.22002 50 130 170 280 29.42003 48 400 170 440 28.42004 46 400 174 720 26.52005 44 951 180 861 24.8

Source: Various sources.

to Shanghai and Guangzhou in the south, but also to Japan where it cameto form a significant component of the Sino-Japanese Long Term TradeAgreement (see Photographs 1.5–1.7).11

After the start of development at Daqing, China’s oil exploration effortmoved to the Huabei Basin of eastern China. Two fields here were to proveof immense importance: Dagang, south of the city of Tianjin, andShengli, in the delta of the Yellow River in Shandong Province. Again,both of these fields were aggregates of many smaller, independent wells.The Daqing ‘battle-front’ method was adopted for the exploitation ofShengli and this was applied not only to the oil field, but also to the culti-vation of adjacent farmland. After four years’ work, output at Shengli of1.34 mmt was achieved in 1966, and from this beginning a succession ofnew fields was discovered, taking total Shengli production up to nearly 20mmt by 1978. At this level Shengli became China’s second most importantoil field. In the early stages, most Shengli oil was refined at local refineriesin Shandong Province, but as output grew it became necessary to transportthe crude elsewhere. For this purpose innovative new pipeline systems wereput in place. One system took oil across the Huahe River and another con-nects the Shengli terminal with the port near Qinhuangdao, from wheretankers ship crude to refineries in southern China.


Photograph 1.5 Daqing pipelines constructed in the 1970s. Prior to thisDaqing crude was transported by long fleets of railwaytankers

The Shengli fields proved to be even more complex in their geophysicalcharacteristics than those at Daqing. Observations from the fields wererecorded and the sedimentary layers modelled by sophisticated techniquesusing computers obtained from the French. As the centre for this kind ofwork, Shengli was the natural site for the establishment of an Academy ofPetroleum to undertake research and train specialized staff.

The development of Dagang was somewhat different. Test drilling beganat Gangsi in 1963 and in the following year the MPI sent in teams fromDaqing. Although output from Dagang only reached the level of 3 to 4mmt in the mid-1970s, the exploitation of the field proved to be of greatsignificance. This was because Dagang became the centre from which theoffshore exploration in the Bohai Gulf could be launched.

Much more dramatic was the discovery of oil at Renchiu in Hebei Province.This eventually proved to be the start of a huge complex of exploitation activ-ity that produced what became known as the Huabei (North China) oil field.First test wells were successful at a ‘buried hill’ oil field in 1975 and test pro-duction reached the remarkable level of over 1000 tonnes per day.

A ‘buried hill’ field is one in which oil is trapped in cracks in deep sub-terranean hills composed of Palaeozoic carbonate salt. After the success atRenchiu, a campaign was launched to search widely for similar forma-tions and a series of ‘buried hill’ wells was developed in the Huabeiregion. Again, the peculiar geological formation posed new problems for


Photograph 1.6 Two Daqing tankers loading crude at Qinhuangdao in theBohai Gulf, probably en route to southern China

extraction. Maintaining water pressure in these structures is very difficultand ‘buried hill’ fields tend to produce a lot of oil in their early life, afterwhich output dwindles rapidly. Production in the Huabei region eventuallypeaked at 17 mmt in 1978.

Finally, the other region where exploration and development in thisperiod were successful was in Liaoning Province. The Liao River Delta wasa natural prospect for oil and gas and the MPI began serious prospectingin 1967. This involved diverting teams from Daqing and later Dagang. By1975 a large field was under development at Xinglongtai. Progress washalted by an earthquake in February of that year. This registered 7.5 on theRichter scale and it caused the adjacent sea to flood the field and damagemuch of the equipment. Between 1976 and 1978, however, further fields inthe region were discovered, most of which were worth development.

In Liaohe the crude is of a highly viscous, heavy type. This could onlybe drawn by using steam injection techniques that lowered viscosity for


Photograph 1.7 Celebrations in June 1973 on the occasion of thedeparture of the first rail tanker carrying Daqing oilexports to Japan. In the following 30 years Daqingexported some 200 million tonnes of crude to Japan

extraction. By 1978, output was 3.5 mmt and 1.65 billion cubic metres (m3)of gas were also being produced. The location of these fields close to majorcentres of industrial activity – notably Anshan and Shenyang – madethem of particular value since the output could be transported relativelyeasily by a combination of pipeline and rail. Today, with annual output of12 mmt, the Liaohe field ranks as the third largest in China.

The north-eastern and eastern regions had clearly become the majorsource of China’s new-found oil during the hey-day of the 1960s and 1970s.However, prospecting and some development were energetically pursued inmany other parts of China. In the north-west, Karamai and Lengfu wereexplored in Xinjiang and Qinghai – China’s remotest provinces. And in theOrdos Basin in the Shanxi–Gansu–Ningxia region, the Yanchang fieldswere opened. Other major finds were in the Jilin and Zhongyuan fields thatextended across the provinces of Henan and Shandong.

The other major exploration and development effort was that in theSichuan natural gas fields. Long known as a source of gas, the province pro-vided output under ‘battle-front’ campaigns from less than 1 billion m3 in1966 to over 6 billion m3 by 1978. This was mainly transferred by pipe tomajor cities such as Chengdu, where it was used for both industrial anddomestic purposes. Natural gas could be burnt directly as fuel and was alsoimportant as feedstock for fertilizer plants. The other major source ofnatural gas in this period was the Daqing field itself. Here, associated gaswas liquefied into LPG (liquefied petroleum gas) and shipped to residentsin Harbin and other northern cities.

Looking back at these years, one is struck by the astonishing achieve-ments of China’s development effort in the oil and gas sector. Cut off fromSoviet expertise and short of all forms of capital equipment and infra-structure, Chinese workers, technicians and high-level specialists of allkinds mounted an heroic effort to bring on stream the country’s oil and gasresources. These resources were beginning to be identified in the period ofSoviet assistance, but their actual development called for truly historichuman effort and technological ingenuity.

THE ISSUE OF SELF-SUFFICIENCY

The exceptionally fast growth of the oil and gas industry in all its depart-ments gave rise to great optimism that China was on the threshold of self-sufficiency. During the early 1960s Premier Zhou Enlai made manypersonal inspection visits to Daqing and by December 1963 he was able totell the National People’s Congress that ‘For the oil needed by our countrywe are basically self-sufficient’.12


This view was based on the estimate that Daqing output had the poten-tial to completely replace Russian imports. By 1966 Daqing accounted for10.6 mmt, 73 per cent of total production. In the same year imports ofRussian petroleum fell to 40 000 tonnes.

However, in spite of gushing crude production, the issue was not so simple.First, there is a problem of principle. In a market economy we can speakmeaningfully about self-sufficiency and shortage by observing not only pricemovements but also absolute shortfalls as reflected either in industrial plantoperating below capacity or ‘outages’ in power generation attributable tosupply shortage. In the planned economy, however, only physical bottlenecksin the latter sense are relevant, since the ‘demand’ for oil or energy is whatthe planners say it is, not what enterprises and households might determinein a market. Under the Chinese planned system, vehicle gasoline, gas oil andother key products including fuel oil were all allocated directly to organiza-tions and enterprises with no legal secondary markets of any kind.

The situation was further complicated by the Cultural Revolution. Thisnot only dislocated output and its growth but, even more seriously, hamperedthe working of refineries, transportation and distribution arrangements. Asa result there was at times almost total gridlock in the system and fuel short-ages were clearly visible in bottlenecks, short-time working, power cuts, anda failure to meet minimal household demand – for example even that forlump kerosene, whose production was forbidden although demand for it wasenormous in the urban area where often no electricity was available.

Even during the 1970s, as matters improved to some degree and a sem-blance of planning was resumed after the fall of Lin Biao, there was still nosign of the expected national ‘surplus’. Two factors were now at work here.One was the growing gap between crude output and refining capacity. Thistrend was clear by 1978, for since crude output had by then risen to over100 mmt per annum (largely based on Daqing), refinery capacity was stilllimited to about 70 mmt.

The other factor was the new policy option open to China after the worldoil crisis of 1973–74. This enabled China to consider the possibility ofexporting crude oil at very high prices, notably to Japan. This possibilitywas of great importance to the Chinese since it allowed them to earn thehard currency which they needed to import capital goods embodyingadvanced technologies. The opportunity was almost equally important tothe Japanese for two reasons. One was that Chinese oil diversified Japaneseenergy sources and thus strengthened Japanese economic security. Of equalsignificance, however, was the fact that Daqing’s oil, with its low sulphurcontent, was doubly welcome because its availability coincided almostexactly with Japan’s decision to embark on a rapid programme of pollutionreduction. During the 1960s (the era of ‘high-speed growth’), the Japanese


government had largely ignored the problems of industrial and trans-portation pollution. But after the environmental scandals of the 1970s theJapanese government began to control many forms of emissions andbecause of its use in thermal electricity generation, Chinese oil, togetherwith that from Indonesia, played a useful role in this.

The other serious imbalance that developed during the CulturalRevolution was that between production and exploration and the conse-quent decline in the reserves:production ratio. Between 1965 and 1978,while crude oil output grew ninefold, proven reserves only doubled. Onereason for the emergence of this problem was the changing balance ofbureaucratic power inside the industry.13

THE CHANGING BUREAUCRATIC STRUCTURE

During the 1960s the main ministerial division was that between theMinistry of Geology and the Ministry of the Petroleum Industry. These twoministries operated a division of labour, with the MOG in charge of explo-ration and the MPI running the production side. But as the pressures to max-imize current output grew, so did the MPI’s budget and its power and abilityto control exploration as well as production. In 1970 the MPI was mergedwith the Ministries for Coal and Chemicals, but in 1975 the Ministry wasagain broken up, with the Ministry of Coal being re-established in its ownright. In 1978 the Ministry of Chemicals was also re-established as an inde-pendent unit to govern the downstream segment of the petroleum industry.

Two results of all this were very important. First, the strength of the MPIin its various forms was a key factor explaining the relatively slow growthof proven new reserves. The MPI gained at the expense of the MOG buthad much less expertise and interest in the prospecting side of the industry.Second, however, the political strength of the MPI and its political backingwere reflected in the strong growth of the industry. Zhou Enlai was a keyfigure here, as was Minister Yu Qiuli, who ran the MPI during the 1960s.Mao also supported both Zhou and the MPI since he saw the developmentof the oil industry not only as a political model for the Chinese economy,but also as an integral part of his ‘Third-Line Battlefront’. This latter wasthe economic dimension to Mao’s anti-Soviet and anti-American policiesand required that the Chinese industrial economy be geographically dis-persed to make it less vulnerable to military action.

This political and bureaucratic strength meant, in effect, that althoughsubject to some disruption, the sector was broadly immune from the worsteffects of the Cultural Revolution and was not disrupted by factionalismand the Gang of Four. Further, in the period after Mao’s death in 1976, the


new Party chairman, Hua Guofeng, entrusted the first steps in the industrialrevival of China to the leader of the so-called ‘Oil Group’ – Yu Qiuli. Yuwas appointed chairman of the State Planning Commission and was alsosupported inside the economic bureaucracy by Kang Shien (chairman ofthe State Economic Commission) together with the ministers for petroleum,metallurgy, and chemicals – Song Zhenming, Tang Ke and Sung Jingwenrespectively. This group was intimately related to Hua’s ambitious economicplans – plans that were strongly oriented to heavy industry and premised onthe promise that the oil industry could construct ‘ten more Daqings’.14

The rise to power of Deng Xiaoping changed this scene fundamentally.Rejecting Hua’s drive for heavy industry, Deng and his chief economistChen Yun pressed to rebalance the economy in favour of agriculture andlight industry. They also began to implement serious institutional reform.In November 1979, MPI Minister Song was forced to take responsibility forthe capsize of Bohai 2, an offshore drilling rig lost in the Bohai Gulf.Subsequent bureaucratic restructuring also weakened the oil industry’sinfluence. In 1988 the MPI was merged into the Ministry of Energy and in1993, when electricity and coal were again given ministerial status, oil wasnot only kept within the Ministry of Energy, but downgraded to a lowerbureaucratic status as the China National Petroleum Corporation. Theextent and significance of these organizational changes will be discussedfurther in Chapter 3.

THE ‘OPEN DOOR’: NEW ROLES FOR FOREIGNERSAND THE BEGINNINGS OF THE OFFSHORE OILINDUSTRY

We have explained above the way in which the oil and gas industry was akey example of the policy of ‘self-reliance’ and of its associated politicalwork style in managing oil and gas enterprises. Deng Xiaoping’s policy ofreform and the ‘Open Door’ changed the prospects for the industry byenabling it to tap into foreign resources of many kinds, by bringing Chinainto international oil and energy markets, and by revolutionizing the organ-ization and management practices of the pre-reform industry. With regardto international markets, China had begun its entry with sales of crude oildeveloped in the 1970s. However, this had been a highly controversial policythat was associated with Zhou Enlai and, although tacitly supported byMao, attacked strongly by the radicals and clearly vulnerable to any futureleftward shifts of political opinion and power.

For both oil and gas, the international dimension was critical to thehealthy development of the sector. Trade was one issue, but even more


important for the longer run was the opportunity to obtain access toforeign technology and know-how – especially for exploration and devel-opment. China’s technological achievements under ‘self-reliance’ were, aswe have argued, truly remarkable and there were three elements to these:first, prolonged contact with Soviet experts and use of Soviet equipment;second, assiduous study of technological literature available from Westernsources; and third, sustained experimentation on the ground as solutionswere sought for China’s particular geological conditions.

But however great these efforts, China’s expertise could not, unaided,hope to match what could be done with full access to foreign expertise.Indeed, even the published materials that the Chinese specialists reliedupon so heavily could not yield their full benefits without the complement-ary explanation, advice and tacit knowledge of the authors, which ofcourse were not available in China. These issues had already becomeserious by the first half of the 1970s and, under the umbrella of ZhouEnlai’s support, some preliminary contracts were signed. However, theunstable and violent political environment made it impossible to bringthese to useful fruition.

The basic difficulty for the industry was die-hard opposition to allowingforeign involvement in the Chinese oil and gas exploration effort if thisrequired any kind of foreign ownership (or even access) to China’s land andterrestrial resources.

These issues were particularly important in the case of offshore oilexploration and development. China had no serious experience of this,could learn little from the Soviets, yet in the worldwide market highlysophisticated skills and technologies were available, honed not only in olderfields such as the Gulf of Mexico, but more recently in the very differentconditions in the British North Sea.

The potential of the continental shelf in the Bohai Gulf and the East andSouth China Seas had long been a matter of some speculation, but this wasnot based on actual exploration. In the post-oil-crisis years, the franticsearch to diversify oil resources led several Western interests to suggest toChina that exploration of the shelf was long overdue.

One paper that attracted attention in this way was written by one of thepresent authors and presented by the US State Department to the Chinesethrough several channels. At the time, the US Trade Representative inBeijing was George Bush, an oil man who may well have been a factor facili-tating these early contacts. While developing a growing interest in the pos-sibilities of offshore exploration, the Chinese side decided that the momentwas not yet ripe to advance the issue.15

In March 1978, nine months before the first public steps in the Deng policyrevolution, the Chinese invited representatives of foreign oil companies to


Beijing for preliminary discussion. However, the Chinese negotiators hadlittle idea how to deal with this unprecedented situation. On the one hand,with the second oil crisis in the offing, the potential gains from successfulexploration and development of China’s continental shelf were enormous.On the other, the practicalities of any contracts required a level of back-ground knowledge and technical sophistication that was not available at thetime. Further, the political risks to any Chinese officials participating in whatto the radicals of the left would have been seen as a sell-out to foreign capi-talism were at the time very real.

In July–August 1978, Japan’s first petroleum mission to China took place.This was led by Mr Hitoshi Miyazaki, vice president of the Japan NationalOil Corporation, and comprised 13 members, including Kambara. Themission visited the major oil fields at Daqing and Shengli, as well as poten-tial sites for offshore exploration. One important result of this mission wasthat it offered the Japanese an opportunity to explain to the Chinese whatthe international legal implications of offshore exploration would be, andwhat kinds of contracts might be on offer from foreign oil companies wereChina to proceed with a policy of allowing a foreign role in its offshoreindustry. In particular it was explained that no foreign contracts would actu-ally deprive China of its rights to its own natural resources. Also, themission outlined the benefits that could flow from production-sharingagreements (PSAs) of the kind that foreign oil companies had withIndonesia and other countries active in exploration. Under such agree-ments, exploration is undertaken by the foreign company, assuming all therisks, but sharing any oil or gas discoveries with the home partner on a pre-agreed basis.

In spite of this successful preliminary exchange, it proved difficult toproduce any concrete agreements. The main reason for this was that theChinese negotiators still felt disadvantaged by lack of access to the detailedcontent of PSAs being made around the world, and hence felt vulnerableto the danger of not achieving the best possible deals for China. To remedysome of the difficulties, a strong Chinese team, headed by the petroleumminister Kang Shien, toured Europe and America on a fact-finding missionto identify current world trends in the industry. In Europe the team visitedthe British North Sea and Norway. In America they visited Washington,New York, Houston and San Francisco, finally returning home via Tokyo.In each place they discussed the issues involved in offshore contracting and,after the visit, foreign specialists from the United Nations and Norway wereinvited to Beijing for further consultancy and detailed discussions on whatmight be involved in these types of agreement.

On the basis of what had been learned, in May 1980 the Chinese finallysigned contracts with Japan and France for exploration and development


of the Bohai Gulf and the Beibu (Tonking) Gulf. The contracting party forthe Bohai Gulf on the Chinese side was the offshore sub-corporation of theChinese Petroleum Corporation, which acted under the supervision of theMPI. For Japan, the acting party was the Japan–China Oil DevelopmentCompany and for the French, Elf Aquitaine. The Chinese chose the Frenchnational oil company Total for the Beibu Gulf contract. Subsequently afurther contract in this first round was signed with an American independ-ent, Arco, for the exploration of the Yinge Sea off the southern coast ofHainan Island.

In 1982, the prospecting effort was strengthened with a second round oftendering. In this, an open tendering process for PSAs to prospect in theSouth China Sea was offered to international companies. In many casesthese companies had already supplied the Chinese with the results of geo-physical surveys. By this time the Chinese government was much better pre-pared to handle the contracting process and had, in February 1982,established the China National Offshore Oil Corporation (CNOOC). TheCNOOC acted under the direct control of the Chinese State Council andwas responsible both for offshore exploration as well as the joint contractswith foreign companies. The 1982 round may be considered the point atwhich serious participation by China in the world offshore industry began.16

OIL PRODUCTION, TRADE AND STRATEGY AFTERTHE ECONOMIC REFORMS

The long-run trends in China’s crude oil production are indicated in Table1.2 and Figure 1.3. We see from these that output peaked at 106 mmt in1979, stagnated, and then actually fell in the early 1980s. Subsequentlyoutput rose, but much more gradually and in a form that resembles a seriesof plateaux of increasing altitude. Understanding the mechanics of thispost-reform performance is important if we are to understand the natureof the Chinese oil output trajectory.

One reason for the slowdown in output growth has already been touchedupon – namely the widening imbalance between resources allocated tomaximizing production in existing fields and those provided for prospect-ing and the development of new fields. This gap reflected both a myopicpreference for quick results rather than the longer-term trend and the shift-ing balance of political influence as the Ministry of Geology ceded powerto the Ministry of Petroleum Industry.

As a first step to remedying this situation, the government resorted toinstitutional reform and in particular to an improved structure of materialincentives, thus reversing the historic dependence of the sector on political


incentives. The first measure to be introduced was the Crude OilResponsibility Contract, a special version of the Responsibility Systemintroduced into industry generally. Under this arrangement oil-field opera-tors were allowed to dispose as they wished of any output above 100 mmtper year. Further, not only could the MPI dispose of the additional output,they could use the funds so obtained to buy foreign equipment and investin new production. The results of this initial measure were good, and thesepositive effects were reinforced by further incentive measures that alloweda share of the taxes levied on oil production to be retained for social andother expenditures. As elsewhere in the economy, these funds were heavilyused to improve housing, recreational and sporting facilities and even, inDaqing, to set up a stunning roller-coaster in the park. Under the impactof this mini-boom, the once desolate town of Daqing was turned into aflourishing city of more than a million people, making it one of the fivelargest cities of Heilongjiang Province (Photographs 1.8 and 1.9).

Apart from the impact of the general institutional and incentive factorsat work, understanding the movements in Chinese oil output hinges crit-ically on the performance of the Daqing field. Daqing was the fundamentalfactor behind China’s oil boom, accounting in the late 1960s for nearlythree-quarters of total output. The performance of Daqing has remainedthe key to oil output ever since. In 1976, when the field reached the 50 mmtlevel of output and accounted for 57.7 per cent of national output, a policyof wenchan or ‘stabilized production’ was introduced. Under normal


Figure 1.3 Crude oil and natural gas production in China, 1971–2005

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Photograph 1.8 Daqing city today – a prosperous city of high riseapartments and a population of more than one million

Photograph 1.9 Oil fields in contemporary Daqing with extraction now atan advanced stage of automation

conditions, in which operators seek to maximize the output of a well, theshape of the output curve will rise to a peak and then fall away, the precisegradients depending on geological conditions, the impact of investmentand other technological factors. But the peculiarity of the Daqing field, asexplained earlier, is that it is made up of hundreds of small wells, each ofwhich has its own special characteristics and profiles of potential output.In these circumstances it was possible for the planners to construct a rangeof scenarios from which to choose an aggregate plan that would stabilizethe output of the field as a whole. This process involved assessing the recov-erable reserves of each individual well and working out possible time pathsfor extraction. Of course there were limits to the accuracy of this proce-dure; also, it must be borne in mind that the sophistication of recovery tech-niques was rising all the time. Thus when recovery conditions proved morefavourable than had been initially estimated, it was often possible to storesuch ‘pocket oil’ for use in a later period when other wells and the overalloutput plan struck unexpected obstacles.

It is remarkable how successful this stabilization policy has been. Twofeatures are particularly interesting. First, it proved possible to raise the topof the output trapezium from the 50 mmt level by several mmt per annum.Second, the stability of the trapezium itself has been maintained for anastonishing 27 years (Figure 1.4 and Table 1.2).

This Daqing performance has been the core around which the rest ofChinese oil and energy policy has been constructed. Two factors explainwhat has happened. First, the mini-boom of the 1980s reflects the impactof institutional reform and the improved incentives that this brought. Theother factor has been the impact of new technologies, several of them


Figure 1.4 Crude oil production in the Daqing oil field, 1960–2005

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imported. We have already seen how the Chinese developed their own waterinjection recovery systems for use in the early stages of the Daqing wells.However, these techniques would not have been able to maintain outputover the longer term. For this, new technologies to enhance recovery late inthe life of the wells were needed. One important technique was the use ofsuction pumps that enhanced recovery rates from every well. Another wasthe application of the so-called ‘infill system’. This enabled the minimuminitial distance between wells to be halved, i.e. reduced from 500 m to250 m. This measure therefore implied the complete reconfiguration of theDaqing field. Improved technologies were also an important factor inraising the output at the Shengli field above the 30 mmt level.

In the Sixth Five Year Plan adopted in 1979, China confirmed its inten-tion to quadruple total output between 1980 and 2000. This policy wasintended to raise the Chinese living standard to what was called the level ofxiao kang – literally ‘small comfort’ or ‘a moderately comfortable life’ (seeAppendix). The target for energy, however, was only to double output. Thisimplied that the planners believed that the energy elasticity of output couldbe held at 0.5 – i.e. for every 1 per cent of output growth, only 0.5 per centof energy growth would be needed. Applied to oil, this scenario impliedthat output was expected to grow from 100 mmt to 200 mmt by 2000.This target, however, proved totally unrealistic. We need to know, therefore,what its basis might have been. Why did the planners get it so wrong?

There seem to have been two considerations that lay behind thinking atthat time. One was a residual confidence in the notion dating from the eraof Hua Guofeng that, somehow, it would be possible to develop ‘ten moreDaqings’. The other basis for this optimistic assessment was that therewould be a bonanza in the offshore sector that would plug the gap of anyshortfalls in onshore output. Neither of these expectations was realized. Aswe have seen, neglect of prospecting and failure to identify major additionsto reserves during the Daqing boom years weakened the onshore situationwhile, for different reasons, the offshore situation proved equally disap-pointing. More than one hundred foreign companies participated inoffshore ventures. Between them they spent more than $3 billion on specu-lative exploration, constructing more than 200 test wells in the 1980s. Butby the 1990s poor results discouraged almost all of them from participat-ing further in the offshore search.

The net result of these trends has been that oil output has struggled to keeppace with demand in the post-reform era of high growth. Two observationsunderline the reality of this problem. One is the continuing phenomenon ofshortages, which cause power outages and short-time working in the indus-trial sector. The other indicator has been the growing role of coal andhydro as the basis for electricity generation. In fact, both coal and hydro


development seem to have been supported by more political strength inrecent years. Coal, for example, has the added advantage that output is veryflexible because it relies not only on a public sector that is in the process ofreform, but also on a private, small-scale sector. The private coal sector hasmany problems, including a low technological level and an appalling safetyrecord, but it is none the less very responsive to prices and economic oppor-tunity.

One other dimension is important if we are to understand correctly thedevelopment of the oil sector in the 1980s and 1990s. This is the changingrole of exports. The export boom in the 1970s and early 1980s had beenstimulated by high international oil prices. One effect of this boom was toinfluence not only the level of output, but also its location. The boomemphasized the importance of Daqing and led to the intensive develop-ment of a transport network that facilitated exports through the port ofDalian. However, when world prices for oil fell in 1985 and the reform and‘Open Door’ policies began to yield results in the growing exports of manu-factures, China was able to substitute such exports for oil. This changeenabled the planners to switch the oil exploration and development effortaway from the north and east and towards the west and southern seaboards.The shift to the west in particular was consistent not only with the knownavailability of oil and gas reserves in that region, but also with the moregeneral ‘Look West’ policy adopted by the Party in the 1990s. This policyis, in fact, an echo of the policy of the 1950s, which was subsequently down-graded because the short-run costs of it were too high, but was then revivedby Mao in the ‘third-front’ policy of the 1960s.

The other geographical factor brought into play by the geographicalreorientation of the oil and gas sector is the reality that, whereas the northand north-eastern regions of China were the ‘key point’ developmentregions in the era of heavy industry, under reform since 1978, industrialgrowth has been strongest in Guangdong and the eastern coastal regions,especially around Shanghai and down the Shanghai–Nanjing industrialcorridor. This shift called for a major change in the energy distributionsystem. For example, Daqing and Shengli crude has had to be shipped bysea to refineries in Shanghai, Guangzhou and Chinhai from the ports ofHuangdao and Qinhuangdao. This, however, was not an easy change toimplement since previously most Daqing and Shengli crude was refinedclose to the oil fields. Competition between refining centres thus becameintense – so much so, for example, that the Luning pipeline, specifically builtto transfer oil from Shengli to Nanjing, has never been fully utilized. Oneby-product of this complicated, and for customers frustrating, situation hasbeen a trend in recent years for Guangdong in particular to become increas-ingly dependent on imports of oil, much of it imported illegally.


These problems of output shortfalls, poor coordination within theenergy sector and other consequences of the poor geographical distribu-tion of resources all serve to illustrate that fundamental institutional andadministrative problems remain unresolved. For while China has moved along way towards a market economy in many respects, energy is a sectorwhere the public interest and public funds still play the central role.Institutional rationality and an accompanying clarity of purpose in policyare essential ingredients for a sound development of oil and gas. We shallreturn to this issue in the next chapter, as well as in our summing up of thelonger-term issues facing the sector.

NOTES

1. This is described in the classical text known as the Hanshu dilizhi.2. Data from Sherman Cochran, Encountering Chinese Networks. Western, Japanese and

Chinese Corporations in China, 1880–1937, Berkeley: University of California Press,2000, p. 24. And for other aspects of this, see Alice Tisdale Hobart, Oil for the Lamps ofChina, New York: Grosset and Dunlop, 1933.

3. Jiao Liren, Dangdai Zhongguo de shiyou gongye (Contemporary China’s PetroleumIndustry), Beijing: China Social Science Publishing House, 1988.

4. Zhang Moxin, Dangdai Zhongguo de shiyou huaxue gongye (Contemporary China’sPetrochemical Industry), Beijing: China Social Science Publishing House, 1987.

5. Jiao Liren, Contemporary China’s Petroleum Industry.6. Tatsu Kambara, Chugoku no sekiyou sangyo (The petroleum industry in China), Tokyo:

Institute of Developing Economies, 1991.7. Ibid.8. J.S. Lee, The Geology of China, London: Thomas Murby & Co., 1938.9. The Chinese divide the history of Daqing into four periods: 1960–66, expansion of

known fields; 1966–76, analysis of the geological characteristics of the field; 1977–85,development of the strategy to stabilize annual output at 50 mmt. Within this frame-work, four different phases of water injection are identified, leading up to the post-1981phase of very high levels of water injection. Zhang Lizhong et al., Keji jinbu yu Daqingfazhan jianshe (Technical progress and the development of Daqing), Beijing: TechnologyPublishing House, 1986, ch. 5.

10. These events are described in Wenhua da geming de Zhou Enlai (Zhou Enlai during the GreatCultural Revolution), Beijing: The Central Party School Publishing House, 1997, pp. 37–45.

