Oil and Gas China: 70 Years of Great Development and Energy Security Concerns



【Summary】Oil is the blood of industry, and the development process of China's oil industry reflects the process of China's economic rise and integration into globalization.

Oil is the blood of industry, and the development process of China's oil industry reflects the process of China's economic rise and integration into globalization.

Since the founding of New China 70 years ago, China has taken off the label of an oil-poor country and become a major oil producer in the world. At the same time, China has become the world's largest oil consumer and the largest importer of oil and gas.

In the first development peak of China's oil industry, oil production exceeded 0.1 billion tons. Not only to meet domestic demand, but also to export to Japan to earn foreign exchange. After the reform and opening up, China's economy took off, the oil industry entered the second peak, and the output exceeded 0.2 billion tons.

However, since China became a net oil importer in 1993, its dependence on foreign oil has increased year by year. As of the first half of this year, the dependence on foreign oil has exceeded 70%, and the dependence on natural gas has exceeded 45%. What is worrying is that after the domestic oil production exceeded 0.2 billion tons, it fell to less than 0.2 billion tons, entering a bottleneck period of increasing production.

Ensuring energy security is undoubtedly a top priority. When the degree of external dependence is difficult to decline in the short term, increasing import sources, adjusting the energy structure, and encouraging Chinese companies to go global are all ways to ensure the security of oil and gas supply.

But policymakers believe that increasing domestic oil and gas production is the most important way to ensure supply security. Although the traditional theory believes that China's energy resource endowment is "poor oil, less gas, and rich coal", history has repeatedly proved that the theory of oil and gas exploration and development is always constantly updated, and every emergence of new technologies can boost oil and gas production. jump. The United States has already gone through the trajectory from oil exporter to importer to exporter. China and the United States have different resource endowments and may not be able to repeat the trajectory of the United States. However, judging from the growth of China's shale gas production, China's unconventional oil and gas production potential is still large.

Some people in the industry also advocate that there is no need to panic about the degree of external dependence. The oil and gas industry is an industry with extremely developed international trade. There are many oil and gas exporting countries in the world, and some developed countries are more dependent on foreign oil and gas than China. Moreover, Chinese oil companies are also cooperating in the development of oil and gas resources in many international regions, and the overseas equity oil and gas production is close to 0.2 billion tons. Discounting overseas equity oil and net exports of refined oil, China's dependence on foreign oil will be significantly reduced.

Looking to the future, there is no need to worry too much about the degree of dependence on foreign oil and gas. According to the National Bureau of Statistics, the country's total energy consumption in 2018 was 4.64 billion tons of standard coal, of which coal accounted for 59.0 per cent of energy consumption, non-fossil energy accounted for 14.3 per cent, and oil and gas accounted for 18.8 per cent and 7.8 per cent of total consumption, respectively. Based on this calculation, China's overall self-sufficiency rate of primary energy is about 80%. With the continuous advancement of energy transformation, the proportion of non-fossil energy will continue to increase, and the self-sufficiency rate of primary energy will not drop significantly in the long run.

However, the energy transition is a long-term process. Industry insiders believe that in 10 to 15 years, renewable energy will mainly replace coal in the energy structure, and the proportion of oil and gas will continue to rise. Therefore, while we objectively look at the degree of dependence on foreign oil and gas, we still need to protect and enhance domestic oil and gas supply.

Daqing "Battle"

The modern petroleum industry has sprouted in China in the second half of the 19th century. What is less known is that China was a net importer of oil at that time, and its dependence on foreign countries was higher than it is now.

In 1867, the United States and other countries began to export oil to China. At that time, oil was called "foreign oil" in China, and its import volume was second only to opium and cotton yarn, and it was the third largest commodity imported by China. In the 45 years from 1904 to 1948, old China produced 2.785 million tons of crude oil, while importing 28 million tons of "foreign oil" during the same period. It can be seen that the high degree of dependence on foreign oil at that time.

When New China was founded, the infrastructure of the oil industry, which had experienced years of war, was in dilapidated. In 1949, the annual output of crude oil was only 120000 tons. After three years of recovery, by the end of 1952, the national crude oil production had increased to 435000 tons, 3.6 times that of 1949 and 1.3 times the highest annual output in old China. Among them, 195400 tons of natural oil, accounting for 45% of the total output of crude oil, 240000 tons of artificial oil, accounting for 55%.

