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Oilfield Technology
December
2014
Current offshore oil activity is concentrated in the relatively
shallow waters of Bohai Bay in the Yellow Sea, and in the Pearl River
Mouth Basin in the South China Sea, with minor current activity in the
East China Sea. While onshore oil production is primarily in the hands of
the Chinese NOCs, offshore oil is relatively open to IOC participation.
China’s primary gas basins are in the Southwest (Sichuan Basin)
and in the Tarim and Ordos Basins. Current production is primarily
conventional gas, with a notable recent large discovery by CNPC
in the Sichuan Basin. Offshore gas production has been primarily
concentrated in the shallow waters of the Pearl River Mouth Basin in the
South China Sea, but exploration is pushing into deeper water of both
the South China Sea and the East China Sea. In March 2014, Husky Oil,
in partnership with CNOOC, started production from the country’s first
deepwater well at the Liwan development in the South China Sea. As
with offshore oil, offshore gas is relatively open to IOC participation.
But the part of China’s oil and gas upstream that has sparked the
greatest interest in the last few years is its unconventional gas potential,
particularly shale gas. Estimates of technically recoverable shale gas
resources in China range as high as 1115 trillion ft
3
(EIA),
8
with estimates
from China’s Ministry of Land and Resources (MLR) and from the
Chinese Research Institute of Petroleum Exploration and Development
somewhat lower (855 trillion ft
3
and 355 trillion ft
3
, respectively).
9
With
the North American shale success as a model, shale activity has been
slowly building in China. Through 2013, 285 shale gas wells had been
drilled in China, with total shale gas production in 2013 estimated at
less than 7 billion ft
3
– less than 0.2% of China’s total gas production.
10
China’s shale gas activity and potential is discussed more fully in the
final section of this article.
China’s massive coal reserves have also supported a sizeable
coalbed methane (CBM) or coal seam gas (CSG) sector, with
production in the North, Northeast, Southwest and Western regions.
Production is slowly increasing, but there are growing challenges from
technical/geological issues, regulatory issues, a lack of infrastructure,
high development costs, and some mineral/land rights issues. Coal
has also spurred some modest interest in coal‑to‑gas (CTG) projects,
but high capital costs, infrastructure and water scarcity, along with
emissions concerns, has slowed development.
Each of the three big NOCs is involved in each of the three distinct
upstream segments – conventional onshore, unconventional onshore
and offshore – but CNPC tends to focus mainly on onshore conventional,
while Sinopec tends to focus more on unconventional onshore, and
CNOOC primarily offshore. It is estimated that the three collectively
invested around US$ 60 billion in the Chinese upstream in 2013, with
some 80% of that spending going to development activities.
11
Looking broadly at the Chinese upstream through M&A activity data
compiled by Derrick Petroleum, it shows an average of about 15 deals
per year since 2006. Of the more than 120 deals, roughly 60% involved
conventional assets and 40% involved unconventional assets. Activity
was broadly dispersed across the upstream spectrum: 22% of the
deals were for new exploration blocks, while another 22% represented
farm‑ins to new blocks; 15% of the deals were for undeveloped
discoveries, while 13%were for discoveries under development; 16%
of the deals involved producing assets, while 10%were corporate deals
and the remaining 2%were mixed.
12
The Derrick data show that Chinese NOCs were buyers in about
16% of all upstream deals in China, while smaller Chinese companies
accounted for 29%. The big international oil companies (the oil ‘majors’)
accounted for 26% of the deals, while the international independents
(both large and mid‑sized) accounted for 25%. Foreign NOCs played a
small role (2%), while the remaining 2% of the deals were unspecified.
13
The international majors’ role in the Chinese upstream has
been led by Shell, Chevron and ConocoPhillips, but the other seven
international majors are also participating in China, albeit generally
on a smaller scale. The IOCs generally work under production
sharing contracts (PSCs) and/or other types of joint ventures with the
Chinese NOCs. Notably:
Ì
Ì
Shell has three shale/tight gas PSCs, two with CNPC and one
with Sinopec, and is reportedly planning to spend more than
US$ 1 billion/yr on Chinese shale over next five years.
14
Shell
also has a PSC with CNOOC for offshore exploration in the
South China Sea.
Ì
Ì
Chevron has a big sour gas development PSC in Sichuan with
CNPC and has interest in several non‑operated offshore producing
blocks in the Pearl River Mouth Basin and Bohai Bay, as well as
an interest in two shallow water blocks in the South China Sea,
where seismic/evaluation work is underway.
Ì
Ì
ConocoPhillips has an interest in two offshore producing blocks
in Bohai Bay, and has joint shale gas study agreements with both
Sinopec and CNPC.
Ì
Ì
Eni, Husky, BG and BP are also involved in offshore developments,
some in shallow water, but also some deepwater developments.
Ì
Ì
Hess, Eni, Total, BP and ExxonMobil are also involved with shale gas
developments.
International independents also have been active in the Chinese
upstream, with the bigger independents including the American
independents: Devon, Anadarko, Noble Energy, Newfield and EOG; and
the Australian independents: Roc Oil, Arrow Energy and Horizon Oil.
Notably however, Devon, Noble, Newfield and Anadarko have sold their
interests in China, while two of the Australian independents have been
acquired: Arrow by the Shell/CNPC joint venture and Roc Oil by the
Chinese conglomerate, Fosun International.
There are four main institutional challenges for the Chinese
upstream:
Ì
Ì
General industry structure: There is a historic NOC bias which
limits the participation of the international oil companies
(IOCs) typically to the more technically‑challenging, higher‑risk
opportunities (e.g. sour conventional gas, shale gas and especially
deepwater), but also limits to some degree the participation of
the smaller, private Chinese companies, with frequent complaints
that the most‑attractive opportunities are generally only
accessible to the big NOCs. Nevertheless, the Chinese government
is looking to improve the productivity of the NOCs and at the
same time attract additional private capital support.
Ì
Ì
Energy price reform: Problems with subsidised/regulated energy
prices have long plagued the Chinese refining industry as well
as the upstream gas business. The government has committed
to price reform and the state regulatory body, the National
Development and Reform Commission (NDRC) has taken some
preliminary steps, but full reform is expected to be a long and
winding process.
Ì
Ì
Midstream liberalisation and expansion: Infrastructure
investments will be critical to efficiently integrating China’s
dispersed supply and demand centres, as well as expanding
international supply access for oil, gas and LNG. In addition,
particularly for gas, pipeline access is tightly controlled by CNPC
– moving towards more open‑access, as is currently planned, will
be welcomed by China’s smaller upstream players.
Ì
Ì
Territorial disputes: Two of China’s most‑promising offshore
areas are challenged by territorial disputes with neighbouring
countries with over‑lapping jurisdictional claims. Potential
development of the East China Sea gas resources is stalled by
the dispute with Japan over a string of barren islands, while in
the South China Sea, disputes with Vietnam and the Philippines
threaten development there. Tensions recently escalated in
the South China Sea when China moved a drilling rig into
disputed waters. While the dispute with Japan is fraught with
some long‑standing political and historical issues, the Chinese
government has given some subtle signals that it would be willing