11. Kambara, The Petroleum Industry in China.12. Zhou Enlai zhuan, 1949–1976 (Life of Zhou Enlai 1949–1976), Part Two, Beijing: The

Central Documents Publishing House, 1998, p. 689.13. Ma Hong and Sun Shangqing, Zhongguo jingji jiegou wenti yanjiu (Research into prob-

lems of Chinese economic structure), Beijing, 1981.14. Kenneth Lieberthal and Michel Oksenberg, Bureaucratic Politics and Chinese Energy

Development, Center for Chinese Studies, The University of Michigan (prepared for theDepartment of Commerce), August 1986 and the same authors, Policy Making in China:Leaders, Structures, and Processes, New Jersey: Princeton University Press, 1988.

15. Tatsu Kambara, ‘Petroleum Industry in China’, The China Quarterly, No. 60, October–December 1974, pp. 699–719.

16. Qin Zhongjian and Gong Zaisheng, Zhongguo youqi kantan. Jinhai youqiqu (Oil and gasprospecting in China. Offshore exploration), Beijing: Oil and Geological PublishingHouse, 1999, Vol. 4.


2. The geological basis of the onshoreoil and gas industry

In order to evaluate the past and to understand the present issues in China’soil and gas industry, we need to consider in more depth the resources naturehas given China on which to base this industry. As China moves from anoil surplus to oil deficit economy, with all the economic and strategic impli-cations of this change, this issue becomes pressing. It is important to knowwhether present problems reflect short-term difficulties or whether theyreflect a fundamental shortfall in the raw energy resources available forChinese development.

THE NATURE OF OIL AND GAS RESERVES

Estimation of oil and gas reserves is a complicated matter. Such reservesare a complex of hydrocarbons which may manifest themselves in a varietyof forms and mixtures. Typical crude oil fields are a mixture of oil, gas andwater, often held within porous rocks. If structures with permeable orporous rock extend to the surface, then leakage and loss will occur, andthe reserves will not be contained. The best oil fields are, therefore,hydrocarbon-bearing formations that are themselves contained in non-permeable rock formations. Such oil fields are thousands of metres deep, atwhich point there is the ideal combination of oil- and gas-impregnatedmaterials bounded in caverns of impermeable materials. Since gas is lighterthan oil, and oil lighter than water, on drilling one typically finds first gas,followed by oil and then water.

Initial prospecting therefore usually begins with the identification ofplaces where the desired geological conditions seem likely. This will be fol-lowed by test drilling and other basic procedures. After any initial discov-ery, the first step is to estimate the volume of the oil-bearing material.However, if the form of the field is one in which there are large numbers ofrelatively small independent reservoirs (as at Daqing), this can be a difficultprocess. Once the volume figure is obtained, analysis can indicate the poros-ity of the rock and hence the likely amounts of oil and water held within it.Data obtained must be standardized for pressure and temperature. Clearly

36

this process of estimation is technically very complicated in some forma-tions, and the scope for error quite wide. Further, while most oil in placewill flow unaided into a well once extraction begins, ‘secondary’ and even‘tertiary’ recovery using water injection and other pressure techniques mayraise the ultimate recovery well beyond what seems likely with primarymethods.

Once a figure for ‘oil in place’ has been established, it is necessary todevelop an estimate for proven, recoverable reserves. This figure will in turndepend on what is feasible using current technologies and what is economicat current prices for transportation and the sale of the final products invarious forms. ‘Proven reserves’ are typically much lower than those for ‘oilin place’. In the USA, for example, only one-third of oil in place has his-torically been reckoned as proven. On this basis, the key data for any oilfield is an estimate of oil in place and proven reserves, and the history ofproduction. For a country as a whole, the key ratio is often thought to bethat of current production to proven reserves, since this gives some notionof how long proven reserves will last before exhaustion. In policy terms,unless reserves are exceptionally abundant, it is usually regarded as prudentto ensure that investment in prospecting and development enable annualadditions to proven reserves to keep up with current production. Thisensures that the production/reserves ratio remains constant.

Much but not all natural gas is associated with reserves of oil. Where itis associated, gas may be either dissolved or free. Alternatively some gasfields are not associated with oil at all. Since, as we noted above, where oiland gas are associated, the gas typically rises above the oil and water, it wasin the past often not commercially feasible to use oil-field gas, which wassimply burnt off. This has now largely changed, partly because of the risein the value of energy and partly because of the development of gas lique-faction techniques and the use of long-distance pipelines. Gas in place isnormally estimated in volume, with standardization for pressure and tem-perature. Estimates of proven reserves again have always to be madeby taking into account technical and economic factors that limit thesignificance of gas in place.1

CHINA’S MAJOR OIL- AND GAS-BEARINGSEDIMENTARY BASINS

China is estimated to have 30 distinct sedimentary basins within whichsignificant amounts of oil and gas are held. In total these cover 4.33 millionkm2 of space out of a total of 9.6 million km2 of land mass and 1 millionkm2 of sea area. Extensive exploration has already been undertaken in

The geological basis of the industry 37

these fields, often probing hydrocarbon formations thousands of metresdeep (see Figure 2.1)

Among these basins, the largest hydrocarbon resources are thought to bein the Bohai Bay Basin, also known as the Huabei (North China) Basin.This huge basin covers 144 500 km2. It extends through the provinces ofHebei and Shandong and Tianjin City, and includes a vast swathe of landin the southern part of Liaoning Province, extending ultimately to theBohai Bay. This basin includes the major fields of Shengli, Liaohe, Dagang,Huabei and Zhongyuan. Oil in place in this basin is estimated to be 18.8billion tonnes.

The second largest basin is the Songliao Basin in north-east China. Thisbasin (which is distinct from the Songliao Plain – a geographical region)includes part of Heilongjiang and Jilin Provinces. Although larger in extentthan the Huabei Basin, the Songliao Basin has smaller reserves, estimated


Figure 2.1 The main sedimentary basins in China

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at 12.9 billion tonnes. The Songliao Basin includes China’s largest field, theDaqing field, which is made up of 40 independent fields, all now discoveredand fully developed.

The third largest region in terms of reserves in place is the Tarim Basinin the Xinjiang Uygur Autonomous Region. This basin, formed severalthousand metres below the Taklamakan Desert, covers a vast 540 000 km2.In 1994 it was estimated that total reserves in this basin were 10.7 billiontonnes. We believe, however, that the huge programme of exploration andsurveying in this region will eventually identify a much higher figure.

Also in Xinjiang is the Junngar Basin located north of the TianshanMountain Range and now thought to be China’s fourth largest region ofreserves. This basin covers 130 000 km2 and at present is estimated to hold7 billion tonnes of oil reserves in place, mainly in what are known as theKaramai oil fields. Finally, two other smaller basins are located to the eastof the Junngar Basin. These are the Turfan–Hami Basin and the QaidamBasin. Together, these two basins, with the Tarim and Junngar Basins, makeup what has now become known as the Western Basins.

There are two other onshore basins of importance in China: the OrdosBasin, which spans territory in the north-western provinces of Shanxi,Gansu and Ningxia; and the Sichuan Basin in Sichuan Province. Both theOrdos and Sichuan Basins are particularly noted for the richness of theirgas reserves.

Turning now to the offshore basins, we have already mentioned theBohai. In addition to this, important basins include the Nan Huang Hai(South Yellow Sea Basin), The Dong Hai (East China Sea Basin) and theNan Hai (South China Sea Basin). Other southern basins include those inthe Yinge Hai Sea and the Beibu Gulf. The South China Sea Basin is par-ticularly large, embracing as it does the whole of the Pearl River Delta.According to a report made in 1994, total reserves in these offshore basinswere 24.6 billion tons.2

CHINESE ASSESSMENTS OF THEIR OVERALLRESERVES OF OIL AND GAS

The question of the country’s oil and gas reserves has been much debatedinside China. In 2000, for example, there was a major nationwide telecon-ference to which local specialists from all over China contributed. As anoverall benchmark, this conference sought to estimate what may be calledthe total ‘geological resources’ of petroleum and natural gas in China.This measure is the sum of what we have called ‘oil in place’, to whichis added oil already extracted plus an estimate of the results of future


surveying efforts. It therefore represents the total natural endowment ofhydrocarbons in all the Chinese sedimentary basins, known and expected tobe known. The detailed results of the teleconference were kept confidential,but it has been reported that the figure for this measure was 106.8 billiontons of petroleum and 52 trillion (million million) m3 of gas.

A more detailed assessment of these resources was that made by theSecond Resources Assessment Conference in 1994. According to this, totalgeological resources were 94 billion tonnes, of which 73.8 per cent wasonshore and 26.2 per cent offshore. The natural gas total given at that timewas 38.04 trillion m3, of which the on and offshore shares were 78.6 per centand 21.4 per cent respectively.

The geological resources of petroleum were concentrated in the six mainbasins (the Bohai Bay, Songliao, Tarim, Junngar, Pearl River Delta andEast China Sea Basins), which between them accounted for 70 per cent ofthe 94 billion tons. At the time (1994) this implied that the three largestbasins (Bohai, Songliao and Tarim) each had more than 10 billion tons,while the others had 4 billion. However, the more recent assessment of 2000suggests that this judgement has now changed somewhat (see Table 2.1).

Turning to the gas estimates, the Tarim and Sichuan fields are stillthought to be by far the biggest holders of reserves, estimated in excess of8 and 7 trillion m3 each, but the Ordos and other basins are still very large(see Table 2.2). If we wish to think in terms of China’s geographical regions,we find that the west and central regions account for 28 per cent and 30 percent of the total respectively, while 21 per cent of the total is offshore.

These gas figures, however, are probably now all on the low side.Surveying and exploration work for gas has been relatively slow over thelong run, but the more recent efforts – particularly in the west – are expectedto produce much higher figures. By the year 2000, after intensive efforts in


Table 2.1 China’s major sedimentary basins: size, geological resources,proven oil reserves, 1994

Sedimentary Area Geological Proven Production Cumulativebasin (km2) resources reserves (1994) production

(billion tonnes) (billion tonnes) (mmt) (mmt)

Songliao 255 400 12.888 5.784 59.30 1348Bohai Gulf 144 500 18.841 3.969 60.11 1065Tarim 560 000 10.760 0.214 1.95 5Junngar 130 000 6.937 1.999 7.90 124

Total China 4 330 000 94 16.987 146.07 2686

Source: CNPC and others.

the Tarim Basin, official estimates of China’s total gas resources were raisedfrom the 38.04 trillion m3 quoted above to a new figure of 52 trillion m3,and even this is likely to be raised again soon.

As can be seen from the earlier discussion, these figures refer to resourcesthat are theoretical and rather remote in operational terms. Not only dothey include estimates of future discoveries but, unlike the ‘proven reserves’concept, they do not take into account the state of technology and eco-nomic considerations. The relation between the different measures is shownin Table 2.3.

Reading reports of oil and gas reserves in the Chinese press can be highlymisleading. There are several reasons for this. First, Chinese press sources


Table 2.2 China’s major sedimentary basins: geological resources ofnatural gas, 1994

Sedimentary Geological resources Share ofbasins (trillion m3) total (%)

Tarim 8.389 21.9Sichuan 7.357 19.4Ordos 4.179 11.0Tsaidam 1.05 2.7East China Sea 2.48 6.5Yinggehai 2.239 5.9Bohai Gulf 2.118 5.5

Total China 38.04 100


Table 2.3 The relation between the different measures of resources

1 2 3 4 5 6

‘Geological Original oil Estimated Cumulative Proven Ultimateresources’ in place ultimate recov- production (current) recovery as(oil in ery from ‘proven’ reserves* % of oil inplace plus reserves (oil in (col. 3 place orestimates place adjusted minus geologicalof future for current col. 4) resources:discovery) technology and col. 3 div-

economic ided by col. 1conditions) or col. 2

Note: * In China, this reserves category is known as the shengyu kecai chuliang (remainingrecoverable reserves).

confuse these categories. For example, the measure in column 1 of Table 2.3is preferred to the more common international use of column 2. Also,columns 2 and 5 are confused, so that the much higher figure of oil in placeis quoted as proven current reserves, which should be the key figure.Second, a much-used measure in Western and Japanese oil literature is theratio of current production to proven reserves. This enables one to estimatethe number of years for which output can be maintained at current levelsbefore exhaustion. In addition, inappropriate base data can invalidate thecomparative meaning of Chinese examples of these ratios.3

We can now approach the Chinese data. In 2000 the figure for ‘geologic-al resources’ was 106.8 billion tons. However, half of this is a very heavytype of crude, unsuitable for extraction, and of the remainder a recoveryrate of 40 per cent may be possible. Of the 21.3 billion tons that remain,cumulative production and proven reserves account for 18 billion tons.Thus only 3.3 billion tons remain to be discovered (see Figure 2.2). Further,in fields already developed, the Chinese data for the reserves: productionratio imply that proven current reserves are only 1.5 billion tons. Thismeans that less than ten years’ production at the 2004 level of output arepossible. However, while this figure may have some validity in terms ofcurrent Chinese technologies, if the most advanced technologies alreadyavailable internationally were applied, it seems likely that proven currentreserves would be very much higher. Further, in the course of time we mayanticipate that even more advanced recovery systems will be developed andthese will raise the figure even higher. Similar considerations apply toreserves in the USA and elsewhere. None the less, these factors do notprovide an adequate reason for the weaknesses in China’s surveying andexploration efforts, or for allowing any further deterioration in the reserves:production ratio.

The gas situation appears to be considerably stronger. Output of gas is


Figure 2.2 Crude oil production in China, actual and projection

mmt200

150

100

50

01900 1950 2000 2050 2100

Actual productioncumulated up tothe end 2004: 4.3 billion tonnes

Ultimate recoverablereserves 21.3 billion tonnes.

106.8 billion tonnes 50 40

Bell-shaped curve

still relatively modest at 40.7 billion m3 in 2004, and on this basis, provencurrent reserves are sufficient to support 45 years of output. On the otherhand, gas output is highly dependent on pipeline and transportation infra-structure, and as these improve, output could grow very rapidly, whichwould pull the estimated lifetime of reserves downwards.

What all this implies is that there are probably substantial opportunitiesfor further petroleum exploration in China. However, the pace of Chineseexploration progress in recent decades has been very slow. For example, theratio of exploration wells established per unit of space in sedimentarybasins is considerably lower than that found, for example, in the USA.Clearly important systemic factors are at work here. In the USA, the freemarket encourages large numbers of companies to compete in explorationactivity, while in China, in spite of reforms, exploration is still very much astate-controlled activity, limited by the financial and bureaucratic con-straints that this implies. We see again, therefore, that China’s oil and gasfuture is far more than a matter of geological speculation. It is a future thatwill also depend on the evolution of China’s economic and financial systemand on the role of foreign participation.

NOTES

1. For a basic discussion of these issues, see H. Stephen Stoker et al., Energy. From Sourceto Use, Dallas, TX: Scott, Foresman and Company, 1975. For an example of an exhaus-tive national analysis and discussion of methodologies, see US House of Representatives,Joint Committee on Interstate and Foreign Commerce, Project Interdependence: US andWorld Energy Outlook through 1990, Washington, DC November 1977.

2. An important recent study of the Chinese sedimentary basins is Zhao Wenzhi et al.,Zhongguo hanyouqi xitong (The Chinese system of oil and gas basins), Beijing: SciencePublishing House, 2003.

3. Chinese oil and gas reserve classifications are the subject of a report prepared by theInstitute for Energy Economics, Japan, Chugoku no tobu yuden chiiki ni okeru seisanyosoku (Production forecasts for the oil fields in Eastern China), Tokyo, 1997.


3. Oil and gas administration and theevolution of exploration anddevelopment

THE EVOLUTION OF STRUCTURES ANDRESPONSIBILITIES

In our overview of the pre-reform industry we emphasized the highly politi-cized nature of administration and management in China’s oil and gassector. At the local level, the ‘Daqing’ method was widely relied upon. Atthe national level, allocations of investment and other resources reflectedthe political and bureaucratic strengths of the powerful factions support-ing these industries. On the basis of these forces, not only did the oil sectordo well in terms of initial allocations of resources but, of equalsignificance, the industry’s priority status meant that the severe coordina-tion problems typical of the planned economy – and especially of theChinese system during the Cultural Revolution – were usually resolved inits favour. This political basis was an important element in the sector’sstrong growth record before reform began in 1978. Economic reform,however, was accompanied by a significant political transition from Maoto Deng Xiaoping, and in this shift the factions supporting oil and heavyindustry turned out to be losers.

This political change had important implications for China’s economicdevelopment strategies generally, but especially for the performance of the oiland gas sector. The impact of political change worked through both themechanisms of investment allocation and resolution of coordinationconflicts. It is important here to bear in mind that the industry, in all its forms,is by Chinese standards typically intensive in its use of modern physicalcapital. There is, for example, no oil equivalent of the ‘handicraft’ form ofcoal mining where in many parts of China enterprising individuals can addto coal output with the aid of a shovel and bucket. This means that the volumeof capital investment is crucial to oil and gas performance. Further, andperhaps even more important, coordination problems in oil and gas are par-ticularly complex and critical to performance. The sector requires the coor-dination of four different groupings of activity. These are shown in Table 3.1.

44

Of particular importance within the array of activities shown is the coor-dination between the upstream and downstream groups and, within theupstream, the balance between exploration and development on the onehand and current production on the other. This last is important becauseover the long run failure to invest in exploration and development will leavepolicy makers without the basic information needed either for investmentplans or for overall national energy policies. The wider issue of coordina-tion is important because, without it, the huge capital requirements of theoil and gas sector, and the long lead times needed to implement investmentintentions, can lead to bottlenecks and huge consequent waste.

In the early years of reform, energy policies generally and oil and gaspolicies in particular were indeed plagued with difficulties arising from lackof viable and internally consistent investment plans. The most glaringevidence of these shortcomings was acute difficulties in electrical supply,leading to frequent factory shutdowns and short-time working. One con-sequence of these shortfalls in electricity supply was a new emphasis on therole of coal as a short-term solution to shortage of primary energy output.The share of coal in China’s total primary energy supply had declinedduring the rapid phase of petroleum development from the mid-1960sthrough the 1980s, and this trend had been expected to continue. In thereform years, however, the trend was reversed. Coal is the primary energyform that is geographically widely spread and can respond quickly to eco-nomic demand. One reason for this is that much new coal output comesfrom small-scale locally managed and often private mines. These are

Administration and evolution of exploration 45

Table 3.1 Activities in oil and gas performance

Onshore oil and gas Offshore oil and gas

‘Upstream’ activities: The sameexplorationdevelopmentproduction

‘Downstream’ activities:refiningchemicals

Transportation and distribution Similar but the main emphasis is onto customers involving road, rail, expensive, dedicated pipeline systemswater or pipeline connections

Coordination with the electricity Similarsupply industry and other energysectors such as coal and nuclear

responsive to price and can expand with little additional capital equipment.But the private/quasi private sector, although dynamic and increasinglypolitically acceptable, has not represented a satisfactory solution to theproblem, since it is beset with safety, environmental and other managementdifficulties that are huge embarrassments for the authorities. In addition,the long-term potential of this ‘handicraft’ coal sector is limited.

In order to explore these issues and to explain why their management wasso unsatisfactory, we must return to the question of the responsibility forthese administrative and management tasks since reform.1

Given the scale and strategic significance of oil and gas projects, deci-sions on major projects and their financing are invariably to be taken atvery high levels. That is, they are taken principally by the State Council,the former State Planning Commission and its successor the StateDevelopment and Reform Commission, and the highest political author-ities. Before reform this factor worked in favour of the industry, but afterthe political balance shifted in the early reform period the oil and gas sectorcould not win national budgetary support of the order of magnitude thatthe industry knew was necessary. This was in spite of the fact that the oiland gas sector contributed 117 billion yuan to the Chinese budget revenuein the decade 1975–85.

At the lower level of planning and management, in the 1980s responsi-bility for the ‘up-’ and ‘downstream sectors’ was divided. Upstream was theresponsibility of the China Petroleum Corporation (CPC) operating underthe Ministry of the Petroleum Industry (MPI). This arrangement changedin 1988 when the CPC was replaced by the China National PetroleumCorporation (CNPC), still under the MPI. There was always another min-istry for petroleum and natural gas exploration in China, the Ministry ofGeology. Through a subsidiary, this ministry profited from sales of oil andgas but had no rights to issue exploration or production permits in onshoreChina.

Downstream, the key entity was the China National PetrochemicalCorporation, known as SINOPEC. This had its own ministry – theMinistry for Chemical Industries. Interestingly, none of these organiza-tions had clearly assigned rights to issue blocks of offshore prospectingareas to foreign companies. This power was largely reserved by the StateCouncil, operating through the directly owned CNOOC.

During the 1990s a major transformation in the planning and administra-tion of the oil and gas sector got under way. This reflected the wider trend toconvert an economy based on central planning and non-competitive admin-istration into one in which independent units improved their efficiency andutility by cost reduction, innovation, and ever-rising capabilities to conformto market needs. Indeed, the oil and gas sector proved to be a model that was


followed by other large-scale, capital-intensive industries. The turning pointin this successful process was the reform of 1998 in which the State Councillaid down the principle that ministries be converted to bureaux – whichin turn could establish below them commercial entities operating on thegovernance and competitive principles of modern corporations.

In the oil and gas sector this led to the establishment of the State Bureauof the Petroleum and Chemical Industries (PCI) responsible to the StateEconomic and Trade Commission. At the same time, two huge commercialentities were created. These were the China National Petroleum Corporation(the ‘new’ CNPC) and the China National Petrochemical Corporation (the‘new’ SINOPEC). However, whereas the old CNPC and SINOPEC dividedupstream and downstream responsibilities, this was fundamentally changedunder the new arrangements. Had the old functional division of labourremained, competition would not have been possible. Under the new dis-pensation, therefore, both corporations were empowered to engage in thewhole spectrum of activities from exploration through to refining anddomestic and export sales. At the same time, however, each was assigned aprimary geographical region – north China for the CNPC and the southfor SINOPEC. The intention of this reform was to give China two nationaloil companies, both of which would develop the capabilities needed tocompete within China and worldwide with the international oil majors.Subsequently the CNPC, SINOPEC and a reformed CNOOC (the organi-zation responsible for offshore activity) were all converted into holdingcompanies known as PetroChina, SINOPEC Corp. and CNOOC Ltd.These were encouraged to establish further operating company subsidiaries.The CNOOC Ltd was actually incorporated in Hong Kong, while allthree companies were listed on stock exchanges in Hong Kong, London andNew York. The three corporations now have many subsidiaries, some ofwhich specialize in a particular branch of the industry while others havea regional responsibility – as for example the Daqing Oilfields OperatingCompany. This model of reorganization, which drastically reduced the oldbureaucracies and redefined operational tasks, was subsequently followedin other industries, including electrical power generation and airlines (seeFigure 3.1).

EXPLORATION AND DEVELOPMENT ONSHOREAND OFFSHORE

Under this new structure, exploration and development fall within theresponsibilities of the three main corporations: PetroChina, SINOPECCorp. and CNOOC Ltd. Overall, however, PetroChina is the largest


corporation, accounting for 65 per cent of crude oil production and takinga leading role in China’s upstream exploration and development effort. Themajor regions in which PetroChina is engaged in petroleum exploration arein north-east China and to some extent in Xinjiang. We now examine thesedevelopments in turn.

Daqing and the Oil Fields of Heilongjiang

Survey work began at Daqing in 1955 and the first field was discovered in1959. In total the Daqing field now accounts for 40 individual fields alllocated in the Songliao Basin, and covering an area 160 km long (north tosouth) and an east-to-west width that fluctuates between 6 km and 30 km.The seven main fields are situated in a large anticlinal basin called theChangyuan structural formation. Still within this broad geological struc-ture are a further ten oil fields located in Jilin Province.2 These fields areshown in Figure 3.2.

In 1995 the estimated geological reserves of the field totalled 4.67 billiontonnes, which was later increased to something in excess of 5 billion tonnes.If the ultimate recovery rate can be raised to 50 per cent, then estimatedultimate recovery would be 2.5 billion tonnes. However, by the end of 2005,1.9 billion tonnes had already been taken, leaving only 610 mmt in place. Ifa more conservative ultimate recovery rate of 40 per cent is adopted, it seemslikely that the remaining recoverable reserves as of 2005 were only 100 mmt.

As well as oil, Daqing produces significant volumes of natural gas. Todate, this gas has only been ‘associated’ gas – i.e. it is produced only in con-junction with crude oil. The volume of gas per tonne of oil has been stable


Figure 3.1 Organization chart of China’s petroleum companies

NDRCNational Development and Reform Commission

SINOPEC StarPetroleum

Oil, gasfields

Oilrefineries

SINOPEC China National

Petrochemical Corp.

SINOPEC Corp.

Oil, gasfields

Oil refineriesPetrochemical

CNPC China National Petroleum Corp.

PetroChina

Oil, gasfields

Oil refineriesPetrochemical

CNOOC China National

Offshore Oil Corp.

CNOOC Ltd

Oil, gasfields

LNGreceiving

centre

for many years at 40–50 m3. So far, over 84 billion m3 of gas have been pro-duced (see Table 3.2.).

More recent exploration work, however, suggests that in the southernDaqing fields there may be significant reserves of ‘non-associated’ gastrapped at much deeper levels than that found associated in the existing oilfields. If this is the case, it is possible that the Daqing field may producesignificant amounts of gas long after it has ceased to produce any oil at all.

As we discussed earlier, the character of the Daqing fields requires thatwater injection methods be used to raise pressures for recovery from theoutset. As a result, as time has passed there has been a seepage of water intothe oil reserves. In 1980 the water ratio reached 60 per cent. By 1995 the


Figure 3.2 Daqing and Jilin oil fields

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Haerbin City

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Sungali River

SonghuajiangSungali River

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ingtaiLonghupaoJiaogulaSifangtuoziSijiaziSongzhanShangjiaXingxiHaerwenJintengLongnanPuxiSaxiFulaerjiAlaxinErzhan

angcaoXindian

LamadianSaer tuXingshugangTaipingtunGaotaiziPutaohuaAobaotaSongfangtunXujiaweizi

angjiatunShengping

ushulinChaoyanggouChangchunling

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ingtaiLonghupaoJiaogulaSifangtuoziSijiaziSongzhanShangjiaXingxiHaerwenJintengLongnanPuxiSaxiFulaerjiAlaxinErzhan

angcaoXindian

LamadianSaertuXinshugangTaipingtunGaotaiziPutaohuaAobaotaSongfangtunXujiaweizi

angjiatunShengping

ushulinChaoyanggouChangchunling

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outaiXinminFuyuXinlangMutouXinbeiXinli

ratio was 80 per cent and in 2000 it was reported to be 85 per cent. Thuswhile the water injection method has been inescapable, the technical impli-cations of this procedure have escalated. During the 1990s the main recov-ery methods changed fundamentally. Not only have pumping systems beeninstalled, but ‘infill’ wells have been drilled, reducing the space betweenwells from around 500 metres to as little as 100 metres in some cases. Thetotal number of oil-producing and water-servicing wells in Daqing nowexceeds 50 000. Another technological innovation of importance has beenthe use of the ‘polymer flooding method’. This is a tertiary recovery proced-ure that involves injecting water-displacing polymers into the wells. Theprocedure was invented in America, and the Daqing field represents thefirst application of this technique on a large scale, made possible by the con-struction (with Japanese industrial assistance) of a polymer manufacturingplant on site at Daqing. Up to 17 per cent of the total oil recovered fromDaqing is estimated to have been produced by this system.

These technologically innovative systems have been responsible formaintaining the output of the field. Output that reached 50 mmt in 1976was maintained at that level, with modest increases of production for 27years under the ‘stable production’ (wenchan) policy discussed earlier.


Table 3.2 Oil and natural gas output in Daqing and their share of China’stotal output, 1991–2005

Daqing oil National oil Daqing share Natural gasproduction production of national output

(mmt) (mmt) production (%) (billion m3)

1991 55.623 140.99 39.4 2.271992 55.658 142.10 39.1 2.291993 55.902 144.00 38.8 2.231994 56.005 146.07 38.3 2.321995 56.007 149.06 37.3 2.291996 56.008 157.29 35.6 2.331997 56.009 159.42 35.1 2.341998 55.704 160.25 34.7 2.331999 54.502 158.78 34.3 2.232000 53.00 162.30 32.6 2.302001 51.50 164.83 31.2 2.392002 50.13 170.28 29.4 2.022003 48.40 170.44 28.4 2.032004 46.40 179.72 26.5 2.032005 44.95 180.86 24.8 2.44

Source: Various.

However, production in 2003 was less than 50 mmt and showed a decliningtendency in 2004 of 46 mmt and in 2005 of 44.9 mmt. This represents ahuge and little-known engineering achievement, although it has had con-siderable costs. In commercial terms, these policies have been importantsince some of the main customers for Daqing oil have been Japanese com-panies. Throughout the 1990s these companies were increasingly doubtfulabout the ability of the field to maintain, let alone enhance, its output, butin the event their fears were not realized.3

Looking to the future, at one time it was estimated that it would be pos-sible to keep output at the 55 mmt level as far ahead as 2010. However,current projections suggest a figure of 45 mmt for 2005 and 37 to 40 mmtfor 2010 according to the CNPC vice president’s press release. These figuresindicate that the natural factors limiting output are now coming into play,and also imply that the costs of maintaining high levels of output at Daqingmust be substantial.

The Jilin and Liaoning Province Fields

The oil fields in Jilin and Liaoning have also been the subject of prolongedexploration and development efforts. The ten chief fields in Jilin are locatedmainly in the Songliao Basin, while some are actually adjacent to theDaqing fields. The largest of the Jilin fields is at Fuyu. Discovered in 1959and situated on the right bank of the Second Sungari River, the field’s loca-tion is an area of complex swamps and wetlands. The development of pro-duction at Fuyu depended on the establishment of pipeline and railfacilities which, by 1972, had enabled the field to become a significant pro-ducer with an output of 1.26 mmt. Some of the crude was refined for localuse and the balance sent to refineries in Liaoning. During the 1970s, a suc-cession of seven further fields was developed. As at Daqing, the recoverymethods used in these fields were novel and very complicated. They involvewater injection and the so-called ‘fracturing method’. The latter enables oilto be extracted from rock formations by application of exceptional pres-sures. By the late 1980s intensive development had raised output to 2 mmtand by 2004 it had risen to 4.29 mmt. In an effort to extract a still higherproportion of the oil in place, with the support of the Japan National OilCorporation, new innovations including microbiological enhanced recov-ery were being pioneered.

Another substantial group of oil fields is that located in the delta of theLiao River in Liaoning Province. Known as the Liaohe fields, these arebased on sedimentary structures known as ‘block fault’ formations. Thisparticular example is known as the Lower Liaohe subsidence, and it is situ-ated to the north-east of the major offshore field in the Bohai Bay.


This region was intensively explored from 1964 by the Ministry ofGeology and later by teams experienced in the Daqing fields who wereunder the control of the Ministry of Petroleum. From 1967 (the height ofthe Cultural Revolution), the latter engaged in exploration methods of the‘battle-front’ variety. Hundreds of experienced oil men were brought in forexploration work and thousands of workers and People’s Liberation Armysoldiers were engaged in infrastructure projects, including the constructionof a 200 km road across the Liaohe swamps. In 1973 a special LiaohePetroleum Exploration Bureau was established to coordinate the explor-ation effort in this region.

During the 1970s a number of new fields were discovered in this regionand preliminary development begun. Notable among these were fields atXinglongtai, Damintong, Gaosheng, Shuguang and Hoangxilin. However,these efforts were seriously hampered by major floods and by a devastatingearthquake in 1974.

From a technical viewpoint, the reservoir formations associated with‘block fault’ structures tend to be complex. Seismic analysis was neededto map these formations as clearly as possible and large numbers of trialwells were drilled. Typically, the block faults created groups of reservoirseach in a range of 1000–3000 metres deep. From the late 1970s the analy-sis of survey results was enhanced by new computer-assisted applications.The three-dimensional seismic surveys developed later had significantresults, including the discovery of a huge ‘buried hill’ type reservoir atDamintong.

A particular difficulty in the Liaohe field region is that its oil tends to bevery heavy, with probably 30 per cent of the entire reserve falling into thiscategory. The best method for extracting this kind of crude is the steaminjection method developed in the USA. This involves injecting steam intowells that are close to but separate from the oil-producing wells. Chineseengineers learned of this method in the 1970s through study of the tech-nical literature and, although they lacked all access to experience and tacitknowledge, they none the less attempted to employ it at Liaohe. A pilotsteam extraction plant was built at Gaosheng in 1979 and after severalyears of experimentation the method began to yield results. By 1985 themethod was producing 1.7 mmt annually – nearly 20 per cent of the entireLiaohe output. In addition, the Chinese also began to employ the steamsoak process, popularly known as ‘huff and puff’. This is another steaminjection technique, but one that injects the steam directly into the produc-ing well, thereby both lowering the viscosity of oil and easing its extraction.

During the 1990s exploration and development of the Liaohe field havecontinued, with intensified recovery techniques adapted to the differenttypes of oil found in the region. Overall, the effect of these has been to raise


the water content of these fields, which by 1999 had reached an average levelof 72 per cent.

As a result of these efforts over many years, output in the Liaohe fieldsas a whole reached 11.35 mmt in 1987 and peaked at 15.52 mmt in 1995.Thereafter output began to decline (see Table 3.3). This was hastened bythe impact of widespread flooding in 1996, when over 1000 wells were


Table 3.3 Oil and natural gas output in the Liaohe field, 1978–2005

Crude oil production Natural gas production(000 tonnes) (billion m3)

1978 3 5501980 5 0001981 5 0201982 5 3401983 6 1101984 7 6101985 9 002 1.5

Cumulative 47 596

1986 9 8401987 11 3501988 12 6701989 13 3501990 13 6001991 13 7001992 13 851 1.771993 14 201 1.761994 15 023 1.751995 15 523 1.75

Cumulative 190 920

1996 15 043 1.591997 15 041 1.551998 14 521 1.201999 14 304 1.10

Cumulative 250 015

2000 14 010 1.152001 13 850 1.272002 13 510 1.132003 13 220 1.052004 12 830 1.002005 12 254 0.92

Source: Various.

damaged. By 2005 annual output was down to 11.6 mmt and was decliningat a faster rate than had ever been anticipated. At the same time, the tech-nical conditions of the field must have been raising costs per tonne of oilproduced. Thus when foreign investors were invited to bid for 17 explora-tion lots in 2001, there was little interest.

FIELDS IN THE XINJIANG UYGUR AUTONOMOUSREGION

The Xinjiang oil fields have not in the past been grouped together; however,the term is increasingly being used to describe all fields in the JunngarBasin. The Tarim Basin itself is such an important issue for the future ofChina’s oil and gas that we devote an entire chapter to it. Here, thereforewe look at the other fields in Xinjiang.

Let us start with consideration of the Karamai field, located in the north-west of the Junngar Basin. This huge area in the north-west of China is tri-angular in shape and bounded by the Tianshan Mountains to the south,the Altai range to the north-east, and the Talbagatai Mountains to thenorth-west. The basin as a whole is 750 km from east to west and 450 kmfrom north to south, occupying 330 000 km2 of land space. The area ismostly desert and mountainous steppe. As a whole, the Xinjiang UygurAutonomous Region has a population of 17 million, of whom half areUygur or Mongolian minority peoples.

The Karamai oil field was first developed in the 1950s. Subsequentlyseveral other fields were discovered immediately adjacent to the Karamai,while to the east of Karamai, major deposits were located at Huoshaoshan.There are still considerable exploration possibilities in the region, notablyat Maqiao. In total, the geological reserves in place are probably as high as1.37 billion tonnes of oil; further successful exploitation of this can beanticipated in the next few years.

Exploration in the Karamai and other Xinjiang fields is controlled by theXinjiang Petroleum Administration. A major obstacle to development inthis region is that local demand for crude oil and downstream products islimited, as is the infrastructure for transport outside Xinjiang. In its earlystages, the exploration of the Xinjiang fields relied on camel transport formovement not only of materials, but also even for water. Today, transportis undertaken by a combination of road, pipeline and rail. For examplepipelines are used to move crude to refineries and petrochemical plants inDushanzi and Urumqi, and surplus crude is transferred to refineries in thecity of Lanzhou in Gansu Province. Of crucial recent importance is thedoubling of the rail track between Lanzhou and Xinjiang.


Although costly to move, in other respects Xinjiang oil is highly desir-able, being of light variety. Xinjiang output has grown from 5 mmt in 1985to over 11.6 mmt in 2005. Total output in the Autonomous Region wasreported to be 20 mmt in 2005. This included 6 mmt produced byPetroChina from the Tarim, 2 mmt from fields in the small Turfan–HamiBasins, and an unknown level of output produced by the SINOPEC–StarCompany, also from the Tarim field (see Table 3.4).

Of crucial importance to the future of the Xinjiang fields are the eco-nomics of the proposed Xinjiang–Lanzhou crude oil pipeline, which wouldreplace the present system of rail transportation. However, it is reported


Table 3.4 Crude oil and natural gas output in the Xinjiang field, 1956–2005

Crude oil production Natural gas production(000 tonnes) (billion m3)

1956 161957 721959 9611960 1 6361961 1 0501964 8791966 1 147 0.181977 3 0681979 3 8051981 3 8381983 4 2701985 4 994 0.541987 5 750 0.441989 6 404 0.501991 7 020 0.551993 7 602 0.841995 7 903 0.881996 8 301 1.051997 8 702 1.241998 8 710 1.341999 8 985 1.502000 9 200 1.622001 9 683 1.902002 10 050 2.022003 10 600 2.152004 11 110 2.552005 11 663 2.89

Source: Various.

that an oil-only product pipeline with an annual transportation capacity of5.8 mmt is now under way. There is as yet no clear information on the pro-posed crude oil pipeline with a capacity of 50 mmt per year.

Exploration and Development in Regions now Controlled by SINOPEC:Shengli

The first major group of fields to consider here are those known as theShengli oil fields in Shandong Province. Some 70 major fields are locatedclose to and under the Huang He (Yellow River), running down to andunder the sea in the Bohai region. Geologically the region is a series of fourmajor depressions that make up the quasi sedimentary basin of the BohaiBasin as a whole. Work on these began in the 1960s and more than half ofthe Shengli fields are associated with the largest of these, the Dongyindepression. Work in the region has continued steadily with many more pos-itive results, most recently the confirmation of an important field atJiangjiaden in January 2002 (see Figure 3.3).

According to the Shengli Oilfields Administration, original oil in placeat Shengli amounts to 3.6 billion tonnes (1997 estimate). However, there issome confusion in official data on this field as it is not always clear whetherreference is exclusively to onshore reserves, or whether the offshore BohaiBay reserves are included. For example, a 1994 estimate of 3.969 billiontonnes was given for the inclusive figure, but this is clearly inconsistent withthe 1997 figure for onshore only, quoted above.

It is clear from the record of production that exploration in the Shenglifields has been very successful. Output began in 1962 and reached an earlypeak of 19.46 mmt annually in 1978. Subsequently output began to declineuntil the Gudao field came on stream in 1983. Output then rose to 31.6 mmtin 1987 and peaked again in 1991 at 33.55 mmt. Although it did not recoverthe peak, output was maintained at above the 30 mmt level until 1995, afterwhich output began to decline, but maintained a level of 26 mmt, reaching26.9 mmt in 2005. Cumulative output at Shengli amounted to 883 mmt by2005 (see Table 3.5).

Looking to the future, it is estimated that the field will continue toproduce above 20 mmt annually using the tertiary recovery method ofinjecting sulfonate (SO3) into the oil formation. However, the preciseperformance of the field will depend critically on economic rather thanthe purely technological factors. This is particularly the case for produc-tion in the shallow waters of the Bohai Gulf. There are, for example,reserves known to exist in the Chengdao field that is just offshore, but withpresent technology and costs, further exploration and development workis not justifiable.


57

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Shengli is the main field under the control of SINOPEC Corp. Otherfields controlled by the Corporation include those known as theZhongyuan fields in Henan Province. Not large in terms of oil, these fieldsdo have considerable gas reserves. Some of these reserves are ‘associated’,but others are independent and at much deeper levels than the oil. In total,reserves of gas are estimated at 100 billion m3. Gas can be transported by


Table 3.5 Oil and natural gas output in the Shengli field, 1978–2005

Crude oil production Natural gas production(mmt) (billion m3)

1978 19.46 1.431979 18.651980 17.59 1.421983 18.551984 23.011985 27.03 1.14

Cumulative 259.39

1986 28.66 1.401987 31.60 1.481988 33.30 1.421989 33.35 1.54

Cumulative 387.14

1990 33.50 1.441991 33.552 1.441992 33.461 1.441993 32.702 1.371994 30.902 1.311995 30.063 1.281996 29.116 1.19

Cumulative up to 600.00August 1966

1997 28.012 1.001998 27.310 0.921999 26.652 0.732000 26.75 0.692001 26.68 0.912002 26.71 0.752003 26.58 0.812004 26.74 0.892005 26.945 0.88

Source: Various.

pipeline to fertilizer plants in Kaifeng and is used for electrical power gen-eration in the city of Puyang.

Conclusions

Three conclusions emerge from this survey of Chinese onshore oil and gasexploration and their results. First, the intensity of the efforts to develop oiland gas resources in the aftermath of the Sino-Soviet dispute was extraor-dinary. These efforts can be judged not only by the high priority given tothem, seen as a crucial economic and strategic task for both governmentand Party, but also by the huge human effort made by thousands ofChinese people, working typically in appalling physical conditions.

The second dimension of this account is the remarkable technologicalaccomplishment that it represented. When the Soviet experts left China in1960–61, they must have believed that Chinese oil and gas developmentwould be stalled for many years. This, however, proved not to be the case.Although cut off from direct contact with most Western sources of expert-ise, Chinese engineers and technicians studied the literature intensively andthen applied this knowledge, by trial and error, to find solutions for theirown problems. Oil and gas extraction problems always vary according to thelocal geological, geographical and infrastructural conditions. Ready-madesolutions are rarely available, and in the varied and often unique circum-stances of Chinese natural endowments, many intractable problems had tobe solved. While Chinese conditions for innovation were obviously far fromideal, their success in developing ways of prospecting and developing theirresources and, in particular, finding new approaches to water injection andto secondary and tertiary recovery techniques consistently astonishedforeign specialists who had access to the Chinese oil and gas fields. The effectof this has been to enable the Chinese to maintain oil output from key fieldsin north-east China for far longer than once seemed likely.

Third, however, we must note that even the strongest and most innova-tive efforts will eventually run into diminishing returns unless they can beapplied to major new finds of natural resources. This has been the growingproblem of the 1990s. In Table 3.6 we see the performance of the majorfields in the last three years.

Under conditions of reform, adequate funds for exploration have not beenavailable from central government and its corporations and, as the Chineseeconomy shifts towards Western-style market institutions, further oil explo-ration has been a growing problem since the 1990s. By its nature, explorationis a risky and expensive business which fledgling capitalist corporations willnot willingly undertake. Advanced market economies have developed spe-cialized institutions that find solutions to these problems, but China is far


from this state at present. Further, the fact that promising possibilities for oiland gas are in the west and far west of China, regions with poor communica-tions, small local markets, and potentially unstable political situations, addsto the complexity of the problems facing the sector in the twenty-first century.

EXPLORATION AND DEVELOPMENT OFFSHORE:THE FOREIGN CONTRIBUTION

We saw earlier that offshore development was critically dependent on aninfusion of Western and Japanese technological expertise and hence was


Table 3.6 Crude oil and natural gas production by major fields, 2003–2005

Name of oil Crude oil productionor gas field

2003 2004 2005Natural gas production

(10 000 (10 000 (10 000 2003 2004 2005tonnes) tonnes) tonnes) (100 mmm3) (100 mmm3) (100 mmm3)

Daqing 4 840 4 640 4 495 20.3 20.3 24.4Liaohe 1 322 1 283 1 225 10.5 10.0 9.2Huabei 435 432 435 5.7 5.8 5.7Dagang 421 488 499 3.5 3.4 3.3Jilin 427 427 458 2.3 2.4 2.7Xinjiang 1 060 1 111 1 166 22.1 25.5 28.9Changqing 701 811 939 51.8 74.5 75.3Yumen 70 74 77 0.2 0.2 0.7Qinghai 220 222 221 15.4 17.9 21.2Sichuan gas 13 13 13 91.9 97.7 116.3Yanchang 453 652 812 – – –Jidong 75 100 125 0.4 0.5 0.7Tarim 525 537 600 10.9 13.5 56.7Turfan–Hami 235 225 810 12.3 13.3 15.3PetroChina 10 799 11 020 11 279 247.6 285.6 360.8Shengli 2 658 2 674 2 694 8.1 8.9 8.7Zhongyuan 361 335 320 17.0 17.5 16.6Henan 186 189 187 0.9 1.0 1.0Jianghan 93 96 95 0.9 1.0 1.2Jiangsu Anhui 158 161 164 0.3 0.4 0.6New Star Co., 342 392 456 23.5 26.6 31.9SINOPEC 3 814 3 860 3 928 53.4 58.3 62.8CNOOC 2 430 2 592 2 878 42.2 63.8 81.2

Total China 17 044 17 472 18 086 343.2 407.8 504.0

Source: China OGP (China oil, gas and petrochemical), various issues.

inconceivable on a serious scale before the tectonic shifts of Chinese eco-nomic thinking began in the late 1970s. As the ‘Open Door’ thinking devel-oped, however, China could begin the serious exploration of its potentialfor offshore oil and gas.

This was inevitably a slow process, first, because in the early days theplanners and bureaucrats responsible for developing this activity did nothave the experience to handle the practicalities and problems of Sino-foreign cooperation in this industry. Nothing in their earlier relations withthe Soviet Union (or with Japanese and Western countries in the brief‘openings’ of 1964–65 and 1973–75) had prepared Chinese officials forwhat was involved in this new activity – an activity marked not only by itstechnological sophistication but also by the unusually high element of riskthat was involved. Further, in the early days of reform thinking, the notionsof reform were imprecise. Thus no one could, for example, envisage thateventually foreign companies would be able to collaborate with Chineseorganizations now described as ‘modern corporations’, organizations withshare ownership and detailed governance arrangements to bring them intoa new relationship with government.

Further, there was the added anxiety that, like earlier economic liberal-izations, the reform might reverse itself. If this happened, officials involvedwith any form of joint foreign ventures could find themselves under heavycriticism for ‘selling out’ Chinese resources to foreigners, a criticism that inthe 1970s had been one of the most serious political crimes in the thinkingof the radical left wing of the Party.

The first organizations to negotiate foreign contracts were the Ministryof Geology and Mining (MGM) and the Offshore Petroleum Bureau underthe Ministry of Petroleum Industry (MPI). In February 1982, however, theChina National Offshore Oil Corporation was established (CNOOC) andgiven responsibility for offshore joint ventures with foreign companies.Under the CNOOC a further four corporations were established. Thesewere to provide specialized services (including base camps) for foreign com-panies. The companies each had a specific geographical remit. These werethe Bohai Petroleum Corporation (based in Tianjin); the South Yellow SeaPetroleum Corporation (Shanghai); the South China Sea East PetroleumCorporation, based in Guangzhou and responsible in particular for thePearl River Delta; and the South China Sea West Petroleum Corporation,based at Maoming and in charge of the Yinge Sea, the Beibu Gulf and alloffshore activity to the west of the Pearl River Delta.

The first three companies to sign offshore contracts were Total and ElfAquitaine from France, and the Japan–China Oil Development Company.These contracts were signed in 1980. Elf Aquitaine’s contract was for thecentral Bohai Sea; Total’s for the Beibu Gulf; and the Japanese company


took the southern and western Bohai region. In 1982, Arco signed up toundertake exploration in the Yinge Sea.

The contracts signed by this first group of companies were each ‘indi-vidually negotiated’. That is, the companies were negotiated with separatelyand terms could be varied to suit each case. In 1982, 1984 and 1989 Chinaalso conducted a series of rounds of international bidding. For each ofthese a six-month period of notice was given before closing dates anda further six months was required for the Chinese to reach their decisions.During the early period, the Chinese were very active in creating the legaland regulatory framework to support international contracts of this kind.

The results of the bidding rounds were strong at first, but had fallen awayby the third round. In the 1982 round, 19 contracts were agreed coveringthe South Yellow Sea (3), the Pearl River Delta (13) and the Beibu Gulf (3).In the 1984 round a further 12 contracts were agreed covering the SouthYellow Sea, the East Yinge Sea and the Pearl River Delta. In 1989, however,only two further contracts were agreed, both for the Pearl River Delta. Tothese 33 contracts, a further round in 1992 added a further 18.

The first four companies engaged under the ‘individual contract’ systembegan work on test wells and geophysical surveying immediately, but hadrelatively modest results. Elf drilled test wells in the Bohai without successand eventually returned the contracted blocks to China. Total found smalland unviable wells in the Beibu Gulf and also eventually returned theirblocks. The Japanese (two companies) did find small fields in their sectionsof the Bohai and began production of crude oil. Arco, however, suffered atragic setback when a gas blow-out at the exploration well in the Yinge Sea(south of Hainan Island) capsized their drilling vessel Java Sea with a lossof 81 lives. Subsequently the company did make substantial gas finds closeby in the Yacheng regions and established a major pipeline to the thermalelectricity generating plant in Hong Kong.

The companies operating under the contracts arising from the 1982 roundof bidding were very active. Altogether these contracts involved 28 com-panies from nine countries. They drilled 83 test wells and undertook seismicsurveys covering the length of 118 000 km. Five major structures were foundto hold significant oil and gas reserves, including four oil fields in the PearlRiver Delta (Huizhou 21-1 and 21-6, Xijiang 24-3 and Lufeng 22-1). Theseall came on stream between 1991 and 1997. Oil from these fields is not piped,but is stored in floating tanks and then off-loaded into tankers. No findswere made in the other areas covered by this round of contracts.

Results of the 1984 round were also modest. This time 15 foreigncompanies were involved, including three Japanese companies that com-bined into a consortium known as the JHN Group. This consortiumfound another Pearl River Delta field (Lufeng 13-1), and two American


companies, Phillips Petroleum (now called ConocoPhillips) and Amoco,developed fields known as Xijiang 30-2 and Liuhua 11-1 respectively.

Altogether the participants in these two rounds invested $600 millionand drilled 190 test wells. The success rate on these wells was in fact high(55 were found to have oil and gas), but the scale of the finds was too smallto be commercially useful. This problem became acute when the oil pricefell in 1986 to $15 per barrel (from a peak of $30). As a result, many fieldshad to be put in storage until the oil price rose again in the 1990s.

During the 1990s the dream of an offshore oil and gas bonanza fadedand foreign companies became generally pessimistic about the China scene.Throughout the 1990s, with the exception of 1996, the number of contractsannually dwindled to single figures. None the less, a total of 87 contractswere signed in the 1990s compared to 53 in the 1980s.

Most of the 1990s contracts were of the ‘individually negotiated’ type,with provision for profit sharing and cost sharing with the Chinese part-ners. The reason for this was that, like other countries in a similar position(Indonesia for example), in order to keep up the momentum of explorationduring a period of weak prices in the oil market, the Chinese had to offerall kinds of tailored incentives to foreign partners who would otherwisehave been unwilling to sign. These special offers included:

1. Extending contractual periods until all planned drilling was com-pleted.

2. Offers of alternative blocks should contracted blocks prove valueless.3. Extending an option to allow final decisions on exploration wells to be

made after geophysical surveys had been completed.4. Special terms for royalties, profit taxes and import taxes on imported

equipment for small fields with annual outputs of less than 1 mmt.5. Approval that failed exploration investment could be recovered as

cost from contracts where a company made profits from successfulfinds.

EXPLORATION AND DEVELOPMENT OFFSHORE:CHINA’S CONTRIBUTION

Between 1987 and 1998 offshore exploration efforts resulted in total seismicsurveys exceeding 100 000 km in length and the drilling of 377 test wells. Intotal, as a result, some 88 geological structures with oil and gas wereidentified. Within these totals, it is a striking fact that over half of theseismic survey coverage and 224 of the test wells were completed byChinese enterprises (see Table 3.7).


China’s interest in offshore work did in fact go a long way back. In 1966the government established the Offshore Exploration SupervisionDepartment in the Dagang oil field. This later became the Bohai PetroleumCorporation (the BPC). In 1971 a test well was successful, which led to theestablishment of the Haisu oil field. In the late 1970s, China purchasedmobile jack-up-type drilling rigs from Japan and, using these, discoveredseveral oil fields. Further rigs were constructed at docks in Dalian and semi-submersibles were purchased from abroad for work in the Bohai. Meanwhile,the Chinese effort was also supported by the Ministry of Geology andMining, which was drilling in the Yellow Sea, and by activities in the south-ern zones undertaken by the South Sea Petroleum and Explorationand Supervision Department working under the Maoming PetroleumCorporation. These companies were later restructured into the South SeaWest Petroleum Corporation. Using survey ships bought from France, Chinaalso began its own gradual programme of geophysical survey work.

During the 1980s and 1990s the Chinese government invested an annualsum of 100 million yuan in the form of capital injections into the ChinaNational Offshore Oil Corporation. CNOOC and its affiliates drilled 15 to


Table 3.7 The results of offshore exploration, 1984–98

Seismic survey line length Number of drilled Number of(1000 km) exploration wells discovered

Chinese oil Foreign oil Total Chinese oil Foreign oil Totalstructures

company company company company

1984 4 36 40 2 33 35 121985 5 20 25 12 28 40 61986 25 26 51 9 25 34 81987 22 5 27 15 21 36 81988 26 2 28 21 21 42 91989 15 7 22 16 13 29 71990 15 9 24 10 9 19 51991 15 2 17 12 9 21 41992 22 19 41 18 9 27 41993 36 7 43 13 6 19 71994 27 13 40 21 3 24 101995 35 40 75 16 22 38 51996 52 112 164 40 8 48 101997 81 121 202 22 15 37 131998 – – 406 20 17 37 6

Source: Larry C.H. Chow and Wing-yin Lo, ‘Chinese Offshore Oil Production: Hopesand Reality’, Journal of International Development and Cooperation, IDEC, HiroshimaUniversity, Vol. 7, No. 2, 2001, p. 85, Table 3.

20 wells per year, with its engineers absorbing skills from working with jointforeign ventures of various kinds. From the outset, the CNOOC was struc-tured to make foreign joint ventures the natural way for its business devel-opment. Unlike the typical state-owned enterprise, the CNOOC had strictpersonnel policies that ensured tight controls on numbers hired and highlevels of professional competence among those hired.

The Bohai Petroleum Corporation (BPC) was another large contributorto the Chinese offshore effort. Major finds that were developed included theJinzhou and Suizhong fields. The latter (SZ 36-1) now produces over 5 mmtper annum, transported by way of pipeline to the refineries at Jinxi. In con-junction with Texaco and BP, the BPC has also developed Qinhuandao 32-6,which, when on stream, will produce a further 4.5 mmt per annum togetherwith 5 mmt oil from Penglai oil field, which was discovered and developedby Phillips/Conoco oil company. Japanese joint ventures with the BPC havebeen less successful, although the scale of their efforts in the Bohai meansthat the Japanese have to be regarded as the pioneers in the Bohai sector.

Considerable activity has also taken place in the East China Sea. Theimportance of this sector stems from its proximity to Shanghai, with its hugeand growing energy needs. Here exploration and development are mainlyunder the East Sea Petroleum Corporation, the local CNOOC subsidiary. Todate, important fields include the Pinghu gas field, a Chinese consortiumalready supplying natural gas to Shanghai. More recently the Chungxiao gasfield is under development, with gas to serve Ningbo City.

Finally, one other recent development of great interest is the agreementbetween China and Taiwan for joint exploration in the Taiwan Straits. Thisagreement, the first of its kind, was signed in Taibei by CNOOC and theChinese Petroleum Company of China (Taiwan), on 16 May 2002. The areacovered by the joint venture contract for surveying, exploration and devel-opment is 15 400 km2. The key elements of this agreement are:

1. Both parties agree to invest $25 million for four years.2. The joint venture will be responsible for seismic surveying and explor-

ation drilling expenses.3. In the event of successful finds, crude oil output will be shared on a

50:50 basis.

OFFSHORE RESOURCES AND INVESTMENT: HASTHE EFFORT BEEN WORTHWHILE?

During the period from 1982 to 2001, it is estimated that discoveriestotalling 2 billion tonnes of ‘proven reserves in place’ have been identified


in offshore fields. Of this, 870 mmt are ‘proven recoverable’ reserves. Whilethe 2 billion figure may seem large, it is in fact less than 10 per cent of the24.6 billion tonnes that are estimated to constitute the ‘geologicalresources’ of petroleum in the Chinese sea area. There remains, therefore,vast scope for further survey and exploration work.

To date, offshore oil production has risen from 1.27 mmt in 1990 to28 mmt in 2005. Natural gas volumes have risen from 375 million m3 in1995 to 8 124 million m3 in 2005. The main contributor to the expansion ofoil production has been the oil from the Pearl River Delta, while the tenfoldincrease in gas has come mainly from the Yacheng field in the Yinge Seaand the Pinghu gas field in the East China Sea.

These results have been the fruit of considerable investments. Totalinvestment by foreign oil companies between 1984 and 2001 amounts to an


Figure 3.4 Oil and gas fields and pipelines in offshore China

Liaodong Gulf

Bohai

South Yellow Sea

East China Sea

Taiwan

South China Sea

BeibuGulf

Yingehai

Beijing

ShanghaiNingbo

Tianjin

Guangzhou

Hong Kong

Maoming

HainanIsland

Jinzhou 20-2 Gas F. Jinzhou 9-3 Oil F.Suizhong 36-1 Oil F.

Qinhuangdao 32-6 Oil F.

Caofeidian Oil F.

Penglai Oil F.Bozhong 34-2/4 Oil F.

Bozhong 26/2, 28/1 Oil F.

Pinghu Gas F.

ChungxiaoGas F.

Xijiang 30-2 Oil F.Xijiang 24-3 Oil F.

Lufeng 13-1 Oil F.Lufeng 22-1 Oil F.Huizhou 21-1 Oil F.Liuhua 11-1 Oil F.Huizhou 26-1 Oil F.

Huizhou 32-2/32-3 Oil F.

Weizhou Oil F.

Yacheng 13-1 Gas F.

Pip

elin

e

DongfangGas F.

ZhujiangkouPearl River mouth

Wenchang Oil F.

estimated $7 billion. This has been divided 60:40 between exploration andsurveying on the one hand, and development on the other. China’s invest-ment by CNOOC is estimated to have been an additional $4 billion.

On a short-term judgement, the returns to investment on this scalecannot be said to be large. However, survey and exploration work is a riskyform of investment and no guarantees could ever be made to foreigninvestors. On the Chinese side, however, the gains have been considerable.This takes the form not simply of oil and gas output, now increasinglyvaluable as world energy prices rise, but in the form of technological learn-ing. Further, exploration continues unabated at the present time, withforeign firms focusing on the most promising sectors and Chinese firmstest drilling in a variety of locations. These efforts still produce some excel-lent results, notably the Penglai 19-3. This field was identified in 1999 bythe Bohai Petroleum Corporation working with Philips Petroleum. Provenreserves are already estimated at 500 to 600 mmt. The viscous quality ofthe oil indicates that development and production costs are going to veryhigh; none the less output is expected to reach 8.5 mmt by 2005 and thereis little doubt that this will prove to be a large, commercially successful field(see Figure 3.4).

NOTES

1. Material for an outline of oil and gas planning and management is contained in Zhongguonengyuan fazhan baogao 2003 (China’s Energy Development Report 2003), Beijing: ChinaEconometric Publishing House, December 2003. See especially the chapters on pricingand policy, energy management, and corporate organizations, chs. 3, 4, 12–14.

2. The petroleum geology of China’s oil fields is described in a series of volumes, Zhongguoshiyou dizhi zhi (The petroleum geology of China). Volume 2(A) is for Daqing, 2(B) forJilin, 3 for Liaohe, 6 for Shengli, 10 for Sichuan, 12 for Changqing and 15 for the Tarimand other fields.

3. The key figure in developing Daqing and explaining its development policy has beenMr Wang Qinmin. Mr Wang, a former president of the Daqing Petroleum ResearchInstitute, has been described by The People’s Daily as ‘An Iron Man of Daqing for themodern age’, thus making him a successor in spirit to Wang Jinxi, the original Daqinglabour hero of the 1960s. In 1996, at a meeting of the Japan Petroleum Institute, Mr Wangoutlined to Japanese petroleum engineers plans for infill wells and polymer flooding thatwould enable the policy of ‘stable production’ to continue. The output estimates he pre-sented on that occasion proved completely accurate.


4. Natural gas: China’s newenergy source

THE BACKGROUND TO NATURAL GASDEVELOPMENT IN CHINA

China’s principal gas-rich sedimentary structures have been in SichuanProvince and the Ordos, Qaidam and Tarim Basins. Of these, the SichuanBasin is by far the longest established, the other basins being the results ofrelatively recent exploration and development. In Sichuan, gas resourceshave been used by the local population, employing primitive technologies,for most of recorded history.

The Sichuan Basin is approximately 180 000 km2; it stands 500 metresabove sea level, yet is itself enclosed by mountains. The surface of the basinis the famous ‘red soil’ of Sichuan, which, geologically, is Jurassic periodsandstone and shale. This soil combines with favourable climatic condi-tions to support an intensive agriculture. The basin region itself currentlysupports a population of approximately 100 million people. In the pre-PRCera, these conditions supported both a large population and food exports.In the 1960s, however, conditions deteriorated, food exports gave wayto deficits, shortages and serious rural poverty, which were major factorsexplaining why it was in Sichuan that the Party leadership pioneered agri-cultural and economic reform experiments in the 1970s. Today, the popu-lation of the basin is concentrated on the cities of Chengdu, Zigong andDukou, while to the south of the province there is also the large city ofChongqing, which, like Shanghai and Beijing, is now administered as anindependent entity.

There are four main gas-producing areas in the Sichuan Basin: ChuanNan, Chuan Dong, Chuan Xinan and Chuan Xibei. These lie to the south,east, south-west and north-west of the basin respectively. In addition tothese gas fields, located in the centre of the basin is a cluster of small-scaleoil fields that make up the Chuan Zhong oil field. Crude oil productionfrom this field has been as high as 1.3 mmt, but has now (2005) fallen to 138000 t per annum. Several small gas fields were discovered in this region inthe 1950s, and the Ziliujing field, also in this region, is reputedly the world’soldest natural gas field (see Figure 4.1).

68

In the 1970s gas exploration efforts moved east of Chongqing, wherethey were concentrated on the northern (left) bank of the Chang JiangRiver. In this, the so-called Chuan Dong region, many new fields weredeveloped, including the important Xiangguosi field.

In its early stages, gas exploration and development in Sichuan werejointly controlled by the Ministry of Geology and the Sichuan PetroleumAdministration Bureau of the Ministry of Petroleum and, under thisarrangement, a number of small finds were developed. In the 1990s,however, it was decided that there were grounds for a major investment pushin gas exploration in Sichuan. As a result, nearly one hundred new fieldswere discovered. To cope with this huge expansion, new administrativearrangements were put in place. The work of the two ministries was takenover by Star Petroleum and by a subsidiary of the China NationalPetroleum Corporation – the South West Oil and Gas Fields OperatingCorporation (SWOGFOC). These two bodies were responsible not only forexploration and development, but also for the production, transportationand marketing of gas from the Sichuan Basin as a whole. By the year 2000,the basin was producing 9.5 billion m3 of gas, of which Star produced 1.166billion and SWOGFOC 8 billion. In 2005, SWOGFOC’s gas productionrecorded 11.63 billion m3.

The current reserves situation of natural gas is as follows. Geologicalreserves in the whole of China are approximately 35 trillion m3. Of these,

Natural gas: China’s new energy source 69

Figure 4.1 Gas fields and pipelines in the Sichuan Basin

Sichuan Province

Nanchong Oil FieldWanxian

Sichuan Basin

Yungui Highland

WanshunchangGas Field

South-westSichuan

Yibin

Zigong

Neijiang

South Sichuan

Chongqing City

Hechuan

ChengduCity

East Sichuan

Boundary of the Basin

Yanze River

WeiyuanGas Field

Ziliuchin Gas Field

100 km0

Trunk Pipeline

Nanchong

more than 20 per cent are in the Sichuan Basin. As we saw earlier, however,this is a very speculative type of measurement. More practically, proven‘reserves in place’ for all Sichuan fields as at the end of 2000 amounted to600 billion m3 of which 200 billion m3 have already been extracted. Thus‘proven current reserves’ are estimated to be 280 billion m3. Production islikely to rise in the near future to 12–15 billion m3 per annum and a targetof 16.5 billion has been suggested for 2010. At these rates of extraction,considerable further investment in survey and exploration work will beneeded if the reserves:output ratio is to be held at comfortable levels.

Transportation of natural gas in the Sichuan Basin relies heavily on atrunk pipeline some 1000 km in length. This major pipeline forms a ringcircuit that connects the major fields with the centres of consumption andprocessing in the cities. This circuit in turn supports a maze of smaller dis-tributive pipelines totalling 10 000 km in length. Approximately 60 per centof the gas is used as feed for chemical fertilizer production. The balance isavailable for further processing in the chemical and other industries, fortransport, and for use by private households. In transport, natural gas takesthe form of compressed natural gas (CNG) and is used to power buses, carsand lorries. In the household sector, approximately 2.8 million householdsrely on this form of fuel.

To date, most of the output of the Sichuan Basin has been consumed inChanggang City and other locations inside the province. However, this willchange dramatically if current plans for the expansion of the Chuangdongfield are implemented. Under these, a new trunk pipeline of 738 km willtransport gas to Hubei Province. This pipeline, known as the Zhong-Wuline, is planned to go from Zhong Xian in Sichuan to the city of Wuhan.Three further lines will branch off the main artery to serve other towns andcities along the Yangzi River.

Although this project has completed its full feasibility stage and hadfinancing arrangements in place, it has been held up by the collapse of theAmerican energy company, Enron, a significant participant in the project.However, unfortunate as this delay undoubtedly is, the project is likely togo forward eventually and achieve its original target.

Development in the Ordos Basin

The Ordos Plain lies within a semi-quadrangular shape formed by mid-stream patterns in the Huang He (Yellow) River. Within this plain lies theOrdos Basin. If we look at this formation in terms of the administrativestructure, we find that the basin extends over the provinces of Gansu andShanxi, the Ningxia Autonomous Region and borders on the InnerMongolian Autonomous Region as well. Locally this region is known


as the Shan Gan Ning Region. The scale of the basin is enormous. It isapproximately 370 000 km2, making it almost as large as the entire landarea of Japan, and it is bisected east to west by the Great Wall of China.

This basin is the location of some of China’s oldest oil fields, atYanchang. At another Ordos location is the Changqing oil field, which wasdeveloped in the 1970s. Both fields are made up of 40 small fields and arestill important producers. Both were also rejuvenated when redeveloped aspart of natural gas exploration and development, and in 2005 theYanchang and Changqing fields were producing 8.12 and 9.39 mmt ofcrude respectively.

In 1988, a large complex of gas fields was discovered in the vicinity ofJingbian, Hengshan and Yulin respectively, and during the 1990s these werecomprehensively explored and developed. Proven reserves in place were esti-mated to exceed 200 billion m3. These huge fields have been connected to con-sumers in Beijing, Xi’an and Tianjin. As a result, production has increasedfrom 1.2 billion m3 in 1999 to 7.53 billion in 2005. The 918 km trunk pipelineconnecting the Jingbian fields with Beijing is known as the Shanjing pipelineand has a diameter of 660 mm. Construction was completed in 1997 with aninitial throughput of 2 billion m3 per annum. The line to Xi’an, completedin the same year, is 488 km long and has a smaller diameter of 426 mm andan initial throughput of 600 million m3. A third pipeline of 313 km, com-pleted in the same year, supplies 600 million m3 of gas for chemical fertilizermanufacture at a plant in Yinchuan City. The second pipeline to Beijing hasbeen completed recently by the Shell oil company in China (see Figure 4.2).1

Impressive as these achievements are, utilization of these supplies andpotential supplies remains unsatisfactory in many respects. In particular,facilities to redistribute gas for commercial and domestic purposes inBeijing and Xi’an are incomplete and below standard. In Beijing, measuresto forbid the use of coal within the city’s central zone are now in place (i.e.within the third ring road). However, these measures require that gener-ators of thermal electricity substitute coal for gas but they are in fact stillreluctant to do so. Further, the natural gas price is so high that the Beijingmunicipal government has been forced to subsidize large-scale gas users.

The prospecting and development of the reserves in the Ordos Basinhave stimulated considerable foreign interest. The Japan National OilCorporation conducted a free geophysical survey in the 1990s and at thetime of writing (2006) there is a joint exploration and production agree-ment between the China National Petroleum Corporation and Shell ChinaExploration and Production Ltd. This agreement is concerned with explor-ation, production and transportation and, under it, Shell is developingblocks in the Changbei gas field. These cover an area of 1588 km2 stretch-ing from north Jingbian prefecture to Yulin prefecture in Shanxi Province.


From the 30 test and appraisal wells drilled so far, proven gas in place isestimated to be 73 billion m3. A new pipeline from the Changbei gas fieldto Beijing is already laid and the production and transmission of gas hasbegun. The target for production is 3 billion m3 of gas to be delivered bypipeline to Beijing and adjacent cities and provinces by 2008, and then overa further 20-year period. Shell’s investment in the project is US$ 3 billion,with a commitment to investment of a further US$ 10 billion in natural-gas-related businesses in China.

Development in the Qaidam and Tarim Basins

The Qaidam Basin is 120 000 km2 and its geological gas reserves have beenestimated at 1050 billion m3. Proven reserves in place at the eight knownfields are 158 billion m3 and, of this total, 134 billion m3 are located in thenorthern Sebei area. During 1995–1996, a pipeline connecting the field to theoil refinery at Gormut was completed and this enabled large-scale produc-tion to begin. Total gas output then rose from 390 million m3 in 1999 to 640million in 2001. To distribute this output, four additional pipelines were con-structed by 1998, each connected to an individual field. By May 2001, an


Figure 4.2 Oil and gas fields and pipelines in the Ordos Basin

Yellow River

Changbei Gas F.

Suligu Gas F.

Ordos Plateau

Majiatan Oil F.

HongjingziOil F.

Xiataozi Oil F.

MalingOil F.

Changqing Oil F.Wuqi Oil F.

Shaanganning Gas F.Jingbian Gas F.

Yongping Oil F.Yan-an Oil F.

ChenghuaOil F.

Yanchang Oil F.Zhiluo Oil F.

HuangtuPlateau Shaanxi Province

Gansu Province

NingxiaHui Tribe

AutonomousRegion

ShansiProvince

Inner MongolAutonomous Region

HuhehaoteBaotou

Beijing

Yinchuan

Yongping

YanchuanYanchangYan-an

TongchuanChangxun

Baoji

Xi’an City

QingyangLanzhouCity

870 km

300 km

490 km

200 km1000

investment of 2.5 billion yuan (US$ 300 million) enabled completion of amajor trunk line from the Sebei field to Lanzhou City via Xining, a total dis-tance of 963 km. The initial capacity of this line was 2 billion m3 per annumbut, eventually, a flow of 4 billion is envisaged. All of this huge future outputis to be absorbed in the provinces of Qinghai and Gansu. Demand fromXining (capital of Qinghai) is estimated to be 1.7 billion m3 and that fromLanzhou (capital of Gansu) is put at 2.8 billion. In 2005, gas production was2.12 billion m3 associated with a crude oil output of 2.2 mmt.

The Tarim Basin is by repute China’s most promising source of naturalgas. It is the key to China’s most ambitious energy project known as XiqiDongyun – ‘The Transfer of Gas from West to East’. This envisages com-pletion of a 4200 km pipeline from Tarim to Shanghai (see oil and gas mapof China at the front of the book). The gas for this plan cannot come fromthe Qaidam field, all of which is already committed to supply Xining,Lanzhou and adjacent neighbourhoods.

In 2005, the output of the Tarim field was 5.67 billion m3, an amountlarger than could be consumed by its local market. In the same year theJunngar and Turfan–Hami Basins produced 2.89 and 1.53 billion m3

respectively. Both of these fields also had output in excess of local demand.The area is shown in Figure 4.3. The major issues posed by Tarim’s gasdevelopment are discussed in the next chapter.


Figure 4.3 Oil- and gas-related map of north-west China

Turfan Basin

Kunlun Mountains

ArtinTagu Mountains

Tianshan MountainsTianshan Mountains

JunngarBasin

Tarim BasinTarim Basin

Kekeya Oil F.Kekeya Oil F.

Tazhong Oil F.

Lunnan Oil F.Lunnan Oil F.

Kela Gas F.

Karamai Oil F.Karamai Oil F.

Yingmaili Oil F.Yingmaili Oil F.

Shanshan Oil F.Shanshan Oil F.

HuoshaoshanOil F.HuoshaoshanOil F.

HetianHotanHetianHotan

QitaiQitai

Pipeline

Karamai CityKaramai City

Nanjiang Railway Lanxin

Railway

Yakela

Kucha

Akesu

LuntaiLuntai

Zepu

Kashi KashgarKashi Kashgar

Oil FieldOil RefineryPipeline

RailwayRoadCity

0 300 kmYutian

Turfan

DushanziDushanziUrumuqi

City Urumuqi

City

KorlaKorla

Altai Mountains

Conclusion

At the present time the main producers of natural gas in China are in theSichuan and Ordos Basins. The third largest source is gas associated withoil output in the Daqing field in Heilongjiang. The problem with Daqinggas is that it is basically ‘associated output’ and hence depends on oil pro-duction. As seen in our earlier analysis, crude oil output in Daqing peakedat 56 mmt in 1997 and fell to 44.9 mmt in 2005, while associated gas outputslightly increased to 2.44 billion m3 in the same year. However, although itis technically possible for gas production to continue after oil output ceases,as Daqing oil output falls this must eventually have a strongly negativeeffect on the supply of gas. Aware of this, the Daqing authorities areattempting to stave off this decline by intensifying their search for gas andthere have been reports of some discoveries in the southern part of theDaqing field. However, these finds remain unconfirmed and cannot yet besaid to alter our judgement about the future of the field as a whole.

There is some associated gas production in the neighbouring province ofLiaoning, but this is also reported to be declining, and output in 2005 wasreported at 921 million m3. A more significant onshore field is that atZhongyuan in Henan Province. Although this is also an associated gas source,in 2005 the field produced nearly 3.2 mmt of crude oil and 1.66 billion m3 ofgas, and with output holding up, the field remains a major onshore resource.

Looking to the future, the one major field that appears to hold significantpromise is the Suligu gas field in Ordos Basin in the Inner MongolianAutonomous Region. Although no plans to develop this have yet been pub-lished, geological resources and proven reserves in place are now estimatedto be 2 trillion and 700 billion m3 respectively, making this the largest gasfind ever made in China.

OFFSHORE GAS DEVELOPMENT

At present (2006) there is one large and two smaller offshore natural gasfields under production. The large field is the Yacheng No. 13-1 field,located about 100 km south of Hainan Island in the South China Sea. Thisfield is connected to the mainland by two major pipelines. The largest is asubmarine line of nearly 800 km that supplies Hong Kong. Completed in1994, this currently supplies Hong Kong with 3 billion m3 of fuel, where itis used for thermal power generation. The smaller line, completed in thesame year, supplies Sanya City on Hainan Island with 500 million m3,which is used as feedstock for chemical fertilizer plants. The Yacheng fieldhas an expected life of 20 years (see Figure 3.4 in the previous chapter).


At one stage it was envisaged that the Yacheng field would supplyGuangzhou City, but this plan foundered on the failure to resolve disputesbetween the Chinese side and its American partner, Arco (later merged withBP–Amoco). This experience brought to light an important problem thatarises under joint venture agreements. For whereas production-sharingarrangements in oil are relatively straightforward to implement, becausegas supply requires specific and inflexible pipeline and storage infrastruc-ture, it presents quite different problems. In this case, in order for Arco tobe paid in foreign currency for its share of the gas off-take, the supply hadto be redirected to Hong Kong. BP has now surrendered this gas produc-tion contract to the Chinese and withdrawn from the whole project.

Another offshore field of considerable interest is the Pinghu gas field inthe East China Sea. But here the problem is political, because the field islocated close to the Senkaku/Diaoyutai Islands, to which China, Taiwanand Japan all lay claim. While these disputes are unresolved, full explor-ation and development remain problematic. Further, at the present time(2006) we still do not have a firm preliminary idea of what the ultimatepotential of the field might be. The extreme cyclonic weather experiencedin this region presents serious obstacles to the exploration and developmentof its resources. None the less, in 2000 China established a number of sur-veying and exploration blocks. These were drawn up on the basis of China’sclaim to the entire extended continental shelf. Japan regards this procedureand claim as illegitimate and is seeking a solution based on a ‘median line’partition of rights. In spite of these objections, with Norwegian help, theChinese have attempted a geophysical survey and Japan continues tomonitor the Chinese moves and to alert international shipping to the situ-ation. Given the potential of this field, further activity in this region,however politically difficult, is likely to continue.

At present the Pinghu field is supplying the city of Shanghai by means ofa submarine pipeline with a capacity of 440 million m3 of gas annually. Asenergy demand in Pudong rises, the capacity of this pipeline route isplanned to rise to 700 million m3. In 2003 actual supply had already reached657 million m3. Administration of this venture is the joint responsibility ofCNOOC, SINOPEC and the Shanghai municipal government. Shanghai’sgas is, in fact, quite diversified, with additional supply coming from theTianwaitian and other small fields connected by pipeline to Pinghu. TheChungxiao field is also expected to supply the city of Ningbo with 800million m3 through a new pipeline laid down by CNOOC in what was a jointventure with Shell and Unocal, both of which subsequently withdrew.

In April 2005, the Japanese government protested to China about theiroil and gas development activity and issued a test-drilling permit for thisarea to a Japanese oil company, Teikoku Oil. Teikoku is at present (2006)


preparing for exploration work in Japan. Part of the Japanese concerns inthis area relate to the possibility that Chinese activity could siphon gasfrom the Japanese EEZ (Exclusive Economic Zone). At joint meetings ofboth parties organized in Beijing and in Tokyo, the Japanese proposedjoint development of those gas fields that lie on either side of the EEZmedian line. But this has not been agreed because China insisted that thegas fields are all on the Chinese side of EEZ. We show an unofficial sketchof the region in Figure 4.4.

THE ENERGY PROBLEMS OF THE SOUTHERNSEABOARD

China’s geographical extent is so large that, irrespective of the scale ofdomestic energy resources, pursuit of a rational energy policy requires thatpolicy makers ask themselves whether, because of transportation costs,some major consuming regions should not import from well-placed foreignsources of supply. At one time this question could not be asked in China,since ‘self-sufficiency’ in natural resource sectors was a basic political


Note: This chart is based on a map that appeared in the Tokyo Shinbun in 2005. TheJapanese government has not published any map of the median line of the ExclusiveEconomic Zone in the East China Sea and the exact whereabouts of the Chinese gas fieldsare unknown. Hence this is an entirely unofficial outline sketch.

Figure 4.4 East China Sea conflict

Chart 13 East China Sea Conflict

200 nautical mile from Japan

200 nautical mile from China

Taiwan

Median line

Chinese claim boundary based on Okinawa trough

Okinawa

Japan

China

Ningbo

Shanghai

Pipeline

Tianwaitian

Danqiao

Chungxiaogas f.

Senkaku/ Diaoyutai Islands

Pinghu gas field

Rongchin

120° 125° 130°

26°

28°

30°

32°

dogma. Now, however, the question is a respectable one again, so muchso that China has become extremely active as a partner in internationalexploration and as an investor acquiring and developing known foreignresources.

The success of the enormous Baoshan steel plant at Shanghai was aturning point in this respect, since it was based from the outset on a planto use imported fuels (Australian coal) and raw materials – especially ironore. This approach marked a fundamental shift in steel policy, away fromone previously based on domestic, generally low-quality raw materials, toone that emulated the policies that led to Japan becoming the world’sleading steel producer in the 1970s, in spite of having inadequate rawmaterials.

In the energy case, the basic problem is the growing imbalance betweenthe location of energy supplies and industrial development. This imbalanceis very much a product of the reform era. Before 1978, China’s main indus-trial energy requirements were in the north-east and Shanghai. Both theseregions could be served by China’s coal and oil resources located in thenorth-west and north-eastern regions. The accelerated growth of anexport-oriented economy in Guangdong, Fujian, and the eastern seaboardgenerally, destroyed this symmetry. Providing energy for the southernseaboard has been a major problem since the 1990s. This problem is not onethat the planned development of oil and gas, as outlined so far, will do any-thing to alleviate directly. Energy imports, therefore, will become increas-ingly important.

PLANNING FOR ENHANCED GAS IMPORTS

Gas, in the form of liquified natural gas (LNG) is an obvious candidate fora programme of importation, since the southern seaboard is within easyreach of major suppliers of LNG in South-East Asia. In April 1999 theState Development Planning Commission officially authorized new plansfor the construction of LNG terminals in Guangdong. These terminals areto be the responsibility of a consortium formed by CNOOC and incorpor-ating gas and electricity corporations from Guangzhou and the nearbytowns of Foshan and Dongguan.

This project has two phases. In phase one, a terminal with a capacity of3 mmt of LNG per annum is to be built at Chengtoujiao, a suburb ofShenzhen. This was to be completed by 2005. This terminal would beserved by a trunk pipeline of some 215 km, with two shorter branch linesof 33 km and 56 km respectively. These installations were expected todeliver 4 billion m3 a year of gas to electricity-generating plants at Huizhou


and Shenzhen by 2006. Thus the project will considerably enhance the elec-tricity supply throughout the Pearl River Delta, as well as supplying gas tothe three major cities of Guangzhou, Dongguan and Foshan. In phase two,the LNG import capacity will be raised to 5 mmt by 2010 and the totallength of the trunk pipelines will increase to 396 km. The volume of gaswill grow to 7.75 billion m3 and direct gas supply will then be available inthe cities of Zhuhai, Jiangmen, Zhongshan and Zhaoqing. Also includedin this plan is a scheme to produce indigenous natural gas in the mouth ofthe Pearl River, as well as the construction of a 1000 MW gas-fired thermalelectricity plant at Huizhou, and an oil-to-gas conversion plant to generate1050 MW in Shenzhen City (see Figure 4.5).

From its early stages, this project seemed to the Chinese authorities to beideal for foreign participation, and many foreign interests did indeed par-ticipate in discussions and negotiations. In 2001 the Chinese reached agree-ment with BP, which obtained 30 per cent of the acquisition rights andagreed to participate in the Guangdong LNG project. Australia is the mostlikely source of LNG for this scheme. Gas fields situated along Australia’snorth-western shelf already have an international consortium of LNG pro-ducers that is established and fully capable of supplying the 5 mmt of LNGper year needed under the Chinese proposals. The first phase of this LNGproject was completed in early 2006.


Figure 4.5 LNG receiving terminal and planned gas pipelines inGuangdong Province

LNG Receiving TerminalCity Gate

Phase 1 Trunk PipelinePhase 2 Trunk Pipeline

Chengtoujiao

Hong Kong

ShenzhenCity

Huizhou City

Dongguan

Qianwan

Guangzhou City

FoshanZhaoqing

Jiangmen

ZhongshanZhuhai

Guangdong Province

In addition to these urgently required schemes around the Pearl RiverDelta, several other LNG import plans have been put in place. One of theseis to supply the city of Fuzhou in Fujian Province with 2.6 mmt of LNGin 2007. This scheme is conducted by CNOOC and Fujian local companiesand is still under construction. LNG will be supplied from the IndonesianTannguh project operated by BP. In addition to these two projects, there areseveral LNG reception bases under construction, including those inShanghai City (6 mmt annual capacity) and at Ningbo in ZhejiangProvince. On the north-eastern coast, the cities of Tianjin, Qingdao andDalian are also reported to have ten projects ordered by former PremierZhu Rongji and designed to be capable of delivering at least 10 mmt peryear in ten projects by 2010.

THE PROBLEM OF HANDLING OIL IMPORTS

It is already abundantly clear that the Chinese energy gap will have to befilled in part by imports of crude oil. The problem is how to handle thephysical quantities involved at reasonable cost. The reason why this is suchan issue is that the natural conditions of China’s harbours are unsuited tothe construction of facilities for unloading the so-called very large crude oilcarriers (VLCCs) (i.e. carriers of up to 200 000 tonnes). Both the Yangziand Yellow rivers carry enormous volumes of sediment down to the sea,making natural deep-water ports an impossibility along them and at theiroutlets. Further, although facilities for the smaller VLCCs have now beenconstructed at various locations, there is not a single location on China’scoastline capable of facilities for the handling of the ultra large crude oilcarriers (ULCCs), whose sizes range up to 500 000 tonnes.

Most of the tankers serving Chinese ports have been in the 100 000 tonneclass. Ports currently capable of accepting the 200 000 tonne tankers areQinghuangdao, Ningbo, Zhoshan (Zhejiang Province) and Maoming inGuangdong. Other cities with ports currently undergoing expansion pro-grammes for VLCCs include Tianjin, Huizhou and Dalian. At Dalian sub-stantial storage facilities are in place from the time when China was a majorexporter of oil to Japan. However, for this and other ports it will be import-ant to ensure that crude imports are transported to appropriate refiningfacilities and to customers, and this will typically mean further investmentin a network of smaller tanker routes.

China’s largest terminal for receiving imported oil is Aoshan in ZhejiangProvince. Aoshan can receive 200 000 tonne tankers without difficultyand in 1993 successfully berthed a Shell tanker of 330 000 tonnes. Totalstorage capacity at Aoshan by 1997 was one million m3 of oil, and further


investment will raise handling capacity of Aoshan to 30 mmt per annum,with total storage capacity of 2.3 million m3 of crude oil and 0.2 million m3

of petroleum products.

NOTE

1. Valuable work in English on this subject is the study by Dr Keun-Wook Paik and QuanLan, China Natural Gas Report, London: Royal Institute of International Affairs andXinhua New Agency Beijing, 1998.


5. The Tarim Basin: solution orproblem?

HOW BIG AN ASSET ARE THE TARIM OIL AND GASRESERVES?

The huge size of China’s potential oil and gas reserves has not been in ques-tion since the 1950s. However, the enormous scale and variety of China’sterrain and the intrinsic difficulties of precise estimation are so great thatserious uncertainties about the extent and character of reserves haveremained, long after early big discoveries were being exploited. Geophysicalsurveys and preliminary testing still have far to go before they can beregarded as anywhere near complete. Further, indispensable as these toolsare, only when full development and production get under way will the fullpicture of China’s reserves be understood.

Exploration for oil and gas started in China’s western regions as early asthe 1950s, at which time the Karamai fields were discovered. In the ensuingdecades, the main focus was on the search for on- and offshore resources inthe Songliao and Bohai Basins of eastern China. Indeed, the 1950s to the1980s might well be called the golden age of petroleum development in theeast. During these years, the exploration of the west, hindered as it was bylogistical and other difficulties, remained a lower priority.

The Tarim is a sedimentary basin located in the Xinjiang UygurAutonomous Region. Its scale is enormous. It extends over 560 000 km2

and has a maximum length (east to west) of 1820 km and a depth (north tosouth) of 510 km. Looked at from the geographical perspective, the basinis bounded by the Tianshan Mountains in the north, the Kunlun range inthe south, and the Karakorums in the west. Its height above sea level is ofthe order of 1000 to 1500 metres and its central area is occupied by theTaklamakan Desert, which alone occupies 330 000 km2.

The basic surface structure of the Taklamakan is one of swathes ofunbroken sand dunes. On its fringes, however, easily visible from com-mercial aeroplanes, are oases fed by the run-offs from snow melting onthe surrounding mountains, themselves over 20 000 feet (6096 m) high.These oases are extensive and support a varied and intensive agriculture,and populations of thousands of people living in the nearby towns

81

and villages. So substantial and self-sufficient have some of these settle-ments been in the past that in the Tang dynasty (eighth century AD) theywere known as ‘countries’. In the Uygur language, ‘Tarim’ means the‘place where the waters gather’; ‘Taklamakan’ means the ‘land of noreturn’.

At an early stage in the prospecting and development of the Tarim, theChinese, relying as so often in business on the old proverb: ‘he who drinksalways remembers who first dug the well’, invited a delegation ofJapanese oil specialists almost identical in composition with the groupthat, in 1978, had negotiated the first offshore oil development agree-ments between the two countries. This group included one of the authors,Kambara.

The itinerary prepared for the group included inspection of newly devel-oping oil fields in the Tarim and in the Karamai and this involved passingthrough some of the most spectacular desert landscapes in the world atFencheng. This landscape includes the soaring, sphinx-like formations nearKorla which is the central base for all western oil and gas development, andKucha and Shasan, where early test wells had been drilled and initialblowouts were occurring.

When the group returned to Beijing, the Chinese asked for observations.The argument expressed by the Japanese side on this occasion was thatwhereas the key to development of the eastern oil fields had been the‘battle-front’ method, characterized by small-scale, indigenous, experimen-tal technologies, the successful opening up of the Tarim and the far westernresources would require something very different, namely, an unpreced-ented combination of large-scale western-based technologies and new,competitive institutional structures. To a considerable extent this predictionhas been borne out by events.

During the 1990s, the Ministries of Geology and Mining and of thePetroleum Industry organized a full-scale petroleum and gas survey ofthe Tarim Basin. This survey was undertaken by drilling teams from thePetroleum Administration Bureaux, which were required to compete witheach other for contracts. The desert terrain, with its virtually complete lackof infrastructure, presents problems of extraordinary difficulty. In Siberia,the Russians undertake similar types of prospecting with the aid of enor-mous helicopters. In the Tarim, land vehicles were the only option. In orderto make the survey, the teams worked in three-month shifts and had to‘commute’ between remote desert sites and the base town of Korla. At thesame time, several hundred thousand labourers were drafted in to beginconstruction of a trans-desert motorway of 219 km, running between thenortherly starting point of Xiaotang (a materials storage base) and a south-ern terminal at the Tazhong oil fields in the middle of the desert. These oil


fields are then within reach, across the Tarim River, of the base town ofKorla (see Photographs 5.1–5.4).

Located to the north of the Tarim are two important oil wells discoveredby the Ministries of Geology and Mining and the Ministry of thePetroleum Industry. These are Shasan 2, first successfully drilled in 1984,and the Lunnan fields, discovered in 1988. While access to these sites is rel-atively straightforward, the problem is that the oil reservoirs are extremelydeep, many being more than 5000 metres below ground level. Since 1989the Tarim Petroleum Exploration and Development Command has beenthe lead institution in surveying and testing, and their first big success wasdiscovery of the Tazhong field. This lies along the huge ridge in the centreof the Tarim Basin. The drilling of test wells over 3000 metres deep in thisremote location was an extraordinary feat, involving the construction ofshort air strips for planes to transport workers, who were then responsiblefor moving the heavy equipment and materials. So important was this fieldconsidered that in 1994 a high-speed motorway was constructed throughthe dunes. This now extends to the desert township of Yutian, where itmeets the east–west highway skirting the northern Kunlun mountain range.This road is itself a unique engineering achievement: in order to enable theroad to withstand the impact of the sandstorms that sweep across the desertand could easily bury the road overnight, on each side of the road theengineers constructed strips of reeds, each 4 to 5 metres wide, that protect

The Tarim Basin: solution or problem? 83

Photograph 5.1 Dynamiting in the Taklamakan desert in the Tarim forseismic information

the core construction. From the air, the road gives the appearance of beingtwo long straw mats laid either side of a modern motorway.

At Tazhong, the first field (known as No. 4) has been in production since1996. At the present time (2006) 40 developmental wells are producing2.6 mmt of oil per year. This output is transported north to the Lunnanfield by a pipeline whose capacity is now 6 mmt. This field is still the sceneof a great deal of exploration and surveying work, and this combination ofa rolling programme of exploration and production is called by the Chinesethe gundong tancha system. To date, no really large discoveries have beenmade at Tazhong, in spite of the fact that exploration of the region isshared between the Chinese and various Japanese and other internationaloil companies working under production-sharing agreements.

It seems clear that the geology of the Tarim is turning out to be ascomplex as that of the other major oil-producing regions of China. Likethem, it may lack the huge reservoirs created by anticlinal traps. These arethe upward folds in the earth’s strata where oil and gas reservoirs are


Photograph 5.2 Well head assemblies in close proximity to the Karamaioil field

trapped in domes of porous material, bounded above and below by imper-vious layers (and often salt water) that stop dispersion of the oil and gas. Itis the favourable prevalence of these types of structure that give rise to thehuge and cheaply accessible deposits of oil and gas in the Middle East.


Photograph 5.3 The huge monument is the ‘Black Oil Mountain’ built onthe natural bitumen deposits on the Karamai field.(‘Karamai’ means black oil in the Uygur language)

Photograph 5.4 Exploratory and extension wells in Karamai

The situation at present, therefore, is that although the Tarim has beensurveyed quite intensively, it is still not clear exactly what the geophysicalstructure of the basin is. None the less, it is certain that the basin containsoil and gas fields that, by any international standards, are very large indeed.Some of these are already discovered and producing. For example, theLunnan fields in the northern Tarim have been sending output by pipelineto Korla since 1992. At Korla the new refinery can process 2.5 mmt a year,and some of the oil delivered through the same pipeline has also beendiverted to Turfan. At first this used the South Xinjiang (Nanjiang) railwayline, but it now goes through the new pipeline with an annual capacity of9 mmt and can be further transported to refineries at Lanzhou by theLanzhou–Xinjiang railway. Although the railway has recently been double-tracked, its annual capacity is limited to 15 mmt. Because of these limit-ations, yet another oil product pipeline with a capacity of 5.8 mmt tons isplanned for Turfan to Lanzhou.

This transport system also serves a number of other oil and gas fields inthe vicinity of Lunnan. These include fields at Donghetang, Jiefangjudong,Yaha, Sangtamu,Yingmaili and Jilake. Also, to the west of the Lunnanfields are the Yakela and Tahe fields that include the large Shasan No. 2well. PetroChina produced 6 mmt of crude oil here in 2005; Star PetroleumCo. also produced some, but the amount is unknown.

One of the features of the Tarim to date has been the discovery not onlyof oil, but also of fields with joint oil and gas reserves and, in some cases,even of non-associated gas. Indeed it appears to be the case that reserves ofnatural gas may ultimately prove to be larger than those of oil. The largestsingle find to date is that at Kela 2, where 250 billion m3 of proven gasreserves in place have been found. This gas is not associated with oil. Otherfields where combined reserves already exceed 100 billion m3 are Yaha,Yingmaili and Yangtake. This group of fields is now known as theKucha–Tabei gas zone. The total natural gas reserves in place in this regionare thought to be 370 m3, and this gas is expected to be the main source forthe project to ‘Transfer Gas from West to East’.

This huge project is essentially simple in the sense that reserves of gas in theTarim are far in excess of any possible local use. Xinjiang, while developingrapidly, still has quite a modest industrial sector. In particular it lacks thelarge-scale chemical and fertilizer plants that would be appropriate outlets forthis resource. Even demand derived from local electricity-generating plants atKorla is relatively small. Thus without the ‘West to East’ project, there wouldbe no point in developing these gas reserves (see Table 5.1 and Figure 5.1).

In the south-west of the Tarim another large group of gas fields, nowcalled the Bachu–Taxinan zone, has been located. This field was firstidentified in 1977 and much crude oil has already been extracted and



Table 5.1 Oil and gas fields in the Tarim Basin

Oil field, gas field, Area Proven reserves (in place)oil/gas field (km2)

Crude oil Natural gas Total (oil(000 (100 mmm3) equivalent)

tonnes) (000 tonnes)

Kela 2 gas f. 47.1 – 2506.10 20 457.8Tazhong 4 oil f. 35.7 8137.0 119.27 9 110.6Yaha oil/gas f. 48.9 4442.9 405.37 7 752.0Kekeya oil/gas f. 27.5 3065.5 313.55 387.0Hotanhe gas f. 145.0 – 616.94 5 036.2Lunnan oil f. 36.6 5113.0 40.33 5 442.2Yingmaili oil/gas f. 48.3 1950.1 309.75 4 478.7Donghetang oil f. 16.5 3292.7 13.70 3 404.5Hade 4 oil f. 66.6 3068.0 7.94 3 132.9Yangtake oil/gas f. 18.3 567.5 274.29 2 806.6Jilake oil/gas f. 52.5 782.0 136.80 1 898.7Jiefangjudong oil f. 14.0 1532.2 34.39 1 812.9Sangtamu oil f. 18.6 1501.0 18.49 1 651.9Tazhong 16 oil f. 24.2 976.0 1.32 986.8Tazhong 6 gas f. 58.0 73.4 85.26 769.4Yudong 2 gas f. 10.2 142.5 73.32 741.0


Figure 5.1 The Kucha–Tabei gas area in the Tarim Basin

0 20 40 km

AkesuShaya

Lunnan Oil Field

Dabei No. 1Gas Field

Dabei No. 1Gas Field

Kela No. 2Gas Field

Kela No. 3

Luntai

Tuzi No. 1 Gas FieldTuzi No. 1 Gas Field

DiergenDiergenDiergen

Erbatai

Yinan No. 2Gas Field

Yinan No. 2Gas Field

Xinhe

KuchaYaha Gas FieldYaha Gas Field

Yakela Gas FieldYakela Gas Field

Hongqi

Yudong No. 2 Gas FieldYudong No. 2 Gas Field

Yangtake Gas Field

YingmailiGas Field

Baicheng

refined at Zepu, which is reached by means of a 100 km pipeline. Proven oiland gas reserves at Zepu are reported to be 30.65 mmt and 31.3 billion m3

respectively. Exploration of this region is, however, continuing. Newreserves have been located at Keshen, while in the Kashgar depression a gasreserve of more than 10 billion m3 has been found. The prospect is that theBachu–Taxinan gas region will become the second major source for the‘West to East’ project. The current estimate of the China NationalPetroleum Corporation is that Bachu–Taxinan could, in the long run,deliver 2–3 trillion m3 of natural gas (see Figure 5.2).

In the eastern Tarim there is one other significant location for oil and gasreserves. This is the Manjar West Oil and Gas Zone. Here, Japanese andother foreign companies have been allocated blocks for survey and explor-ation work on the basis of production-sharing agreements. But althoughthese contracts have been running since 1993, no major discoveries have yetbeen reported. All the foreign oil companies in this zone have already with-drawn from their contracted blocks.

It has been reported that planners of the ‘West to East’ project are basingtheir projections on the assumption that proven gas reserves in place willamount to 720 billion m3. By 2000, reported reserves had already reached505 billion m3, and since exploration continues unabated, it is highly prob-able that this figure has already been significantly enhanced, and that thetarget reserve is already close to being met.


Figure 5.2 Oil and gas fields in the Tarim Basin

KashiKashgar

Maigaiti

BachuBachuBachu

Yecheng

Keshen 1Hetian

Hotan

YutianMinfeng

RuoqiangRuoqiangRuoqiang

Akesu

BaichengKucha Luntai

Yinan 2Gas F.Yinan 2Gas F.Kula 2 Gas F.Kula 2 Gas F.

Donghe 1Donghe 1

Korla

Yudong 2Yudong 2

Dawan 1Dawan 1

Tazhong 10Tazhong 10

Tazhong 4Tazhong 4

Tazhong 6Tazhong 6

QiemoQiemoQiemo

South depression

North depression

Tabei uplift

South-west depression

CentrCentral upliftCentral uplift

Tanan uplift

Oil field

Gas field

Manjiaer WestOil & Gas area

Kuche–Tabei gas area

Bachu–TaxinanSouth-west gas area

THE PROJECT TO ‘TRANSFER GAS FROM WESTTO EAST’: THE CONCEPT AND EARLY STAGESOF IMPLEMENTATION

China’s reform and ‘Open Door’ policy has had the result of strengthen-ing the economy of the eastern and coastal regions relative to the interiorand the west. This result has been to some extent welcome, as it has rebal-anced an economy distorted by Mao’s ‘third front’, a strategy that placedmany industrial enterprises in unviable locations in China’s interior, farfrom markets, high-quality human resources and often even far fromraw materials. However, the main determinant of the new configurationhas been the operation of ‘market-like’ development and the emergence ofexport-oriented growth poles on the eastern seaboard. The coastalprovinces had both the human and physical infrastructures needed toenhance the productivity of new, post-reform investment, as well as thelocational advantage of relatively easy access by sea to export markets,especially those in the Pacific region. The eastern seaboard also had easyaccess to Hong Kong, Taiwan and Japan, all of which were both marketsfor China and important sources of the foreign investment and expertiseneeded to make the development process work. There was no seriousconcern about the disadvantages of this rebalancing process until the late1990s, by which time a growing inland–coastal cleavage had becomeapparent. This geographical inequality was part of a wider problem ofinequality which, increasingly, the Party has seen as a threat to its funda-mental strategy of basing its power and legitimacy on reform and suc-cessful economic development.

The concept of the drive to the west was thrust to prominence byChairman Jiang Zemin during a visit to Xi’an in June 1999. Xi’an is thecapital of Shanxi Province and has traditionally been a key city linkingcentral and north China, through the silk route, to India and the west. Inrecent years it has become an important regional and industrial centre, withparticular strength in aeronautics and aerospace. Speaking in Xi’an inMarch 2000, Jiang announced: ‘The time is ripe for developing the mid-west of China, and in particular, the far west’. Following the guidance ofthis speech, Premier Zhu Rongji announced his plan for the ‘GrandDevelopment of Western China’ at the National People’s Congress in 2000.Various large-scale projects to advance the strategy were subsequentlyannounced, but the upgrading of the ‘West to East’ gas pipeline project hasclearly become the centrepiece of the entire policy.

In financial terms the overall cost of the project was preliminarily esti-mated at 120 billion yuan (US$14.5 billion). In real terms, the proposalsembrace the development of the Tarim Basin’s oil and gas resources and


the construction of a pipeline from the Lunnan terminal in the Tarim toShanghai. This pipeline is 4200 km in length. In addition to this trunk line,in order to utilize its flow, further large investments have been needed forstorage and distribution facilities around Shanghai and other cities.

The project has two proposed phases. The first covers the years 2001–2005and the second extends to 2010. One major pipeline system is proposed foreach stage. In the first, the pipeline capacity will be 12 billion m3 of gas peryear. In the second, capacity of a further 20 billion m3 will be added, makinga total capacity of 32 billion m3.

Phase one is well under way and initial completion was achieved in 2005.This line starts at Lunnan, the main pipeline base, travels across the Tarimto the Turfan Basin, finally reaching the Ordos Basin at Jingbian. Thelength of this section is 2586 km. In its second major section, the pipelineruns via Zhengzhou and Nanjing to Shanghai, a further 1581 km. The totalpipeline is thus 4167 km long and its diameter is in places as wide as 1118mm. This latter part of the project from the Ordos fields was completed in2004, with some experimental gas flows put through it to Shanghai. Theflow through this pipeline is planned to rise gradually to an annual capac-ity of 12 billion m3.

The second pipeline is planned to be similar to the first over the initialstage, but then to deviate through Lanzhou, Xi’an and Xinyang, andbend towards Shanghai. The total distance of this second pipeline is to be4212 km with a diameter of 914 mm.

Although this plan is the core of the ‘Gas from West to East’ project, abroader definition of the project would also include the development ofthe Qaidam, Ordos, and Sichuan basins described earlier. Although thepipelines for these fields are separate from the Lunnan-based pipelines,their development and the plans associated with them are also enormousundertakings and contingency measures are already in place to connect,at two points, the Lunnan–Shanghai lines with those serving the Qaidamand Ordos Basins. The Qaidam–Lanzhou pipeline is to be connected tothe second phase of the Lunnan–Shanghai trunk line at Lanzhou. Inaddition, a further line is to be constructed from Lanzhou to Gantang,which is on the line of the first phase of the Lunnan–Shanghai trunkpipeline. The resources of the Ordos Basin will also be linked to thisnetwork because the existing line from Jingbian to Xi’an City can be con-nected to the second phase of the Lunnan–Shanghai trunk line. Finally,around all the major gas-using cities such as Shanghai, Beijing, Xinyangand Wuhan, further pipeline networks and distribution terminals will bebuilt and, as needed, subterranean storage tanks will have to be con-structed (see the oil and gas map of China at the front of the book; seealso Photographs 5.5–5.7).



Photograph 5.5 Pipeline construction work in the Qaidam Basin, nearXining City. The pipeline technology in this case wasprobably supplied by the Italian firm Saipem

Photograph 5.6 Road construction for oil field development in the JunngarBasin

The scale of these future and potential future supplies is now being bal-anced against estimates of demand. The most important estimate to date isthat by PetroChina, which has investigated the requirements of all majorindustrial and governmental consumers. Its survey covers the whole ofChina, excepting Fujian and Guangdong provinces, which are not withinPetroChina’s terms of reference. Estimates for 2005 and 2010 were thataggregate demand will reach 56.9 and 115.1 billion m3 respectively. By 2010the ranking of major consumers is expected to be the electricity-generatingstations, various industrial sectors, urban commercial and household con-sumers, and the chemical industry (see Table 5.2). Forecasts for major gasconsumers by region are shown in Table 5.3.

The 120 billion yuan cost referred to above is the cost of phase one of theproject only. The breakdown of this figure is as follows. Exploration anddevelopment 20 billion; pipeline construction 40 billion; and construction ofthe supply and distribution facilities a further 60 billion. In recent years theChinese government has been making huge bond issues to cover the budgetdeficit. Out of these issues, it has been suggested that 150 billion yuan arein support of the ‘Grand Development of Western China’. However, thisfigure includes provision for a number of major projects, not simply the ‘Gasfrom West to East’ plan. Among these other projects are some that arealso extraordinarily ambitious, including the plan to transfer ‘Electricity


Photograph 5.7 Crude oil production at Tazhong 4 in the Tarim. A‘Christmas Tree’ well head assembly and a lookoutplatform

from West to East’ and the Tibetan railway project whose line was opened inJuly 2006.

What this means is that although some state funding through bond issuesis available, a huge financing task remains. The approach to financing takenby PetroChina is by no means clear. For example, PetroChina now has alisting on the Hong Kong and New York Stock Exchanges. This, however,was not for the purpose of raising funds on the scale needed for the ‘Westto East’ project. The corporation must also have considered puttingtogether a syndicate of international bank loans, but has not pursued thisroute either. In the event, it appears to have decided to try to raise moneyby seeking the participation in the project of international oil majors andother companies with direct interests of various kinds in its outcome. Theseinterests have included Japanese trading companies, long familiar with


Table 5.2 Natural gas demand estimates and share by principal users(100 mmm3)

2005 2010

Electricity generation 174 484Chemical industry 120 180Other industry 168 257Town gas 106 230

Total 569 1151


Table 5.3 Natural gas demand forecasts by China’s major geographicalregions (100 mmm3)

Area 2005 2010

North-east (Liaoning Jilin, Heilongjiang) 118 189Pan Bohai (Beijing, Tianjin, Hebei, Shandong) 128 266Yangtze Delta (Shanghai, Jiangsu, Zhejiang) 119 310Central South (Hubei, Hunan, Anhui, Henan) 76 173Central (Inner Mongolia, Gansu, Shanxi, Ningxia) 110 161West (Xinjiang, Gansu, Qinghai) 28 52

Total 569 1151South (Guangdong, Fujian) – 214

Total China – 1365


complex and long-term financing arrangements in the energy sector. Thesecompanies, however, dropped out when PetroChina excluded Japanese andother foreign companies from participating in the market to supply thelarge-diameter steel pipes needed for the project. The supply of steel prod-ucts had been one of the main ways in which Japanese companies hadenvisaged benefiting from the whole project.

Another international participant that dropped out was BritishPetroleum. This was surprising at the time, bearing in mind that BP hadtaken a 20 per cent share in the PetroChina stock market offering. Itemerged that the terms offered by PetroChina to participate in the ‘West toEast’ project were simply not acceptable. In January 2004, BP sold its sharewhile stating that it none the less retained an active interest in the project.

In December 2001 PetroChina finally concluded a provisional agreementfor a joint venture with Shell. The terms of this agreement are confidential,but it is reported that, under it, PetroChina and Shell will share 55 percent:45 per cent. The agreement also appears to stipulate that it covers notonly pipeline construction, but also development of the gas fields in thenorthern Tarim Basin. Another pair of companies reportedly involved withthe project are Gazprom of Russia and Exxon–Mobil. Given the financialand technical scale of the project and the long time horizons involved, itseems likely that these are simply the early moves in what may prove to bea complex story. However, later, this Shell-led group of companies with-drew from the project. The reasons for this were not disclosed, but the finalcontract terms with Chinese oil companies may have been very difficult.

A further complication in the Tarim development is the political com-plexity of the region. The Tarim is located in an area ruled by the XinjiangUygur Autonomous Government. This form of local government isallowed where national minorities are predominant and where a form ofself-government, even if nominal, seems politically wise. However, as is wellknown, there has been an active Uygur independence movement seeking toestablish a state of ‘East Turkestan’ in a political tradition that goes backto the decades before the establishment of the People’s Republic. TheChinese handling of this movement has fluctuated somewhat. In the earlystages the ‘Grand Development of Western China’ was seen as a tool toconsolidate and develop the region economically with beneficial politicalresults. But the worldwide sharpening of ethnic and religious political ten-sions since 11 September has made Xinjiang’s political uncertainties thatmuch greater. China has (with the USA and Russia) strengthened anti-terrorist campaigns in regions where terrorism is seen as a tool of Muslim-based independence movements. In spite of the impact of 11 September,however, the Chinese are attempting to retain and use the economic factorby developing the Shanghai Organization for Economic Cooperation


among Central Asian states. Both the Chinese and Russian states see local-ized economic cooperation as desirable and the intention is to create aframework to develop the regional economy in ways that benefit the localpopulations, but do not undermine the Beijing- and Moscow-centred polit-ical systems.

The prospect of large revenues from the development of the Tarim fieldsand the pipeline raises major political issues for Beijing. An interesting par-allel to the situation has been the development of the Prudoe Bay reservesin Alaska. Here, the Alaskan State government actually succeeded inobtaining an increase in the local oil royalty rate, which has made it therichest of all American states measured in terms of local fiscal revenue. Atpresent, the Xinjiang government benefits from oil and gas developmentonly through the local tax on production-sharing agreements involvingforeign companies. There is no parallel to the Alaskan royalty payments,which would of course greatly increase the capacity of the local adminis-tration to stimulate economic development. Moreover, under the StateCouncil regulations for the protection of petroleum and natural gaspipelines, the Chinese central government has draconian powers to stoplocal interference with the flow of resources from Xinjiang.

Thus our conclusions so far on the Tarim development and the ‘Gasfrom West to East’ project are as follows. This is an enormous project basedon the reality of very large gas and oil reserves in China’s far westernterritories. The project has far-reaching potential implications both for theenergy supplies to the eastern seaboard and for the development ofwestern China. However, the technical, financial and political aspects allremain problematic. Setting aside the political issues, it is essential that theChinese planners develop comprehensive plans for the Tarim in terms oftechnical, financial and other practical issues. Realistic and transparentfinancial plans consistent with the technical ‘real’ plans are particularlyimportant. All these scenarios need to take into account not only theTarim reserves, and other geological and pipeline issues, but also the role ofgas supplies in Siberian Russia and in Central Asian states such asKazakhstan and Turkmenistan: although these regions are not part ofChina, their scale, location and potential role in the Chinese oil and gassupply are considerable.1

NOTE

1. Keun-Wook Paik, Gas and Oil in North East Asia. Projects, Policies and Prospects,London: The Royal Institute of International Affairs, 1995.


6. Refining and distribution

REFINERY RESOURCES AND PROSPECTS

China’s oil refinery capacity in 2005 had reached 270 mmt of crude oil perannum. This is a large figure, exceeded only by the refining capacity of theUSA and Japan. In the same year China’s production of crude oil andconsumption of petroleum products were 181 mmt and 317 mmt respec-tively. We see, therefore, that not only was China’s refinery capacitysignificantly below that needed for domestic self-sufficiency, but muchcapacity was also being used to refine crude oil imports. As we have seen,on present estimates of domestic output it is likely that China’s importsof crude oil and oil products will need to rise to 138 mmt and 48 mmtrespectively by 2010, lowering the oil self-sufficiency rate to 46 per cent ascompared to 71 per cent in 2000.

The sources of these imports will have an important bearing on plans forthe refinery sector. In the year 2000, the first and second largest sources ofimports to China were Oman and Angola. These supplied 22.2 per cent and12.3 per cent of total imports respectively. Iran and Saudi Arabia took thenext two places with shares of 10 per cent and 8.2 per cent. Of these sources,crude oil from the first two are low in sulphur content, while the latter arehigh-sulphur oils. If we consider also the contributions of Indonesia,Vietnam and the North Sea, we find that as of 2000, low-sulphur crudeaccounted for about 75 per cent of total imports. However, this scenario isalready changing rapidly as Middle Eastern sources grow rapidly in impor-tance. In 2003, for example, Saudi Arabia and Iran emerged as the two mostimportant sources of imports into China. This shift is going to constitutea serious technical challenge to the industry. The reason for this is that therefineries will have to raise sharply their capacity to desulphurize anddevelop other technologies to make these crude oils suitable for commer-cial use.

A further consideration here is the growing need to provide petroleum tosatisfy China’s rapidly expanding population of cars. At current levels,China’s per capita consumption of petroleum is low. At 170 kg per personit is only approximately 10 per cent of the level in advanced economies. By2010, petroleum demand alone is expected to reach 350 mmt of crude oilequivalent and by 2020, the figure will be 450 mmt.

96

Taking these factors into account, we estimate that the refinery capacityfor crude oil will have to be increased by some 50 mmt within the next fewyears. The problem is that the starting point for such an expansion is notstrong. Much existing refinery capacity dates back to the Soviet period ofthe 1950s. As the Daqing field came on stream in the 1960s, the first stepswere taken towards the modernization of the refinery sector, but theseefforts were hampered by the Cultural Revolution and the consequent lackof access to more modern refining technologies.

Steps to reform and enlarge the refining sector began again in the reformera, particularly after the establishment of SINOPEC in 1983. The prob-lems now faced by the industry are a complicated combination of organi-zational, technical and commercial ones. Let us look at some key aspects ofthe industry at the present time.

The organizational structure of the industry is as follows. SINOPEC isthe largest refinery owner, with 33 refineries with a total annual capacity of140 mmt of crude oil. SINOPEC’s refineries are mainly located in Beijing,Tianjin and in the eastern coastal areas. By contrast, the 34 refineries con-trolled by PetroChina are largely located in the north-eastern provinces ofHeilongjiang, Jilin, Liaoning and, in the west, in Xinjiang. These refinerieshave a capacity of 110 mmt.

China’s total capacity of 270 mmt of crude oil refining is thus the sumof these networks together with the capacity of a small number of otherplants. A full list of China’s capacity is shown in Table 6.1.1

While this capacity is substantial, the appearance is misleading in thatmany of these refineries are small, technically deficient, and inefficient inother ways. The international industry standard for capacity of a singlerefinery is of the order of 10 mmt per annum. Only four Chinese refineriescurrently meet this standard. These four refineries are those at Jinling,Chinhai, Qilu and Maoming. They are all SINOPEC refineries. A further20 refineries are in the 5 mmt to 10 mmt class. These include plant at Dalian,Daqing, Beijing, Shanghai, Guangzhou and Urumqi. The combinedcapacities of these two groups of relatively large refineries are 52 mmt and135 mmt respectively. Together they therefore account for 65 per cent of thenational total. At the bottom of the pyramid are some 100 refineries withcapacities of less than 1 mmt per year.

To understand other important technical problems in the industry weneed to recall the fundamentals of the refining process. Crude oil/petroleumis a complex of many hundreds of chemical compounds. Refining is themeans whereby this complex bundle of compounds is reduced to specific,commercially valuable products. There are three distinct processes that canbe involved. These are:

Refining and distribution 97

98

Tab

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fine

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in C

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Refi

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Typ

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(10

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1000

tonn

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3000

Med

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-siz

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01Ji

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chem

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6817

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1000

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chem

ical

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9000

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(a) physical separation,(b) chemical conversion of initially separated products into other prod-

ucts, and(c) purification.

Physical separation is basically made possible by taking advantage of thediffering volatilities of compounds. Thus, if crude oil is first heated to thepoint of vaporization, it can then be passed into towers where differentproducts are drawn off at their appropriate temperatures. In this way agiven crude oil can produce quantities of gasolene, kerosene, fuel oil, petro-chemical feedstocks, lubricating oils, paraffin etc. Precise refining possibil-ities in any case will thus depend in the first instance on the chemicalcomposition of the original crude. By subsequent processes of conversionand purification, refiners then adapt the structure of initially refined prod-ucts to reflect market factors.

A particularly significant aspect of refining arises from the fact that onlysmall volumes of gasoline can be physically separated from crude oil. Bychemical conversion, however (known as ‘cracking’ processes), this fractioncan be greatly increased.

The structure of demand facing refiners will of course change over time.For example, over the short run there are seasonal factors requiring refinersto adjust output to reflect peak demands for fuels needed for heating andair conditioning respectively. Over the longer run, of course, the industrymust accommodate to the requirements generated by rising incomes andchanging technology. Thus we normally find that in advanced, high-incomeeconomies (where motor and aviation transport are major sources ofdemand) the structure of refined output will be very different from thatfound in less developed economies where paraffin, fuel, and basic lubricat-ing compounds are much more important.

One other challenge that arises over time is that refiners have to meetrising quality standards. These are particularly demanding for the fuels andlubricating substances used in sophisticated types of machinery – notablycombustion engines of all kinds.

Refining is, therefore, a complex business in which both commercialfactors and technical capabilities play important roles. Refiners haveto work in ways that reflect not only the types of crude oils being fed infrom domestic wells (or from imported imports), but also the varyingeconomic landscapes of national economies. Through time, all theseinfluences will change, and the refinery sector must adapt and expandaccordingly.

Turning now to the Chinese situation, we find that refineries fall into fivemain categories. These are:


1. Refineries primarily for manufacturing fuel oil. These are typicallyequipped with facilities for distillation, fluidized catalytic cracking,and delayed coking units. These refineries are thus capable of pro-ducing a range of products including high-octane and high-qualitygasoline and many other products derived from the initial separationprocesses.

2. Refineries capable of producing fuel and lubricating oils.3. Medium-scale refineries, usually of less than 4 mmt capacity, mostly

located at or near oil fields. These are capable of basic distillation andcracking processes only.

4. Large-scale comprehensive refineries that produce feedstock for theproduction of ethylene and other petrochemical products, includingpropylene and aromatics.

5. Refineries that, while not comprehensive in the sense of those ingroup 4, are designed to produce petrochemical feedstock suitable forthe production of man-made fibres and synthetic resins.

We may see already, therefore, that in terms of scale, modernity and tech-nical range, the refining sector at present offers only a weak base formeeting China’s needs and there are a number of other pressing technicaland commercial issues that have to be considered in developing a strategyfor the sector.

First, in spite of recent refinery construction, there remains a majorimbalance in the geographical distribution of refining and consumption.Basically, in the regions where consumption is high and growing, refinerycapacity is inadequate, while in areas of low consumption, it is in surplus.This reflects an earlier policy of locating refineries close to the point of pro-duction of crude oil supplies since, at the time, these were also the regionsin which demand from China’s old generation of heavy industries wasimportant.

Second, the output structure of the refining sector is increasingly atodds with the structure of product demand. In general terms the situationis as follows. The facilities typically found in existing refineries are thosefor simple atmospheric distillation, vacuum distillation, and fluidizedcatalytic cracking (FCC). These facilities were appropriate for the typesof domestic crude typically refined and the range of products needed inthe 1960s and 1970s (i.e. low-sulphur, heavy, hydrocarbon-rich crude oilsbeing refined for simple lubricants, kerosene, fuel oils etc.). Theserefineries are, however, inappropriate now and the structure of China’srefinery output is completely at odds with those found in the refiningsector worldwide. For the future, the growing demand for petroleum prod-ucts requires much more capacity in the higher-end cracking and


purification processes and a general convergence of Chinese with world-wide refining patterns.

There is the added problem of quality. The whole range of gasoil, gaso-line and lubricants produced by current refineries is often poor in quality,so much so that they fail not only to match minimum environmental stan-dards but fail even to reach the specifications called for by modern trans-port and other industrial equipment.

THE GASOIL (DIESEL) PROBLEM

The results of existing imbalances in the refining structure are alreadyevident in the ‘marketplace’. Gasoline products tend to be consistently insurplus, while gasoil is in chronic short supply. As a result of these imbal-ances, refineries frequently operate below capacity in terms of their intakesof crude oil. This is because without the more sophisticated refining andprocessing facilities needed for marketable hydrocarbons, there is simply nouse for the volume of crude oil that can be handled in the basic separationprocesses.

The gasoil problem is a particularly intractable one. This product is onefor which growth of demand is rapid. The main uses of gasoil include awide range of transport machinery as well as machinery for agriculture,fisheries, and electrical power generation. As road transport grows, notonly does the demand for gasoil grow but the question of quality becomesincreasingly urgent. Modern diesel engines require fuel that is low insulphur, high in cetane value, and is chemically stable.

By 2002–2003 the consumption of gasoil was estimated to be 66.25 mmt,with the coastal provinces of Jiangsu, Zhejiang and Guangdong account-ing for 60 per cent of the national total. The government has adopted apolicy of keeping gasoil prices low, and this has led to a rise in consump-tion of gasoil relative to gasoline. The problem is that gasoil and gasolineare only produced jointly. Thus if gasoil output is increased, then relativelylarge amounts of gasoline are also produced. In the circumstances, the sen-sible policy would be to meet some of the increased demand for gasoil byimports, thereby ensuring that the balance of domestic production wasmore satisfactory. At present, surplus gasoline is being exported. There aresigns that the government is addressing this problem and imports of gasoilin 2002 were 2–3 mmt. However, with domestic demand for gasoil expectedto be 85 mmt by 2005 and 108 mmt by 2010, significant changes in currentpolicy will be called for.

On the quality side, before July 1999 the government implemented asystem of three grades, namely: ‘basic’, ‘first class’ and ‘premium’. Under


new regulations there is now to be only a ‘premium’ grade. This will havewith a low sulphur (0.2 per cent) and cetane value 49. This represents quitea modest standard and further tightening was announced for 2004.

DEMAND FOR GASOLINE, KEROSENE ANDLPG PRODUCTS

In 2000 the consumption of gasoline was 35.55 mmt – little more than halfthe demand for gasoil. However, current plans for the expansion of theautomobile industry and the growth of the road and infrastructure networkto support automobile use suggest that demand for this product will growexplosively. This will occur not only in urban, but also in rural areas, wheredemand for small, rugged vehicles will be strong. Gasoline demand is esti-mated to be 43 mmt in 2005 and at least 52 mmt by 2010 (see Table 7.2 inthe next chapter). These figures are actually lower than the growth of vehi-cles might lead one to expect because, for environmental reasons, the gov-ernment is encouraging the use of LPG (liquified petroleum gas) and CNG(compressed natural gas) for vehicles in major cities including Beijing,Shanghai and Guangzhou. In 2000 there were already 100 000 vehiclesusing these fuels in major cities.

Again, quality and type of gasoline are important. Leaded gasoline,which accounted for 45 per cent of all gasoline in 2000, is now outlawedand new types of unleaded fuels are being introduced. This was planned tolead by 2005 to a ‘Clean Gasoline Standard’ available at 90, 93, 95 levels ofoctane strength.

At present kerosene is produced in quite small quantities. In 2004 con-sumption was only 10.4 mmt. However, the major form of kerosene is avi-ation fuel, for which demand is now growing rapidly. If growth continuesat present rates – 10 per cent per annum – the demand for aviation fuel by2010 will rise to over 15 mmt per annum.

Demand for LPG is also expected to grow rapidly. Consumption of LPGrose from 13.53 to 18.77 mmt between 2000 and 2004. Much of this is usedfor domestic heating, and demand in the coastal areas is particularlystrong, reflecting the real-estate boom. Of the 18.77 mmt in 2004, 12.42mmt was produced domestically and much of this was refinery gas. Importsof LPG are basically left to market forces with little interference by gov-ernment. Thus imports from Saudi Arabia, the United Arab Emirates andThailand are shipped to the coastal areas, which also receive LPG fromnorth-east China, where the product is basically in surplus. Under thesefree market conditions, foreign participation in the industry, notably by BPand Arco, is becoming marked.


PLANS TO RESTRUCTURE, EXPAND ANDMODERNIZE REFINING CAPACITY

By the end of 2000, the authorities had ordered a drastic pruning andrestructuring of China’s refining facilities. Of the 193 refineries in thesystem, only 82 were allowed to remain in operation. Of the 111 closures,13 were designated as refineries incapable of reaching minimum environ-mental standards. In addition, all refineries with less than 1 mmt capacitywere classified as hopelessly suboptimal. The total loss of capacity involvedin these closures was 11 mmt, which will have to be made up in the pro-gramme of new construction.

Under the Tenth Five Year Plan (2001–2005) it was proposed thatChina’s total refinery capacity be increased to 270 mmt. Taking intoaccount the loss of capacity implied by the closures noted above, this meansthat additional capacity of 80 to 90 mmt will have to be put in place. Thegovernment has further ordered that, within this total, there must beenough capacity suitable for the high-sulphur imports of crude to enabletotal capacity for these oils to reach at least 75 mmt. These targets are to bemet by the construction of eight or nine refineries, each with a capacity of10 mmt or more. If these plans are fulfilled, then China’s refining capacityin terms of crude oil intake was planned to rise to 270 mmt by 2005, and to300 mmt by 2010.

Within this aggregate picture the two major corporate actors continue tobe PetroChina and SINOPEC. Both have ambitious programmes to mod-ernize and upgrade their refinery systems in ways that will enable them toprocess ever-rising volumes of imported oil. As we have seen, importedcrude will require facilities capable of handling crude oils with high-sulphur content, and in the process of restructuring, both companies planto modernize in ways that will enable them to make much fuller use of theirunderlying refining capacity (see Photographs 6.1 and 6.2).

In the case of SINOPEC, the plan was to expand capacity to 160–179mmt by 2005. This would include expansion at Maoming and Chinhai,where capacity is to rise to 20 mmt a year, and expansion at Jinling,Guangzhou, Shanghai, Fujian and Yangzi in Jiangsu Province to enablethem to upgrade their ability to handle the high-sulphur crudes. Thesechanges were planned to give SINOPEC a total capacity for refiningsulphur-rich crudes of 62 mmt by 2005. Another major objective of theSINOPEC plan was to configure its refining capacity in ways that wouldreduce transport costs as well as reducing refining cost. It planned to dothis by adapting the system so that it conformed more to the changinggeography of the market and also to secure a significant improvement inutilization rates.


PetroChina has more modest ambitions. To begin with, it is planning toclose small and badly located refineries with a total capacity of 16 mmtper annum. None the less, by 2005 the company planned to have a capacityof 117.8 mmt, which will supply 42 per cent of domestic requirements


Photograph 6.1 A modern refinery at Maoming, Guangdong Province

Photograph 6.2 Most retail petroleum outlets belong to either SINOPECCorp. or PetroChina. The station shown here, however, isan independent

for refined petroleum products. Located mainly at inland sites, PetroChina’sfacilities have in the past mainly been employed to refine low-sulphur indige-nous crudes. Among these refineries, there is a major plan to enlarge andupgrade the refinery at Daqing. This will expand almost threefold to achievea total annual capacity of 20 mmt, including up to 5 mmt per annum of high-sulphur crudes. Lanzhou is another major project planned by PetroChina. Inpartnership with Total Oil of France, the Dalian West Pacific refinery willexpand by 50 per cent to a total capacity of 8 mmt.

It will be observed that all these investments are enlargements andrestructuring based on existing facilities. Neither company is planning tobuild new refineries. However, the shortfall in refining capacity as of 2005is estimated to be as much as 50 mmt per year. To bridge this gap willrequire two or three modern refineries. These could be joint ventures. Forexample, the suppliers of China’s oil imports clearly have a large potentialinterest in such facilities and PetroChina has been in talks with SaudiAramco and Exxon Mobil about a new refinery in Fujian Province. Clearlyjoint ventures of this kind would bring huge benefits to the Chinese refiningnetwork. In addition, for reasons explained above, there is a pressing needalso for a whole range of improved and enlarged secondary processingfacilities. The conclusion is, therefore, that while current plans are impres-sive and are moving the refinery sector in the right direction, they cannotyet be regarded as complete and adequate. More expansion with anenhanced role for foreign participation to bring both new capacity and con-temporary technologies will be called for within the next five to ten years.

NOTE

1. China Refinery Industry Editorial Committee, Zhongguo lianyou gongye (China’s refineryindustry), Beijing: Oil Industry Publishing House, 1989.


7. Summing up and looking ahead

China is now the world’s second largest consumer of petroleum andwill soon surpass Japan as the second largest importer of crude oil andpetroleum products. Oil consumption in 2004 is estimated to have been 320mmt, which represents a daily consumption of 6.4 million barrels. In 2005,it was estimated that China consumed about the same amount of oil as inthe previous year.

China’s total consumption of oil and LPG in 2004 and 2005 was sup-plied from the sources shown in Table 7.1.

FORECASTING CHINA’S INDIGENOUS CRUDE OILOUTPUT

The statistics available for the study of the Chinese energy sector are inmany respects still quite opaque. There are, for example, at least four official

107

Table 7.1 China’s oil balance in 2004 and in 2005 (mmt)

2004 2005

Domestic crude oil production 174.72 180.86Imports of crude oil 122.81 129.08Exports of crude oil 5.49 8.06Net imports of crude oil* 117.32 121.02Imports of petroleum products* 37.86 31.46Exports of petroleum products 11.45 14.00Net imports of petroleum products* 26.41 17.46Total oil supply 318.45 319.34

Imports of LPG 6.38 6.14Domestic LPG supply 12.39 12.48

Total LPG supply 18.77 18.62

Note: * No allowance has been made in these data for illegal imports of crude oil,petroleum products or LPG although these are known to be significant, especially insouthern China.

Source: China Oil, Gas and Petrochemicals, various issues.

series for crude oil output that appear in different publications. These serieshave varying degrees of coordination and the differences between centraland local data, for example, are notorious.

As we saw earlier, Chinese statements about their oil reserves present theforeign analyst with a particularly serious problem. One unusually completeset of official data was, however, incorporated in a graphical representationof China’s annual additions to proven oil reserves since 1950. These dataseem broadly credible and are consistent with other partial information.

The data are shown in Figure 7.1. It is interesting to note that the figureshows that additions to reserves were being accumulated even during theCultural Revolution. Looking to the future, we observe that estimates ofreserves to 2050 take the form of a parabola whose highest point is 2013,in which year the addition to reserves is 800 mmt.1

The shape of the future supply curve for crude oil will depend on the rateat which these reserves can be exploited. We must bear in mind that thecharacteristics of the many fields included here are varied, but we may sayin general that if exploitation is rapid, the bell-shaped curve for each fieldwill be pronounced. In China’s case, however, exploitation is likely to beslow; hence the bell-shaped curve may be expected to take the form of arelatively gentle hill.

The other element required to estimate future potential output is theextent to which recovery of theoretically available reserves will actually takeplace. For China, a recovery rate of 40 per cent of one half of its resourceswould seem to be a reasonable estimate. Thus if geological resources are106.8 billion tonnes, we may expect that 21.3 billion tonnes will ultimatelybe recovered. Cumulative production up to 2004 has been approximately


Figure 7.1 Annual discoveries of crude oil proven reserves in place inChina

1200

1000

800

600

400

200

01950 60 70 80 90 2000 2010 2020 2030 2040 2050

mmt

4.3 billion tonnes, implying that only 20 per cent of recoverable reserveshave been extracted. It is therefore likely that future output will rise on anupward trend with a peak in about 15 years. Thereafter output will be on aplateau followed by a decline. This forecast is made on the assumption –now increasingly realistic – that no huge fields will be found in locationssuch as the Tarim Basin, and hence that China’s domestic oil output willdepend on the systematic exploitation of large numbers of small andmedium-sized fields (see Figure 2.2 in Chapter 2).

Let us now turn to the medium-term future, i.e. the next 10 to 20 years.A simple extension of the recent trend of output would suggest that by 2020output might reach 225 mmt. Many in the industry now think that this istoo optimistic – a view we share. The likely output for 2020 is 200 mmt, inwhich case output is likely to be 185 mmt in 2010 and 190 mmt in 2015.2

Underlying this forecast are a number of assumptions that need to beborne carefully in mind. The most important assumption is that adequateinvestment in oil and gas exploration and development is undertaken byChinese oil companies. Second, we assume that at least 50 mmt of crude oilper annum will be moved from western China by pipelines constructedalong the Lanxing railway line. The third assumption is that output in thelarge, older oil fields in eastern China are now at their peak or already indecline, as is certainly the case at Daqing, Shengli and Liaohe.

A very detailed Japanese report published in 1997 has suggested that pro-duction in these three fields would reach 76 mmt in 2005 and then declineto 55 mmt by 2010. The same source estimates that output from the othereastern fields will stabilize at about 25 mmt in 2010.3

The outlook for offshore oil appears to be more promising. In 2004output was 26 mmt and rose to 29 mmt in 2005. By 2010 an output of 40mmt should be reached. Thereafter offshore output from existing fields isexpected to stabilize, but there are realistic prospects for further offshorediscoveries that will eventually enhance supply. It is clear, therefore, thatoverall it is the performance of the western oilfields that will be critical toChina’s oil future. Output from these fields is projected to increase to 40mmt by 2010 which is entirely feasible. This view of the future based ondetailed analysis is consistent with official policy lines.4

However, two major problems lie ahead in this strategy. One is the seriousnature of transportation bottlenecks. The Lanxing rail connection is cur-rently shipping 15 mmt per annum, and as this is already a double-trackedline, its capacity cannot be increased. A second technical problem relates tooil from the Tarim. In this field substantial quantities of gas are associatedwith the output of oil. Thus if the oil is to flow, this gas has to be transportedfor use elsewhere. The alternative possibility of re-injecting associated gasinto the field is a technical possibility, but a very expensive procedure.

Summing up and looking ahead 109

At the present time construction of a new petroleum product pipelinealong the Lanxing railway is in progress, and this should add 5.8 mmt tocapacity. Valuable as this amount may be in terms of the energy needs ofeastern and central China, it is clear that planned transportation capacityis still far too small to handle the problem of the overall east–west demandand supply imbalance.

In thinking about China’s future energy balances there is a strong temp-tation to focus on factors that can be quantified relatively easily. Thus onthe demand side one can look at projected growth rates for the economyand the energy elasticity of output (i.e. the ratio of energy demand growthto growth in the economy). On the supply side there are the many physicalfactors of the kind we have been discussing above. However, purely quali-tative factors and factors to which it is hard to assign clear numbers are inreality just as important. China’s energy future will be influenced by avariety of policy choices, by the evolution of all relevant institutions andmarkets, and by the accumulation of technical skills. The financial system,particularly through its impact on exploration and development, will alsobe critical. Finally, we need always to bear in mind that from time to timeChina experiences both natural and socio-political upheavals, and these toocan affect the progress of the industry.

THE OUTLOOK FOR PRODUCTION OFNATURAL GAS

Future production of natural gas will depend on the development of supplyand transportation facilities as well as demand factors. The demand factorsseem likely to be more important in the gas sector than they are in oil.

In terms of supply, a key field will that at Jingbian in the Shaanxi–Gansu–Ningxia field. This supply will be connected to the major consumingcities of Beijing and Xi’an by means of the Ordos Basin pipeline. Theamounts to be supplied will depend not only on the pipeline capacity, butalso on the installation of local facilities to receive and use the gas. It isexpected that Beijing will use 3 billion m3 per annum, Xi’an a further 1 billionm3, while 600 million m3 will be shipped to Yinchuan as fertilizer feed.

When the Beijing pipeline is double-tracked, a further 3 billion m3 couldbe supplied from the new Shell field at Changbei in the Ordos Basin. In2005 the total supply of gas from the Ordos Basin had already reached 7.53billion m3, which means the above-stated demand-side construction workwas already completed.

Other important natural gas fields are those located in the Qaidam,Junngar, Turfan–Hami and Sichuan Basins. In Qaidam, 2.1 billion m3 is


already flowing to Lanzhou and Xining, and the future capacity of this fieldis expected to rise to 4 billion m3. In 2005, output from the Junngar andTurfan–Hami fields was 2.9 and 1.5 billion m3 respectively, and thesefigures are expected to double. In Sichuan, at present the largest gas field inChina, output in 2005 was 11.6 billion m3 (PetroChina only), and currentplans will raise this to 12–15 billion m3. A major beneficiary of this expan-sion will be the industrial city of Wuhan. Wuhan and its immediate regionwill receive an annual supply of 3 billion m3.

Looking to the future, the Tarim Basin will become the largest source ofChina’s natural gas supply. According to the plan for the first phase of the‘West to East’ pipeline project, it was planned that Shanghai should bereceiving 12 billion m3 annually. Under phase two, to be completed in 2010,this should rise to 20 billion m3.

There are also substantial prospects for gas output from offshore fields,notably the Dongfang field off Hainan Island. Gas ‘associated’ with oiloutput may also be quite significant. If we sum all these possibilities, we canexpect that gas output, which was 40.7 billion m3 in 2004 and 50 billion m3

in 2005, may exceed 70 billion m3 in 2010. However, this last figure must besubject to the many qualifications that we have discussed above.

CHINA’S FUTURE IMPORT NEED FOR PETROLEUMAND NATURAL GAS

Projecting China’s future import needs is a hazardous undertaking but inspite of the uncertainties, it is essential to obtain some idea of the param-eters of future consumption and likely import dependence. One of thepresent authors (Kambara) has been engaged in several attempts to do this.These projections were usually based on data reported in the official Chinaenergy statistical yearbook.5 However, it is worth noting that none of theknown forecasts, made by either Chinese or foreign specialists, correctlypredicted the low consumption of the late 1990s (see Appendix). Part ofthe problem is that a key to accurate forecasting is a correct understandingof the energy consumption characteristics of the major industrial energyusers. Unhappily the data required for understanding past consumptionare not accurately reported. Further, because of rapid modernization andstructural change in the economy, Chinese energy-using patterns are shift-ing in quite radical ways – mostly in the direction of becoming more energyintensive.

In addition to problems with official data, there has been the persist-ent problem of energy imports and consumption that are ‘unofficial’ –smuggled by any other name. Unofficial oil imports are thought to have been


as high as 20 mmt per annum in recent years, and failure to take account ofthese distorts our understanding of energy use, especially in south China.For quite different reasons, coal is also a difficult area. Much of the Chinesecoal supply comes from small-scale private mines and these do not keepproper records, are often illegal, and details of their output are estimated(probably using rather crude methods) by the Chinese authorities.

In spite of all these problems we have to use every source of data. Energyconsumption in China has undoubtedly grown rapidly in the recent past andunderstanding this is of critical importance to both our understanding of thefuture growth rate of the economy and its many international consequences.

The transport sector is a good place to start when looking for some firmfigures on demand and forms a building block for the wider long-termpicture. Table 7.2 gives some figures for the growth of gasoline, diesel,kerosene and heavy oils. The gasoline data are based on the growth of carsand gasoline-powered lorries from 24.5 million in 2003 to 40 million in2010. Other sectors are based on current consumption and predictedgrowth rates for each sector. In order to come to a total figure for oil andpetroleum products we need to add in petroleum-grade naphtha as materi-als for the petrochemical industry.

If demand in 2005 and 2010 is as proposed in Table 7.2, net imports arelikely to be 120 mmt and 145 mmt respectively. However, it remains a majorquestion whether refinery capacity will be adequate to meet these levels ofdemands and imports.

Let us now look forward to the year 2020. Various estimates of demandfor Chinese oil and petroleum products for 2020 have been made in recentyears. These vary significantly. At the high end, for example, are estimates


Table 7.2 Demand for crude oil and oil products, 2004–10 (mmt)

Type of demand 2004 (actual) 2005 (estimated) 2010 (estimated)

Automobile demand 46 48 77for gasoline

Transportation demand 102 110 140for diesel (gasoil)

Kerosene (total) 10.4 11.4 18.3Kerosene (jet fuel) (9.9) (10) (15)Heavy fuels (power 49 52 66

generation)Predicted total crude 290 300 350

oil demand

Note: Figures in parentheses are a subtotal of the total figure above.

published by the US Energy Information Administration and a recent studyby the Japanese Institute of Energy Economics. These put demand andrequired imports in 2020 at 525 mmt and 350 mmt, and at 512 mmt and 312mmt respectively. These figures imply domestic outputs of 175 mmt and 200mmt respectively.6 Then, what is described as a ‘conservative’, ‘ideal’ scenariois that proposed by a group of official Chinese energy think-tanks. This hasdemand at 370 mmt and required imports at 205 mmt, while another Chineseinstitute argues for 380 mmt and imports of only 173 mmt.7

Between these two positions we argue for a middle way, estimatingdemand at 450 mmt, domestic output of 200 mmt, and an import require-ment of 250 mmt (5 million barrels per day).

The conversion of China into a net importer of oil began in 1993. Up tothat year, while some level of imports was normal, these were exceeded byexports. Trade was a matter of specialization and convenience, and themain customer for Chinese oil exports was Japan. By 2005 gross importshad reached 160.5 mmt and net imports 146.4 mmt. Of gross imports, 129.0mmt were in the form of crude oil and 31.5 mmt were oil products. By 2005,then, China was already dependent on imports for approximately half ofits consumption. As we have seen, China’s early imports were mainlySumatran light crude and similar low-sulphur-content oils from Malaysia,Vietnam, Oman and Angora. These imports were readily refinable inChinese refineries since these were designed for Chinese oils – especiallythose from Daqing – that had similar characteristics. Without adaptation,these refineries could be seriously damaged by the corrosion caused by thehigh sulphur content of oils typical of the Middle East. As these refinerieshave been reinforced by anti-corrosion protection devices, large-scaleimports from the Middle East have become feasible. In 2005 Chinaimported a total of 59.9 mmt from Middle Eastern suppliers. The largestcontributions were from Saudi Arabia (22.1 mmt), Iran (14 mmt) andOman (10.8 mmt) (see Table 7.3).

It has been suggested that China’s expanding appetite for imports of oilmight destabilize world oil markets. It is of course impossible to predictworld oil balances in the distant future because so much depends on avariety of demand factors and on political circumstances that cannot beforeseen at present. However, on present evidence the quantities predicted(at least in the low to medium forecasts) cannot be thought of as unman-ageable. If we start with the quantifiable, we note that world oil reserves andproduction capacity are growing each year. According to the BP StatisticalReview of World Energy June 2006 world proven reserves at the end of 2005were 163.6 billion tonnes (1200.7 billion barrels), which gives a reserves:production ratio of approximately 40. Although comfortable, there isnothing binding about this ratio and, as new technologies and new


investments in prospecting take place, proven reserves are expected toimprove significantly. Also, the recent rises in oil prices make known butpreviously uneconomic reserves such as the Canadian oil sands and deepcontinental shelf reservoirs much more promising and eligible for inclusionin the reserves figure.

In market terms, we need first to bear in mind that current global demandfor oil is 82.46 million barrels per day (b/d) and that of this, 50 million b/dare traded internationally. China’s current import requirement of 3 millionb/d (150 mmt per annum) is thus only just over 6 per cent of the worldtraded volume. It is true that the sharp jump in demand for imports byChina in 2003 and 2004 sent a message to the international market, butthese increases were only one factor in the oil price rise. Of greater impor-tance was the seasonal winter demand in the USA and supply problems inVenezuela, Nigeria and the Middle East. These real events were thenmagnified in price movements by speculation that bore little relationship tounderlying trends of demand and supply. One problem here is that most ofthe world’s traded oil takes the form of ‘direct deals’, i.e. deals between


Table 7.3 China’s crude oil imports by country (000 tonnes)

Country/region 2003 2004 2005

Saudi Arabia 15 176 17 244 22 179Iran 12 389 13 237 14 273Oman 9 277 16 347 10 834Middle East (46 365) (55 788) (59 992)

Angola 10 101 16 208 17 463Sudan 6 258 5 770 6 621Congo 3 389 4 773 5 535Africa (22 182) (35 300) (38 470)

Russia 5 254 10 776 12 776Norway 931 2 008 517Brazil 123 1 576 13 432Europe/W. Hemisphere (8 725) (17 565) (18 937)

Vietnam 3 505 5 348 3 195Indonesia 3 333 3 428 4 085Malaysia 2 031 1 691 348Asia Pasific (13 853) (14 161) (9 684)

Total 91 126 122 815 127 083(+34.7%) (+3.5%)

Source: China OGP, 1 Feb. 2005, p. 18; 1 Feb. 2006, p. 13.

national companies belonging to the major exporting countries and privatecompanies selling in the major importers. Thus the ‘free oil’ traded on spotmarkets is relatively limited and hence liable to big fluctuations and strongspeculative trends. China does most of its oil transactions through thedirect deal route, but is of course also involved in and affected by the spotmarket.

From the Chinese perspective, we may observe that the sharp increase inChinese demand was itself a product of special circumstances that seemunlikely to be repeated, and it is worth bearing in mind also that China’s oiltraders are known to be highly experienced and in possession of a full andsophisticated understanding of world energy markets.

Looking to the future, it is clear that China will be able to diversifyimports of crude oil still further as supplies from Russia and Kazakhstanexpand. At present 10 mmt per year come by rail from the Siberian field toChina, and a similar amount comes from the Kazakhstan field. TheRussian Yurubchenskoye field in the eastern Siberian oil field and otherfields in Kazakhstan have the potential for considerably enlarged suppliesin the future. All this will be facilitated by the imminent replacement of railby pipeline transmission.

In the short run the outlook for natural gas imports will be determinedby the progress made in the construction of two new LNG terminals, oneat Shenzhen (Guangdong Province) and the other at the city of Fuzhou. Ifthese proceed as planned, then by 2010 these facilities will be capable ofhandling 10 mmt (13.8 billion m3) per annum. In addition to this, a furtherten LNG terminals are planned, which would add a further 30 mmt tocapacity. These facilities are to be located in Shanghai, Ningbo, Qingdao,Tianjin, Dalian and other cities. If all these projects are completed, thentotal LNG capacity by the year 2010 will be approximately 40 mmt (55.2billion m3).

We see that all these terminals are located on the Chinese easternseaboard and, with the exception of deliveries to Shanghai, the LNG willnot be distributed further inland. In the case of Shanghai, as noted earlier,an important aspect of the LNG supply is that it is a competitor to gascoming through the ‘West to East’ pipeline.

The market conditions under which Chinese buyers have been negotiat-ing for LNG were at first generally favourable to them. The main Chinesebuyer has been CNOOC, but PetroChina and SINOPEC have also beenactive. CNOOC is in partnership with BP in contracts to supply Shenzhen,and one of its major sources of supply has been the north-west shelf devel-opment in Australia, where it is now a partner in the development consor-tium. In conjunction with BP, CNOOC has also entered agreementswith Pertamina to take supplies from the Tangguh field in West Irian


(Indonesia). It continues to be active in the market for further agreementsfor other Chinese LNG terminals. However, market conditions in 2005became difficult for the Chinese. Proposed long-term commitmentsincreased sharply in price, and domestic consumers, especially power-generating plants, found coal to be the cheaper and possibly more reliablefuel. Given the scale of the investments needed to import, distribute anduse natural gas, this experience of international market volatility has notbeen a happy one for the Chinese.

Some of the biggest issues in natural gas supply relate to plans involvingSiberia and the former Soviet Union. For example, 30 billion m3 will beimported through an international pipeline from the huge Koviktinskoyegas field in eastern Siberia. This pipeline would be jointly constructed byRussian, Chinese and Korean companies.

Although the Russians originally sought a route for this massive projectthat went through Mongolia and involved Mongolian participation,the Chinese preferred a route that by-passes Mongolia and follows theroute of the Trans-Siberian railway. This would enter China at the oldfrontier station at Manzhouli, pass through the three north-easternChinese provinces, and then proceed to Beijing. The Korean interest inthis consortium will be supplied by a pipeline routed to Korea under theBohai Gulf.

A major role in natural gas supply is also planned for the central AsianRepublics of Turkmenistan, Kazakhstan and Uzbekistan. These supplies,together with those from western Siberia, will make use of the ‘West toEast’ pipeline system originating in Xinjiang.

According to estimates by PetroChina, China’s total demand for naturalgas by 2010 will be 136.5 billion m3. Domestic supply is projected to be 70billion m3, leaving a shortfall of 66.5 billion m3. Within this total thesituation for southern China (which can be supplied by coastal facilities)looks fairly good, providing the seaboard terminals are completed to plan.However, if southern China is excluded, demand will still be 115.1billion m3 in 2010 against domestic supply of only 65 billion m3. For thisshortfall to be met, a vast and complex inland pipeline will need to becompleted.

Overall, then, the challenge of natural gas supply is an enormous oneand for success three conditions will need to be fulfilled. First, there mustbe a clear national strategy for the amounts and regional distribution of thegas supply as a whole. Second, the companies must devise effective com-mercial strategies to secure the required contracts for imported supplies.And, finally, the investment must be made to construct the extensive receiv-ing terminals and pipeline networks necessary to receive and then distributegas from all sources to the main points of consumption.


THE EVOLVING INSTITUTIONS

In thinking about the future and how these underlying trends will work out,we need think further about the complicated and changing institutionalproblems that the Chinese are having to face. The fundamental point is thatthe Chinese economy remains one in which central government leadershipand power remain unusually omnipresent. This is especially the case inindustries such as energy, which are central to future economic perform-ance, to strategic considerations, and to international economic and polit-ical relations. At the same time the oil and gas sector is part and parcel ofChina’s economic reform.

In most market economies we find that governments use special arrange-ments, fiscal policy and other devices to retain powers of guidance in theenergy sphere of a kind not usual in the economy as a whole. Further, theoil and gas price rises of 2005–2006 are promoting much new thinkingabout the nature of state, regional and international responsibilities inenergy matters – so much so that the world institutional framework cannotbe regarded as in a stable phase at the present time. The problem for China,therefore, is a double one. On the one hand it has to implement a domesticreform that ensures efficient use and development of energy resources,while on the other it maintains an appropriate role for the state at homeand, at the same time, develops an active role on a world energy stage thatis itself being transformed.

The basic domestic organizational change of the late reform period isthat since 1998 the old state monopoly has been replaced by a group ofjoint stock companies. These act under the umbrella of the State OilCorporation and have been entrusted with a key role in the development ofthe Chinese energy sector. The three companies that replaced the StateOil Corporation – PetroChina, SINOPEC and CNOOC – are all engagedin various forms of exploration, production and distribution. The newstructure has thus been designed to introduce a new element of competi-tion between the companies and to encourage them to seek profits in allthree activities. The competitive dimension of the energy sector has alsobeen intensified by agreements entered into with China’s accession to theWTO in 2001.

However, in some respects China still has the worst of all systems. Thisis because the central guidance and control functions have been weakenedby a reform that has transferred power to industries, firms and local gov-ernments. These now compete ferociously with each other for supplies ofenergy. This is particularly serious in the case of cities and regions, whichnow seek to offer local ‘energy security’ as a key incentive in the packageoffered to potential foreign investors. This rough competitiveness has


made energy sharing – notably in the form of electricity grid operation ofthe kind common to developed market economies – very difficult.8

At the same time, this new competitiveness is far from reflecting thearrival of a true market culture, and the energy sector still lacks theflexibility and responsiveness of a properly marketized system. ThusChinese analysts, for example, much admire the way in which the Japaneseeconomy responded to international market forces both in the changingcomposition of its energy supply and in developing conservation and otherresponses to the energy price rises of the 1970s and 1980s.9

Pricing is a particularly instructive example of the limits of the reformprocess. In the 1950s China adopted the Soviet practice of low energy pricesand administrative control. Thus even within the limits of the plannedsystem, there was little incentive to economize on energy. After the GreatLeap Forward in the early 1960s, energy pricing was one element of theeconomy reserved to the centre. However, in the Cultural Revolutionpowers were given to local pricing committees and central direction waslost again.

Under reform, the general trend has been to raise and unify prices in amove towards the creation of markets. However, there has been muchad hoc and inconsistent behaviour. Since 1998 there have been more seriousefforts to address the problems, but they remain enormous. Price rational-ization involves the relations between wholesale and retail prices andbetween coal, oil and natural gas prices. There are also big problems in theelectricity pricing structures and those arising from regional variations inenergy prices. At present these structures are described as ‘confusing’ and‘chaotic’, and fail to provide appropriate signals to producers and con-sumers.10

Another difficulty with the new industry structure is that it does not byitself solve the problem of finance. Oil exploration and most other aspectsof the oil business are, particularly in a partially marketized developingeconomy such as China’s, hugely expensive and unusually risky. In theWestern economies and Japan, the industry structure and its financialarrangements have evolved over many decades. China has hardly begun theprocess of restructuring, financial deepening and integration into the worldenergy economy that will be necessary, but must do so urgently. Withouteffective institutional and financial structures, exploration and develop-ment failures could be a major factor pushing China towards an unaccep-table and unpredictable reliance on imported forms of fuel.

All these matters are under urgent consideration by government andespecially its key think-tank, the National Development and ReformCommission. The events of 2004–2005 clearly provided the stimulus tonew institutional arrangements strengthening the role of the centre in


coordinating the domestic energy economy. Also there is new thinkingabout the foreign role in oil and gas. Further consideration is being givento some of the oil industry’s traditional devices (including production-sharing agreements) with foreign companies in the upstream activities ofexploration and production, and there appears to be an increased willing-ness to grant oil exploration licences to foreign oil companies interested inboth on- and offshore oil and gas ventures. These trends are supported byChina’s WTO accession.

Another critical area where new thinking and foreign participation arepotentially important is the refining problem discussed in the last chapter.As we have seen, China’s refineries are old, small, and by internationalstandards technologically inadequate. Also, even when in use, they areincapable of meeting the demand for refined products. There has beenmuch talk about this issue, and policies and plans to reform and modern-ize the refinery sector have been adopted. But implementation of many ofthese promised measures seems still to be awaited. Plans to invest in largemodern refineries have, to date, borne only modest results. Further, impor-tant policy issues that are essential to a rational refining policy have yet tobe addressed. For example, in several of the southern Chinese ports thatreceive crude oil imports investment is under way in refineries capable ofhandling the high-sulphur-content crude from overseas. Yet these invest-ments are being undertaken in the absence of any clear national policy thatsets out the expected volumes and sources of China’s future crude importrequirements.

A fundamental point to bear in mind in thinking about China’s integra-tion into the world energy economy is that Chinese oil costs are generallyhigh when compared to those in the low-cost producers. Indeed, theChinese are constantly trying to reduce costs to below $10 per barrel. Oneresult of this has been that as commercial consumers are increasingly freeto buy low-cost oil imports, the higher-cost Chinese fields are being putunder strong financial pressure. Imports have already been a factor in someoil well closures, including a significant one in the Daqing field.

Conversely, however, the oil price boom of 2004–2005 has had somepositive effects on China’s oil supply prospects. China’s transfer prices torefineries are designed to shadow world market trends so that the pricejump not only brought marginal wells into production but has also encour-aged more intensive efforts in exploration. The problem of course is thatthis kind of price instability takes China’s long-term planning andfinancing for energy into uncharted waters, far more difficult to navigatethan the pre-reform days when the Chinese oil economy was largely isolatedfrom price movements in the outside world and government provided thedevelopment finance from central resources.


‘OIL SECURITY’ AND CHINA’S PARTICIPATION INOVERSEAS OIL DEVELOPMENT

By 1990 it was clear to the Chinese energy planners that the domesticenergy supply was going to be inadequate to demand and that the likeli-hood of huge, unexpected oil discoveries (onshore or offshore) was remote.In particular they now understood from detailed geophysical investigationthat the geology of the Tarim Basin was not such that it could be expectedto provide a solution to the Chinese oil supply problem in the form of‘super giant’ fields of the kind known in the Middle East. In these circum-stances China had to abandon thinking in terms of energy self-sufficiencyand plan instead for a comprehensive oil security programme. To be suc-cessful, such a programme would involve a combination of domestic devel-opment, participation in exploration and ownership of overseas reserves,and a plan for a national strategic oil stock.

At this time, the Chinese learned much about the practicalities of such astrategy from the Japanese, especially that based on the many decades ofexperience of the Japan National Oil Corporation. The JNOC had beenresponsible for both policies to develop state stockpiles and the implemen-tation of what is known as an ‘[own] development of overseas oil’ (kaigaisekiyu jishu kaihatsu).

The meaning of this last phrase is not likely to be familiar to readers inEurope and the USA. The activity described is simply the ‘upstream’ activ-ities of the major oil companies, i.e. exploration and development of oiland gas supplies. Japan’s position in the 1960s was that it had no significantdomestic oil and gas supplies and no companies that ranked as ‘majors’ onthe international scene. This was felt to be a serious national disadvantageand one that could only be overcome if appropriate Japanese companiesapproached the oil-producing governments directly, and agreed with themprogrammes of exploration and development. The first attraction of theseapproaches was that the Japanese companies could offer host governmentsboth capital and rewarding revenue-sharing schemes. In addition, theseschemes had the added virtue that they were a form of competition withthe oil majors that, hitherto, had kept a strong hold on the skills and otherassets needed for exploration and development. This policy was advancedvigorously in the 1970s and 1980s, mainly with energy-rich economies inSouth-East Asia and the Middle East. As a result, the supply of so-called‘yen oil’ rose at its peak to 34 mmt – 15.1 per cent of Japanese petroleumconsumption in 1995.

Among other oil importers, the USA, UK and the Netherlands have oilmajors based in them. For big oil importers that do not have majors basedat home, an alternative strategy is one that has been followed by Germany.


This is the strategy of allowing the majors to operate freely in a competi-tive market.11

The Chinese position is that while it has been moving from being an oilsurplus to oil deficit economy, it has also been trying to develop an ‘exter-nal’ oil strategy that has much in common with the Japanese model. In 1998the China National Petroleum Corporation was restructured into a groupof joint stock companies, all with shares listed in Hong Kong andNew York. Part of the remit of these companies was to become active par-ticipants on the world energy scene. PetroChina, SINOPEC Corp. andCNOOC Ltd have all made initiatives in exploration and development invarious places and, since 2000, their activities have been supported by fundsraised on international capital markets. This is believed to have totalledabout $8 billion so far.

The main problem for China, however, is that there are now few areas ofthe world that can be considered ‘underdeveloped’ in terms of oil and gasexploration and the majors and others who hold significant developmentrights will not part with them cheaply. In some cases it is believed that theChinese have paid extraordinarily high prices for interests in oil develop-ment contracts, and some specialists in the market have criticized theChinese for being ‘obsessed with the oil problem’.

Chinese companies now operate in some 30 countries and in the processof developing an ‘own oil’ policy find themselves competing with India,which has started a similar policy. However, if countries such as China andIndia seek to achieve status in the global oil scene that compares to that ofthe majors, they have a very long way to go. Such status involves long-termcommitments to both buy and sell oil and gas and, in present circum-stances, the old-style ‘concession’ rights for oil and gas no longer exist.Foreign companies seeking to enhance their global standing now have threepossible options open to them if they wish to share (‘farm in’, as it some-times called) overseas oil development. The choices are, first, to negotiatefor exploration and development rights in given regions or designated‘mining lots’; second, to enter production-sharing agreements with foreigncountries; or third, to pay ‘operating fees’ (in oil) for exploration and devel-opment services to state oil companies.

With regard to the first choice, few developing countries have new‘mining lots’ for tender at the present time. Thus the only way into this typeof activity is to seek to participate in or buy outright lots already grantedto other firms. Today this basically means they have to negotiate for suchagreements with American firms that own development interests aroundthe globe.

Among the countries that China is now operating in are Venezuela,Kazakhstan, Indonesia and other South-East and Central Asian countries.


They have also been very active in Africa, with significant oil-related ven-tures in the Sudan, Angola, Nigeria, Libya, Republic of Congo and Gabon.They have even sought participation in the Canadian oil sands, an excep-tionally ambitious project. In some cases, companies have created ‘Chinesevillages’ to support their overseas operations, even developing localfarming to supply their food needs. This is the case in Sudan and Venezuela,whose oil is to be shipped through a pipeline system to local ports and thentrans-shipped to China by tankers.

The biggest Chinese actor on the world stage is CNOOC Ltd, which inIndonesia now controls oil production and is second in size only to Caltex.Among its achievements, CNOOC Ltd has gained participation in the JavaSea and other Indonesian projects and has become a significant member ofthe consortium formed to take LNG from the Northwest Shelf in WesternAustralia to the LNG terminals at Shenzhen.

During 2004 Chinese companies imported approximately 30 mmt of oilfrom their ‘overseas oil’ developments. This represented about 10 per centof total petroleum consumption, but remains a very small amount in termsof the operations of the major oil companies. During 2004/2005 the worldoil price jumped above the $50 per barrel mark. If the price remains above$50, although modest in scale, then China’s overseas oil deals to date mustall be considered to have been successes and the work of their internationaladvisers invaluable.

The oil price rise, however, makes future progress in developing ‘overseasoil’ even more difficult. Under present circumstances few oil-owning coun-tries are prepared to accept foreign involvement in their upstream activities.It is reported that Iran has signed development-operating agreementsrecently, but on terms that are not favourable to the foreign party. At onetime the Caspian Sea seemed a likely candidate for new agreements, butthese opportunities have now largely been taken up by the majors. Thus,overall, the worldwide opportunities for the Chinese now appear veryrestricted.

The problem of ‘oil nationalism’ is also proving to be an obstacle to theChinese. This phenomenon, now very widespread, was revealed by theevents surrounding the Chinese bid for Unocal in 2005. Unocal (formerlyUnion Oil Company of California) is a middle-ranking American companywith proven domestic and overseas oil and gas reserves of 1.7 billion barrelsof oil equivalent. These overseas assets are mainly in Thailand, Indonesia,Myanmar, Bangladesh, Azerbaijan and the Congo. Although the Chinesewere ultimately willing to bid $18.3 billion against the under-bidder,Chevron, US governmental action ensured the success of the lowerChevron bid.12 In January 2006 a senior official of the National EnergyLeading Group, Ma Fucai, told a conference that China ‘has laid a solid


material foundation for the realisation of self reliance in domestic [energy]supply’. It was reported that this renewed emphasis on self-reliance was inpart a direct reaction to the Chinese Unocal experience.13

Against this background of ‘oil nationalism’ and heightened concernabout the world energy market, the keys to China’s future oil security wouldappear to lie in the following principles. First, China needs to keep on gooddiplomatic terms with all the petroleum-exporting economies, especiallythose in the Middle East. Second, China must develop measures to ensurethe safe passage of oil tankers through the sea lanes linking the MiddleEast with China. Third, China should develop appropriate international,regional and bilateral arrangements to avoid the most obvious forms ofenergy-related conflict, especially with Asian neighbours. The recent agree-ment with India of January 2006 for the ‘Enhancement of Co-operation inOil and Gas’ seems a good precedent. According to this, the two countrieswill exchange information in order to avoid conflicts arising from theircompetitive interests in the acquisition of exploration rights, and the twocountries will also cooperate in research for exploration and developmentof oil and natural gas.

Gunboats and confrontational diplomacy in any part of the world arenot going to help the Chinese here. What is called for is an energy diplo-macy of the kind Japan initiated after the oil crises of the 1970s. The omensfor such policies are good. Former President Jiang Zemin visited a numberof oil producers in the Middle East and Middle Eastern visitors to Chinaget a very warm reception. These exchanges have as part of their back-ground the good reputation Chinese oil workers have built up in the region.Chinese standing is particularly high in Kuwait, where they helped dampenthe oil fires and revive production after the first Iraq War. The Chinese alsohave the advantage in oil diplomacy that they are willing to act in countriesabout which other members of the international community have reserva-tions (Sudan, Venezuela, Myanmar).

The problem of safe shipping lanes is very important. Oil tanker routesin the world’s oceans are rather limited – especially for the larger classes ofvessel. Asian countries, including Japan, Korea and China, are all large-scale oil importers, mainly from the Middle East countries. This oil mustpass from the Arabian Gulf, across the Indian Ocean, then up through theMalacca Straits that divide the Malay peninsula and Sumatra, finallymoving from Singapore to the Southern and Eastern China Seas. Thenarrow Malacca Straits and Indonesian waters remain highly dangerousand vulnerable to pirates.

The Chinese have recently negotiated a series of agreements to protecttheir interests in these routes. For example, Indonesia has agreed that, inreturn for Chinese Silkworm missiles, Chinese navy vessels can use three


Indonesian ports. Chinese submarines already patrol the Malacca Straitsand the Andaman Sea, and China has also entered into an agreement withMyanmar to use radar facilities in the Cocos Islands and in the AndamanSea, and with Pakistan for use of her new naval base at Gwadar in theArabian Sea. This network of protection for Chinese oil has now becomeknown as the Chinese ‘pearl necklace’ (see Figure 7.2). After joint navalexercises in the Indian Ocean in the summer of 2005, the Chinese ambas-sador to India, Mr Sun Yuxi, even declared that China would welcomeIndian naval patrols against piracy and other crimes in the Malacca Straits,but at the same time insisted that Beijing did not favour the presence ofoutside powers such as the USA in the South-East Asian region.14

The Chinese oil supply position would be helped if they could re-routetankers through the Lombok Straits (between the islands of Bali andLombok) instead of taking the Malacca Straits route to the southernChinese terminals. The Lombok Straits are able to take the ultra-largecrude oil carriers (ULCCs) fully laden as they do for Japan. The problemis that the Chinese have no terminals capable of handling the ULCCs.


Note: Oil tankers are classified as follows: 50 000–100 000 tons, ordinary tankers for oceanvoyage; 200 000–300 000 tons, VLCC; 400 000–500 000 tons, ULCC.

Figure 7.2 Chinese sea-lane for oil tankers: the ‘pearl necklace’

Japan

Korea

North Korea

China

Mongolia

Philippines

Indonesia

Malaysia

Singapore

Malaysia

Brunei

Cambodia

VietnamLaos

Thailand

Myanmar

Bangladesh

BhutanNepal

Pakistan

India

AfghanistanIranKuwailt

Iraq

Turkey

SyriaLebanon

JordanIsrael

Saudi Arabia

Bahrain

UAE

OmanYemen

Maldives

Srilanka

Former Japanese ULCC route

Chinese VLCC &other tankersroute

Taiwan

Beijing

Tianjin

Dalian

Qingdao Kiire

Nanjing

Shanghai

Fuzhou

Guangzhou

Zhanjiang

Ho Chi Minh

Sumatra

New Delhi

Baku

Baghdad

Abu Dhabi

Karachi

Gwadar

Yangon

Hainan Dao

South China Sea

Bay of Bengal

AndamanSea

Arabian Sea

Caspian Sea

Indian Ocean

Mak

assa

r Str.

Str. of Malacca

East China Sea

Jawa

Coco Is.

Bali

Lombok Is.

Sulawesi

Palawan

KalimantanBorneo

However, in the event that the Malacca Straits were closed in an emergency,Chinese oil tankers of the smaller VLCC class could take the Lombokroute to the South China Sea.

One alternative to this, at present highly speculative, would be the build-ing of a huge oil terminal in Myanmar, which could then be connected toChina’s south-western provinces of Yunnan and Sichuan by long-distancepipeline. However, this project is neither technically nor economically feas-ible at the present time.

The other important dimension to Chinese oil security is stockpiling. Atpresent China is not a member of the International Energy Agency and istherefore unable to take advantage of the IEA’s ‘emergency oil rationingscheme’. This means that in the event of any interruption of supply, Chinahas to depend entirely on its own stockpiles of fuel.

At present there are four terminals for national oil reserves under con-struction in the coastal areas. The first to be completed will be at Zhenhaiin Ningbo City (Zhejiang Province). This will have a capacity of 5 millionkilolitres (in 52 storage tanks) and its first stage was to be completed by theend of 2005. By 2008 three more stockpile terminals are to be prepared.These are at Qingdao (Shandong Province), Dalian (Liaoning Province)and at Zhoushan (Zhejiang Province). Each facility is expected to have acapacity of 3 million kilolitres.

Under this plan, therefore, China’s total reserves will be 14 million kilo-litres, which is equivalent to 100 million barrels of oil – 16 days’ supply atcurrent usage. Under present regulations, China’s oil-importing com-panies are in addition each required to make their own stockpiling provi-sions, so that as these are built up the total reserves may be expected toincrease considerably. Although still low in relation to the strategicreserves of major consumers, this growing stockpile will add to the stabil-ity of Chinese supply and give reassurance to those concerned aboutthreats to world energy markets posed by Chinese instabilities in energydemand and supply.

CONCLUSION

The development of China’s oil and gas resources has been a remarkableand largely unrecorded story. China’s natural oil and gas resources aresignificant but their exploitation has always presented technical difficultiesof a kind that were a particular challenge in an economy still at a relativelylow level of technological development.

Since the beginning of the period of opening up and reform, two impor-tant changes have taken place. On the one hand the demand for energy has


been strong and, in the early years of the present century, exceptionally so.Looking ahead to 2010 and 2020, further strong growth of energy demandis inevitable as China continues to modernize. At the same time, however,China has entered the global energy scene. However much the leadershipmay wish to revert to the days when China’s energy policies could be largelyindifferent to the outside, this is not a long-term option. In terms ofimported energy supplies, technological solutions for developing their ownresources, and probably in terms of finance, China needs the support of theglobal economy and all parties need to get to grips with the implications ofthis. Looking ahead for the next decade or so, however, there appears tobe no fundamental reason why China’s demands on the world energyeconomy should prove unmanageable.

Throughout this book we have attempted to explain the realities of theChinese oil and gas supply as we understand them from study and first-hand experience. However, what is clear is that the future will be determinednot only by physical resources and the trajectory of supply capacity, but bythe success of the Chinese in continuing on the path of internal reform andexternal opening up. At the present time energy pricing is primitive andunbalanced, power capacity sharing weak, long-term financial planningnot yet in evidence, and expenditure on energy-related research (especiallyconservation technologies) far too low. These problems are in principle wellunderstood in China, but the context in which the continued reform musttake place will be complicated by the considerable turmoil in the outsideworld. The problems of reform and international cooperation are thusimportant to all partners in the global energy enterprise, as well to theChinese themselves.

NOTES

1. Bo Chengde, ‘Zhongguo youqi ziyuan xin shiji zhanwang’ (Prospects for China’s oil andgas resources in the new century), World Petroleum Industry, April 2001.

2. Chinese estimates of future oil output remain very cautious, and estimates often imply thatthe peak will come before their 2020 planning horizon (see Appendix). For example, LiuXiaoyu, ‘The strategy for an improved energy structure in the “comfortable” society’, inZhou Dadi (ed.), Zhongguo nengyuan wenti yanjiu 2003 (Research into China’s energy prob-lems 2003), Beijing: China Environmental Science Publishing House, 2005, p. 14. Liu usesthe 200 mmt figure but does not name the peak year.

3. Institute of Energy Economics, Japan, Production Forecasts for the Oilfields in EasternChina.

4. The official priorities for exploration are: offshore, the western, eastern, central andsouthern regions. Overall policy is summed up in the phrase ‘Stabilise the east anddevelop the west’, China’s Energy Development Report 2003, p. 44.

5. Zhongguo nengyuan tongji nianjian (China energy statistical yearbook), Beijing: ChinaStatistics Press, annual issues to 2004.

6. US Energy Information Administration, International Energy Outlook, 2005.


7. Zhongguo nengyuan fazhan zhanliu yu zhengce yanjiu (Research on national energy com-prehensive strategy and policy of China), Beijing: Economic Science Press, November2004, pp. 261–62. (Hereafter RNECSPC), p. 262.

8. See China’s Energy Development Report 2003, chs 3 and 5; and especially the detail in ‘Ourcountry’s progress toward and an evaluation of energy marketisation’, in RNECSPC,pp. 724ff.

9. Zhu Meiping, ‘Choumou Zhongguo shiyou zhanliu’ (Thinking a way through to an oilstrategy for China), Guoji maoyi wenti (Problems of international trade), 2002, No. 2.

10. In 2002, the price of natural gas for electricity generation in Shanghai (per ton of coalequivalent) was nearly four times the coal price and twice the oil price, ensuring the envi-ronmentally worst choice.

11. At one time Germany experimented with entrusting oil security to a state-ownedcompany called Deminex, but the company was eventually privatized.

12. The Senate was able to delay the Chinese bid and the US Federal Trade Commissionfacilitated Chevron by decisions on regulatory matters. The underlying US concern waspart strategic and part the lack of reciprocity with China over foreign control of nationalassets.

13. ‘China’s goal of self reliance in energy “within reach” – official’, South China MorningPost, 14 January 2006.

14. Reported in The Himalayan Times, Kathmandu, 29 October 2005.


Appendix: The background to China’senergy planning

The way China assembles its economic plans has changed very significantlyin recent years. At one time the modern sector of the economy was largelycentrally controlled and planned in one-, five- and occasionally ten- andtwelve-year time horizons. These plans had detailed numerical targets.Although imperfections in the initial compilation and unexpected eventscould derail such plans, they did have an operational meaning. This is nolonger the case. Annual economic plans are still announced at budget timeand these and the Five Year Plans are given publicity and approval by theParty and by the National People’s Congress, which is China’s parliamentand law-making body. But, increasingly, plans include only a small numberof indicative figures, usually relating to key points of focus on the nationalpolitical agenda.

These changes reflect the fact that the Chinese economy is now so muchmore decentralized and marketized, and includes so many foreign elementsthat the totality cannot be planned in the old way. This trend is fully embod-ied in the announcements in March 2006 surrounding the Eleventh FiveYear Plan for 2006–10. This is now described as a ‘layout’ or ‘programme’and its main pronouncements have been qualitative statements about thegeneral principles that should guide economic development. The EleventhPlan, for example, signals a new emphasis on ‘green’ approaches, witheconomic growth and trade being demoted in favour of balance, environ-mental protection, social and regional equity. Some of these statements do,of course, have important practical implications, particularly the decisionto nominate three areas as China’s key ‘growth poles’.1

In spite of this important change in the nature of China’s planning, thestate still maintains a very strong leadership function. It maintains respon-sibility for overall industrial development, still owns large swathes of themodern sector, and, because China’s financial system is so underdeveloped,through the banking and fiscal systems controls much investment. Thesepowers are used to nominate and protect ‘pillar industries’ and to ensurethat strategically important decisions remain at the centre. Energy clearlycomes into the category of industries in which state involvement is crucial.The scale, uncertainties, cross-regional and international ramifications of

128

investment in energy make the central government a key factor. But as wehave seen, forecasting failures and lack of coordination are serious andproved to be a major factor in the crisis of 2002–2005.

There is no doubt that this crisis focused the government’s mind sharplyon the issue of energy planning. In November 2004 a vast authoritativereport on China’s energy future was compiled led by the State CouncilDevelopment Research Centre (the RNECSPC). In 2005 the governmentestablished a very high-level State Energy Office under Mr Ma Kai, who isconcurrently in charge of all economic planning at the Development andReform Commission and, in January 2006, a start was made in drawing upa new legislative framework for the development and implementation ofenergy plans and policies.

Where, however, does energy planning start? The RNECSPC report pro-vides us with many insights into these issues. The starting point, in fact, isthe phrase we have already mentioned, xiao kang. This was used by DengXiaoping as a slogan to describe his long-run objective for Chinese society.Translated, this means ‘a moderately comfortable life’. The phrase has aclassical origin, in which its meaning emphasized the qualitative virtues ofa just, caring society. It still has important qualitative connotations but hasbeen given a quantitative dimension as well. Originally it was to imply anintention to quadruple national income between 1980 and 2000, and thento quadruple it again. This objective has been repeated by later leaders, whohave identified 2020 as the date for the second quadrupling. This gives along-run growth rate target of about 7.2 per cent per annum. In the event,growth has been in the range of 8–9 per cent and per capita living standardshave risen by 7–8 per cent. As these above-range achievements came in, theleadership tried to modify the rate of progress, as suggested by the newEleventh Plan, but usually without success.

This growth rate figure and the 2020 horizon provide the starting pointfor Chinese energy thinking. The xiao kang growth rate objectives fit intothe Five Year Plan framework, so that 2010 is important as representing theend of the Eleventh Plan and the half-way mark to 2020. However, in addi-tion to this simple quantitative framework, there are a large number ofother targets defined as necessary to achieve xiao kang. These include arange of indicators of human resource development, urbanization, educa-tion, housing, and various types of equality.

This background provides the planners with a number of starting pointsto think about energy in 2020, although they are also thinking well beyondthis, for example to 2030 and even 2050. First, there is the long-run growthrate, Here, the income quadrupling plans provide a lead, although alterna-tive scenarios are considered. Having identified a growth rate, they can thenconsider the historical experience of the energy elasticity of output growth

Appendix: background to China’s energy planning 129

and analyse the determinants of this by exploring the elasticities ofdifferent sectors and mapping the results on alternative predictions ofChina’s changing economic structure. Built into these visions of the futurecan be xiao kang targets that have quantifiable energy implications. In iden-tifying the level of energy consumption needed for the xiao kang society,two comparative yardsticks are useful. First are international comparisons;second are internal ones, since in China’s most developed cities and regionsit is judged that the xiao kang state has already been reached.

Let us now consider the past experience of China’s energy elasticity ofgrowth. Table A1 shows the experience from 1980 to 2000.

We see here that energy elasticity has fluctuated considerably. During1980–95 elasticity averages 0.56, but then collapses to a low negative value.The data for the decade of the 1990s provided the background for decisionson energy (especially electricity) requirements in the Tenth Five Year Plan,2001–2005. We see from Table A2 what a disastrous guide this proved to be.

From 2000 onwards both elasticities jumped above unity and, in the firsthalf of 2002, electricity elasticity was reported to be nearly two and a halftimes its average level during 1995–2000. As a result of this unexpecteddemand, the overall target for energy consumption in 2005 was exceeded bythe end of 2002, with electricity and coal experiencing the sharpest expan-sion.2 It was in these circumstances that the State Council held a mid-termrevision of the Tenth Five Year Plan, ordered an emergency programme tobuild more electricity-generating plants, and initiated a variety of energy-saving and sharing measures. Experiences like this call long-term planninginto question unless they can be understood and built into the future.

Three factors seem to have been important. One was the bringing intooperation of much new capital plant, much of it of an energy-intensivekind. Second was the rapid rise in vehicles. Third was the boom in new officeand residential construction. These factors have been intensively studied in


Table A1 Output and energy annual growth rates and elasticitycoefficients, 1980–2000

Period 1980–85 1986–90 1991–95 1996–2000

Economic growth 10.7 7.9 12 8.3Energy consumption growth 4.9 5.2 5.9 �0.01Elasticity coefficient (energy) 0.46 0.66 0.49 �0.02Elasticity coefficient 0.77

(electricity only)

Source: RNECSPC, p. 149; Zhou Dadi (ed.), Research into China’s energyproblems 2003, p. 19.

thinking about the 2010 and 2020 targets. Of the three, it may well be thethird that is the most intractable. China is forecasting a continuing rise inthe relative size of the services sector, which means that modern-style officespace will grow rapidly. Also, the residential space targets for the xiao kangstandard are quite high, and these spaces too will be increasingly equippedwith heating, air conditioning and other electricity-using equipment.

The RNECSPC report suggests that in round figures, the growthprospect for the next 20 years will about 7 per cent (the long-run xiao kangtarget) and that energy should be able to grow at about 4 per cent (elasti-city of 0.5–0.6) They then develop three scenarios to 2020 based on percapita income growth rates of 6.5, 6.4 and 6.3 per cent and on energydemand growth for three major sectors of 3.3, 4.1 and 4.7 per cent respec-tively. (The ‘ideal’ scenario has high-income growth but low population andenergy demand growth.) In the central scenario, the growth and shares ofenergy consumption by the three main sectors are as shown in Table A3.

This analysis of the future is based on the view that in industrial pro-duction there is scope for regular gains in energy conservation and that, asdiscussed earlier, transport demand will be large. However, the predictionsare also based on the view that expansion in both the residential and com-mercial buildings sectors will be fast. Because present standards are so lowin terms of both space and heating/air conditioning, this source of demandis set for an unprecedented share of total energy consumption on anyscenario.

Where does this leave China in terms of its xiao kang objective? In termsof tonnes of coal equivalent (tce) the richest Chinese city of Shanghai isalready close to 4 tce per head. Poorer cities are in the 1–2 tce range. TheChinese believe that xiao kang standard will be reached if the whole nation


Table A2 Output, energy and electricity annual growth and elasticities,2000–2003

Period 2000 2001 2002 first 2002 2003six months

GDP growth 8 7.5 8.3 9.3Energy consumption growth 0.1 3.5 9.9 15.3Electricity consumption 9.5 8.6 11.6 16.5

growthEnergy elasticity �0.25 1.73 1.73 1.6Electricity elasticity 1.18 1.15 1.88 1.39 1.77

Source: Based on data in the China Energy Statistical Yearbook, 2004, Table 1–1; ZhouDadi (ed.), Research into China’s energy problems 2003, p. 19.

moves to Beijing’s level of 3.1 tce. However, to reach this by 2020 wouldrequire an expansion of energy output of 6.2 per cent per annum over2000–2020, which suggests that in energy terms, the comfortable life wouldbe very difficult to achieve inside this time horizon.

The other aspect of energy planning that gives rise to great concern is thestructure of primary energy. China is unusual among industrial nations inthat the share of coal in total energy supply (and electricity generation) isvery large. How this has changed in recent decades and how the centralforecast looks are shown in Table A4.

These data show that coal gained in the 1980s but then lost ground overthe whole period. They also show the quite sharp fall in the coal share pre-dicted and the planned rise in the role of natural gas. This shift is desiredpartly on the social grounds discussed earlier, but also on environmentalgrounds, which we have not discussed in this book. However, this desire toreduce the role of coal has been around for a long time and tends always tobe frustrated. As we have seen, coal is the flexible sector when demand


Table A3 Sectoral shares of energy consumption, 2000 and 2020(% shares and annual growth)

Share in Share in Growth rate of2000 2020 energy consumption

Production departments 73 58 2.9Transport 11 17 6.3Commercial and private 16 25 6.5

residential buildingsTotal energy consumption 100 100 4.1

Source: RNECSPC, pp. 12–13.

Table A4 Shares of primary energy consumption, 1980–2004 and centralforecast for demand in 2020 (% shares)

Coal Oil Natural gas Hydroelectricity

1980 72.2 20.7 3.1 4.01990 76.2 16.6 2.1 5.12000 66.1 24.6 2.5 6.82004 67.7 22.7 2.6 7.0

2020 (forecast) 61.7 27.5 6.7 4.1

Source: China Statistical Abstract 2005, Beijing: China Statistics Press, 2005, p. 139;forecast from RNECSPC, p. 4.

grows strongly. Also, in present circumstances, the renewal of anxietiesabout ‘energy independence’ will work in coal’s favour. In the speech byMr Ma Fucai, deputy director of the new State Energy Office, cited earlier,he spoke of coal in 2030 retaining a share of ‘60–70 per cent’. This figuresuggests that these 2004 forecasts may already be being overtaken by events.

NOTES

1. These are the Shanghai–Yangzi river delta region, the Beijing–Tianjin agglomeration inthe north, and the Chengdu–Chonqing agglomeration in Sichuan, western China. TheSichuan pole replaces the overdeveloped Guangdong–South China pole.

2. China’s Energy Development Report 2003, pp. 42–6.


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agreements 20, 63, 122, 123–4see also contracts; joint ventures,

foreign; production-sharingagreements (PSAs)

agricultural policies 14, 26, 68Amoco 63, 75Aoshan 79–80Arco 29, 62, 75, 103Australia 77, 78, 122

Bachu–Taxinan zone 86, 88‘battle-front’ methods 13, 14–16,

18–19, 20, 52Beibu (Tonking) Gulf 29, 61, 62Beijing 17, 19, 71, 72, 90, 97, 103, 110,

132block fault formations 51, 52Bohai Bay Basin (Huabei Basin) 13,

20, 21–2, 38, 51, 56, 81Bohai Gulf 26, 27, 29, 39, 40, 41, 61,

64, 65Bohai Petroleum Corporation (BPC)

61, 64, 65, 67BP (British Petroleum) 65, 75, 78, 79,

94, 103, 115–16bureaucratic power 25–6, 29, 43,

46‘buried hill’ oil fields 21–2, 52

capital investment 14, 44, 45,64–5

Changbei gas fields 71–2, 110China National Petrochemical

Corporation (SINOPEC) 46, 47,48, 55, 56–9, 75, 97, 104, 105, 117,121

China National PetroleumCorporation (CNPC) 26, 46, 47,48, 69, 71–2

China Petroleum Corporation (CPC)29, 46

Chuan Dong gas field 68, 69, 70

CNOOC (China National OffshoreOil Corporation) 29, 47, 48, 61,64–5, 67, 75, 77, 79, 115–16, 121,122

coal 1, 10, 33–4, 45–6, 71, 112, 116,132–4

competition 43, 46–7, 117–18consumption, energy 1, 70, 96, 101,

103, 107, 110contracts 27–9, 30, 61–3, 88, 115–16,

120–24see also agreements; foreign

companies; joint ventures,foreign

corporations 47–8see also CNOOC (China National

Offshore Oil Corporation);PetroChina; SINOPEC (ChinaNational PetrochemicalCorporation)

costsoil and natural gas exploration and

development 59–60, 63, 67, 118oil production 51, 67, 119‘Transfer Gas from West to East ‘

project 92–4transportation 76–7, 104

crude oilcarriers 79, 124–5consumption 96demand 12, 112–13, 114–15exports 1, 20, 24–5, 34, 51, 107geological basis 36–7geophysical problems 15–16, 18–19,

21–2, 32imports 1, 12, 13, 79–80, 96, 104,

106, 107, 112–13, 114, 115production see crude oil productionproperties 18, 22–3, 24–5, 52, 56, 67,

96, 101, 104, 113refineries see refineriesreserves see crude oil reserves

137

Index

stabilized production (wenchan) 30,32, 50–51

transportation see oil transportationcrude oil production

1920–2120 actual and projected data42

1949–60 data on total production 131960–2005 data on total production

19, 321971–2005 data on total production

29, 30, 331994 data from major sedimentary

basins 402003–2005 data from major fields 602004 data on total production 1costs 51, 67, 119Daqing fields 16, 18, 19, 24, 30,

32–3, 34, 48, 50–51, 74, 109forecasts 107–10Jilin and Liaoning fields 51, 52,

53–4, 109Ordos Basin 71Qaidam field 73Shengli fields 56, 58, 109Sichuan Basin 68Tarim Basin fields 40, 55Xinjiang fields 55

crude oil reservesestimation procedures 36–7geographical location 37–9geological resources 39–40, 41–2, 54,

108oil in place 37, 39–40, 41, 42, 48, 56,

65–6, 67, 87, 88, 108proven, recoverable reserves 32, 37,

40, 41, 42, 48, 66, 108–9reserves:production ratio 11, 25, 37,

42total supply 107, 120world proven, 2005 113–14

Cultural Revolution 17, 18, 23–4, 25,44, 96, 118

Dagang field 20, 21, 38, 64Dalian 10, 64, 79, 97, 115, 125Daqing 30, 31, 97Daqing fields

crude oil production 16, 18, 19, 24,30, 32–3, 34, 48, 50–51, 74, 109

description 39, 48

exploration and development 12–14,15–20, 23, 48–51, 81

exports 34natural gas production 23, 48–9, 50,

74recovery techniques 14–16, 18, 33,

48–9, 50–51refineries 16–17, 19, 34, 97, 106transportation 34

Daqing method 14–16, 18, 33, 48–9demand

crude oil 12, 112–13, 114–15energy 12, 24, 65, 125–6, 130–31natural gas 73, 75, 92, 93, 116petroleum products 10, 12, 96,

101–2, 103, 112–13Deng Xiaoping 26–28Dushanzi oil fields 9, 10, 11, 54

East China Sea Basin (Dong Hai) 27,39, 40, 41, 65, 66, 75

economic development and growth 1,4, 14, 129, 130–31

economic reforms 1, 29–35, 44, 68,117–19

electricity supply 3, 33–4, 45, 71, 78,118, 130, 131, 132

Elf Aquitaine 29, 61, 62energy

conservation 130consumption 1demand 12, 24, 65, 125–6, 130–31prices 67, 118security 117, 120–25shortages 3, 24, 33, 45, 116see also coal; electricity supply;

natural gas; oilenergy policies

and crude oil imports 79–80and economic reforms 117–19elasticities of growth 33–4, 129–30,

131and energy planning 129–33and gas imports 77–9and gasoil imports 102and investment plans 45–6‘Look West’ policy 34oil security 120–25stabilized production (wenchan) 30,

32, 50–51


‘Transfer Gas from West to East’(Xiqi Dongyun) project 2, 73,86, 88, 89–95

and transportation costs 76–7environmental policies 24–5, 103, 128,

132environmental pollution 103, 132exploration see oil and natural gas

exploration and developmentexports 1, 20, 24–5, 34, 51, 102,

107

fertilizer feed 23, 59, 71, 74, 110Five Year Plans 3–4, 11, 33, 104, 128,

129, 130foreign companies

LNG (liquified natural gas) projects78–9, 115–16

offshore oil and natural gasexploration 2, 27–9, 33, 60–63,64, 65, 66–7, 75–6, 122

oil and natural gas exploration 2,9–10, 11–12, 71–2, 82, 88,120

refinery joint ventures 106technology and technical knowledge

2, 11, 21, 27, 64and ‘Transfer Gas from West to

East’ (Xiqi Dongyun) project93–4

foreign investment 66–7, 72, 122France 28–9, 61, 62, 106fuel oil 8, 24, 101Fujian 77, 104, 106Fushun 10, 12, 19

Gansu oil fields 8, 11, 12, 13, 23gas see LNG (liquified natural gas);

LPG (liquified petroleum gas);natural gas

gasoil (diesel) 24, 102–3, 112gasoline 3, 8, 24, 96, 101, 102, 103,

112geographical factors 34, 37–9, 68, 89,

97, 101geophysical factors 15–16, 18–19, 21–2,

32, 51, 52, 84–5geophysical surveys 8, 13, 29, 64, 71,

75, 81, 82, 84, 86Guangdong 77, 102, 105

Guangzhou 3, 20, 34, 75, 77, 78, 97,103, 104

Hainan Island 29, 62, 74, 111heavy industry 26, 34, 44, 101history of oil and natural gas industry

1949–mid 1950s, Soviet support ofPRC, 10–12

1960, Daqing method 14–171960–late 1970s, self-sufficiency and

Daqing method anddevelopment 17–25

1960s–late 1980s, bureaucraticstructural change, 25–6

1970–1982, ‘Open Door’ andoffshore oil industry, 26–9

early period to 1948 7–10late 1950s, Daqing field discovery,

12–14post 1976, production and trade

after economic reforms, 29–35Hong Kong 62, 74, 75Huabei Basin (Bohai Bay Basin) 13,

20, 21–2, 38, 51, 56, 81

importscrude oil 1, 12, 13, 79–80, 96, 104,

106, 107, 112–13, 114, 115forecasting 111–16gasoil (diesel) 102kerosene 7LNG (liquified natural gas) 77–9,

115, 122LPG (liquified petroleum gas) 103natural gas 116oil 1, 2, 13, 34, 96, 111–12, 122petroleum products 1, 10, 12, 13, 24,

80, 96, 107, 122raw materials 77

incentives 29–30, 63India 121, 123industrial policies 26, 34, 44industry 26, 34, 44, 77, 101infrastructure and storage

LNG (liquified natural gas) 115natural gas industry 43, 75, 90, 116oil industry 52, 54, 79–80, 82–3,

124–5institutions 46–7, 117–19internationalization 1–2

Index 139

investment 30see also capital investment; foreign

investment; joint ventures,foreign; public investment

Iran 96, 113, 114, 122‘Iron Man’ Wang Jinxi 16, 18

Japancrude oil exports to 20, 22, 24, 51offshore oil exploration 28–9, 61–2,

65, 82oil and natural gas exploration and

development 7–8, 71, 84, 88oil security 120pollution reduction policies 24–5shale oil development 9–10technology 64territorial disputes 75–6and ‘Transfer Gas from West to

East’ (Xiqi Dongyun) project93–4

Japan–China Oil DevelopmentCompany 29, 61–2

Japan National Oil Corporation(JNOC) 28, 51, 71, 120

JHN Group 62–3Jiang Zemin 89Jiangsu 102, 104Jilin 10, 48, 49, 51, 97Jingbian gas fields 71, 90, 110Jinling 97, 104joint ventures, foreign

LNG (liquified natural gas) 78–9,115–16

offshore oil and natural gasexploration 2, 27–9, 61, 65, 75,122

oil and natural gas exploration 2, 9,11–12, 71–2, 82, 88, 120

refineries 106‘Transfer Gas from West to East’

(Xiqi Dongyun) project 94Junngar Basin oil and gas fields 9, 11,

12, 39, 40, 54, 73, 91, 111

Kambara, Tatsu 13, 28, 82Karamai oil field 9, 11, 12, 39, 54, 81,

82, 84, 85Kela 2 gas field 86, 87kerosene 7, 8, 101, 103, 112

Korla 82, 83, 86Kucha–Tabei gas zone 86, 87

labour supply 14–15Lamadian field 15, 18–19Lanzhou 8–9, 10, 54, 55, 73, 86, 90,

111Li Siguang 12–13Liaohe fields 22–3, 38, 51–4, 109Liaoning fields 51, 74, 97LNG (liquified natural gas) 77–9, 115,

122‘Look West’ policy 34LPG (liquified petroleum gas) 23, 103,

107Lunnan oil field 84, 87, 90

Ma Fucai 133Maoming, Guangdong province 12,

79, 97, 105market economies 2–3, 46–7, 118, 128Middle East 3, 96, 103, 113, 114, 115,

122, 123Ministry of Geology (MOG)

bureaucratic power 25, 29, 46and Daqing field discovery 12–13exploration 13, 52, 69in period of Soviet support 11and Tarim field 82, 83

Ministry of Geology and Mining(MGM) 61, 64, 82

Ministry of Petroleum Industry (MPI)bureaucratic power 25, 26, 29, 46Crude Oil Responsibility Contract

30and Dagang field 21exploration 13foreign offshore contracts 61in period of Soviet support 11–12and self-sufficiency 14and Tarim field 82, 83

natural gasassociated and non-associated 48–9,

58, 74, 86, 109, 111consumption 70, 110demand 73, 75, 92, 93exploration and development see oil

and natural gas exploration anddevelopment


geological basis 36–7imports 116offshore see offshore natural gaspipelines see natural gas pipelinesprices 2, 71, 117production see natural gas

productionreserves see natural gas reservessupply 116uses 7, 23, 59, 70, 71, 74, 110see also LNG (liquified natural gas);

LPG (liquified petroleum gas)natural gas industry see oil and natural

gas industrynatural gas pipelines

from Ordos Basin 71, 90, 110from Pinghu fields 75from Qaidam and Tarim Basins

72–3, 90, 91, 94–5, 111from Russia and central Asia 115,

116from Shengli fields 58–9from Sichuan fields 7, 70from ‘West to East’ 89–95, 111, 115,

116from Yacheng fields 62, 74, 75

natural gas production1971–2005 total production data 302003–2005 total production data 60Daqing field 23, 48–9, 50, 74forecasts 110–11Junngar and Turfan–Hami Basins

73, 111Ordos Basin 71, 74, 110Qaidam Basin 72, 73, 110–11Shengli fields 58Sichuan fields 23, 69, 70, 111Tarim Basin 72, 73, 109, 111Zhongyuan fields 58, 74

natural gas reservesestimation procedures 36–7gas in place 37, 70, 71, 72, 74, 86, 87,

88geographical location 37–9geological resources 39, 40–43, 58,

69–70, 72, 74proven, recoverable gas reserves 37,

43Ningbo 75, 79, 115, 125Ningxia oil fields 13, 23

offshore natural gasexploration and development 27–9,

62, 65, 66, 67, 74–6geographical location 39, 62pipelines 62, 74, 75production 66, 111reserves 40, 41

offshore oilexploration and development 27–9,

33, 61–7, 75–6, 122foreign investment 66–7production 65, 66, 67, 109reserves 39, 40, 65–6, 67sedimentary basins 39transportation 62

oilconsumption 1, 101, 107geophysical factors 15–16, 18–19,

21–2, 32, 51, 52, 84–5imports 1, 2, 34, 96, 111–12, 122offshore see offshore oiloverseas development 120–25prices 2, 3, 34, 63, 114, 117, 119, 122reserves see crude oil reservesself-sufficiency 13, 14, 17, 23–5, 96stockpiles 120, 125supply 13, 23–5, 96, 107, 114terminology (shiyou) 7, 8transportation see oil transportationsee also crude oil; fertilizer feed; fuel

oil; gasoil (diesel); gasoline;kerosene; LPG (liquifiedpetroleum gas); petroleumproducts; shale oil

oil booms 30, 32, 33, 34oil crises 3, 24, 123oil nationalism 122–3oil and natural gas exploration and

developmentcapital investment 45and competition 43costs 59–60, 63, 67, 118Daqing fields see Daqing fieldseffort by China 59and foreign companies 2, 9, 11–12,

71–2, 82, 88, 120history see history of the oil and

natural gas industryJilin and Liaoning Province fields

51–4

Index 141

‘Look West’ policy 34offshore natural gas 27–9, 62, 65, 66,

67, 74–6offshore oil 27–9, 33, 61–7, 75–6, 122Ordos Basin 11, 12, 13, 23, 39, 40,

41, 70–72, 74Qaidam Basin 72–3responsibility 47–8risk 59–60, 61, 67, 118Shengli fields 56–9, 81Sichuan Basin 23, 68–70Tarim fields see Tarim Basin fieldsXinjiang fields 54–6, 81Zhongyuan fields 58–9

oil and natural gas industryadministration and organization

44–7, 117–19competition 46–7, 117–18history see history of oil and natural

gas industryinfrastructure and storage 43, 52, 54,

75, 79–80, 82–3, 90, 116, 124–5production see crude oil production;

natural gas productionoil products see petroleum productsoil security 117, 120–25oil transportation

pipelines 19, 20, 34, 51, 54, 55–6, 72,84, 86, 88, 110

rail 15, 18, 19, 51, 54, 55, 86, 109,110

road 54, 82–3, 86sea 19–20, 34, 62, 123–5

Oman 96, 113, 114‘Open Door’ policies 26–9, 34, 61, 89Ordos Basin oil and natural gas fields

11, 12, 13, 23, 39, 40, 41, 70–72,74, 90, 110

Pearl River Delta 39, 40, 62, 66, 78Penglai oil field 65, 67PetroChina 47–8, 55, 86, 92, 93, 97,

105–6, 111, 115, 116, 117, 121petroleum products 1, 10, 12, 13, 24,

96, 101–2, 107, 112–13see also fertilizer feed; fuel oil; gasoil

(diesel); gasoline; kerosene;LPG (liquified petroleum gas)

Phillips Petroleum 63, 67Pinghu gas field 66, 75

pipelines, oil 19, 20, 34, 51, 54, 55–6,72, 84, 86, 88, 110

pipelines, natural gas see natural gaspipelines

planned economies 1, 24, 44–5, 61,128

policiesagricultural 14, 26, 68energy see energy policiesenvironmental 24–5, 103, 128, 132Five Year Plans 3–4, 11, 33, 104,

128, 129, 130industrial 26, 34, 44‘Open Door’ 26–9, 34, 61, 89xiao kang (‘moderately comfortable

life’) 33, 129–32politics 3–4, 8, 14, 44–7, 75–6, 94–5port facilities 79–80, 115, 116,

124–5prices

energy 67, 118gasoil 102natural gas 2, 71, 117oil 2, 3, 34, 63, 114, 117, 119, 122

productioncoal 34crude oil see crude oil productionnatural gas see natural gas

productionoffshore natural gas 66, 111offshore oil 65, 66, 67, 109reserves:production ratio 25, 37, 42

production-sharing agreements (PSAs)28–9, 71–2, 75, 84, 88

proven, recoverable reservesconcept 41, 42crude oil 32, 33, 37, 40, 41, 42, 48,

65–6, 108–9natural gas 37, 43

public investment 45, 46, 67, 69, 119

Qaidam Basin oil and natural gas fields12, 39, 72–3, 90, 91, 110–11

Qingdao 79, 115, 125Qinhuangdao 19, 20, 21, 79

rail transport, of oil 15, 18, 19, 51, 54,55, 86, 109, 110

recoverable reserves see proven,recoverable reserves


recovery techniques‘battle-front’ methods 14–16, 18–19,

20, 23, 52innovative methods 33, 42, 50, 51,

52–3, 59, 82pumping methods 33, 50steam injection techniques 22–3, 52sulfonate 56water injection 16, 18–19, 33, 37,

49–50, 51refineries

capacity 24, 96–7, 98–9, 102, 104,112

Daqing oil 16–17, 19, 34, 97, 106geographical factors 34, 97, 101joint ventures 106Lanzhou 8–9, 10, 12Liaoning 10, 51organizational structure 97quality of products 102–3restructuring, expansion and

modernization 104–6, 119Shengli 20, 34Tarim Basin 86, 88technology 96, 97, 100, 101–2, 119types 100–102Xinjiang Autonomous Region 54

reserves see crude oil reserves; naturalgas reserves

risk 59–60, 61, 67, 118RNECSPC (State Council

Development Research Centre)report 129, 130

road transport, of oil 54, 82–3, 86Russia 94, 95, 115, 116

see also Soviet Union

Saertu field 15–16, 18Saudi Arabia 96, 103, 106, 113, 114sea transport, of oil 19–20, 34, 62,

123–5sedimentary basins 37–43, 68seismic surveying and analysis 52, 63,

64, 65, 83self-sufficiency 13, 14, 17, 23–5, 96shale oil 10, 12, 13Shanghai 3, 7, 20, 34, 65, 73, 77, 79,

90, 97, 103, 104, 111, 115, 131Shanxi Province 7, 13, 23Shasan 2 oil field 83, 86

Shell 7, 71–2, 75, 79, 94, 110Shengli fields 20–21, 33, 34, 38, 56–9,

81, 109Shenzhen 77–8, 115, 122shortages 3, 24, 33, 116Sichuan Basin oil and natural gas fields

7, 12, 23, 39, 40, 41, 68–70, 90,111

Sino-Soviet dispute 14, 59SINOPEC (China National

Petrochemical Corporation) 46,47, 48, 55, 56–9, 75, 97, 104, 105,117, 121

Songji No.3 well 13–14, 15Songliao Basin 38–9, 40, 48, 49, 81

see also Daqing fieldsSongliao Plateau 12–13South China Sea Basin (Nan Hai) 27,

29, 39South China Sea West Petroleum

Corporation 61, 64South West Oil and Gas Fields

Operating Corporation(SWOGFOC) 69

South Yellow Sea Basin (Nan HuangHai) 39, 62, 64

Soviet Union 9, 11–12, 14, 24see also Russia

stabilized production (wenchan) 30, 32,50–51

Standard Oil Company 7, 8Star Petroleum 55, 69, 86State Council 29, 46, 47, 129, 130State Development and Reform

Commission 46, 129State Energy Office 129, 133sulphur content 96, 101, 104, 113, 119

supplycapital 14electricity 3, 45, 71, 78, 118, 130,

131, 132labour 14–15natural gas 116oil 13, 23–5, 96, 107, 114

Taiwan 9, 65, 75Taklamakan Desert 39, 81–2, 83Tarim Basin fields

crude oil production 55, 109exploration and development 82–8

Index 143

foreign joint offshore oil ventures 82

geophysical structure 39, 81–2, 84–6infrastructure and storage 82–3natural gas production 73, 109, 111natural gas reserves 40–41, 86–8oil reserves 40, 87, 88‘Transfer Gas from West to East’

(Xiqi Dongyun) project 73, 86,88, 89–95

transportation 82–3, 84, 109Tazhong oil field 83–4, 87, 92technical knowledge 11, 14, 21, 27, 59technology

computer-assisted techniques 21, 52drilling rigs 64from foreign companies 2, 11, 21, 27,

64recovery techniques see recovery

techniquesin refineries 96, 97, 100, 101–2, 119see also geophysical surveys; seismic

surveying and analysisTeikoku Oil 75–6territorial disputes 75–6Total 29, 61, 62, 106‘Transfer Gas from West to East’ (Xiqi

Dongyun) project 2, 73, 86, 88,89–98, 115, 116

transportationcosts 76–7, 104natural gas see natural gas pipelinesoil see oil transportationsafety 123–5

vehicles, fuel consumption 3, 70, 96,102, 103, 130

Turfan–Hami Basin oil and gas fields39, 55, 73, 90, 111

Unocal 75, 122–3Urumqi 54, 97USA 7, 9, 27, 29, 37, 62–3, 75, 114, 120

Wang Jinxi 16, 18water injection recovery techniques 16,

18–19, 33, 37, 49–50, 51‘West to East’ (Xiqi Dongyun) project

2, 73, 86, 88, 89–98, 115, 116WTO accession 117, 119

Xi’an 71, 89, 90, 110xiao kang (‘moderately comfortable

life’) 33, 129–32Xining 73, 91, 111Xinjiang fields 9, 11, 54–6, 81, 94–5

see also Tarim Basin fieldsXinshugang field 15, 18

Yacheng gas field 62, 66, 74–5Yanchang oil field 8, 10, 11, 23, 71Yellow River (Huang He) 20, 56, 64, 79Yinge Sea Basin 29, 39, 61, 62, 66Yu Qiuli 25, 26Yumen oil fields 8, 11, 12

Zhongyuan oil and natural gas fields38, 58, 74

Zhou Enlai 18, 23, 25, 26, 27


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