Oil production has been greatly improved, but still can not meet the needs of the time. In order to increase oil production and upgrade the level of the oil industry as soon as possible, in August 1952, the Central Committee of the Communist Party of China ordered the 57th Division of the 19th Army of the Chinese People's Liberation Army to be transferred to the First Division of Petroleum Engineering. Petroleum division contributed a new force to the oil industry, but oil exploration and development is a technology-intensive and capital-intensive industry, and more capital and scientific and technological investment is needed to make a qualitative leap in the weak oil industry at that time.

Since 1955, the Ministry of Geology and the Ministry of Petroleum have carried out comprehensive geological surveys in the North China Plain and Songliao Basin. In January 1956, the Ministry of Petroleum held the "First National Petroleum Exploration Conference", which explored the direction for the initial development of China's petroleum industry. The meeting recommended that "a comprehensive plan should be made for the country's oil-bearing areas, starting from solving the fundamental problems, and prospecting in a step-by-step manner".

By the end of the 1950 s, four oil and gas bases were initially formed in Yumen, Xinjiang, Qinghai and Sichuan. In 1959, the national crude oil production reached 3.733 million tons. Four of the bases had 2.763 million tons of communist crude oil, accounting for 73.9 percent of the country's total crude oil output, and Sichuan's natural gas output increased from more than 6000 million cubic meters in 1957 to 0.25 billion cubic meters.

The discovery of the Daqing Oilfield was also made in the late 1950 s. On September 26, 1959, Songji 3 well in Songliao Basin produced oil, marking the birth of Daqing Oilfield. But at that time, China was in a difficult period of three years. In the case of lack of money and technology, the development of Daqing Oilfield was very difficult. The central government decided to mobilize various forces across the country to develop and build the Daqing Oilfield in the form of a "general battle.

In March 1960, the oil battle, which related to the fate of China's oil industry, kicked off in Daqing. The Central Military Commission deployed more than 30000 re-transferred officers and soldiers to participate in the battle. More than 5000 factories and enterprises throughout the country produce mechanical and electrical products and equipment for Daqing, 200 scientific research and design units are technically supporting the battle, and elite troops and large quantities of materials from 37 factories, mines and colleges of the petroleum system are concentrated in Daqing one after another.

At the end of 1963, the Daqing Oilfield Battle ended. In those more than three years, Daqing Oilfield produced a total of 15 million tons of crude oil, which made China get rid of the label of "poor oil country. In December 1963, Premier Zhou Enlai announced at the Fourth Session of the Second National People's Congress that the oil China needs can now be basically self-sufficient, and the era when the Chinese people made "foreign oil" is about to return.

Based on the Daqing Oilfield, China's oil industry has really ushered in the first round of high-speed development period. In 1964, China launched another oil war in North China. It took less than two years to identify a 0.46 billion-ton oil field.

Since 1976, Daqing Oilfield has achieved an annual output of more than 50 million tons of crude oil for 27 consecutive years, creating a miracle in the history of similar oilfield development in the world. By 1978, the national crude oil production exceeded 0.1 billion tons. In addition to half of the contribution of Daqing Oilfield, the Bohai Bay Basin produced 43.4 million tons of oil, which was another major oil-producing area at that time.

During the 13 years from 1966 to 1978, China's crude oil production increased at an annual rate of 18.6 per cent, with annual output exceeding 0.1 billion tons and crude oil processing capacity increasing more than five times. Since 1973, China has also exported crude oil to Japan in exchange for a large amount of foreign exchange for the country.

The oil output exceeded 0.1 billion tons, which laid the energy foundation for the subsequent reform and opening up economic construction, and also laid the theoretical and technical foundation for the development of China's petroleum industry.

0.215 billion tons, historical peak

After China's oil production reached 0.1 billion tons in 1978, the oil industry did not keep the upward arrow continuously, and experienced many twists and turns in the middle. After some policy adjustments and explorations in the early 1980 s, China's oil production began a 30-year period of steady increase in production from the late 1980 s.

In 1979 and 1980, China's oil production remained stagnant for two consecutive years. By 1981, the country's crude oil production was down nearly 6 million tons from its peak year.

In 1979, there was also a shipwreck in the Bohai Sea No. 2 that shook the entire oil industry. The accident is the most serious death accident in the oil system since 1949, and it is also rare in the history of offshore oil exploration in the world. On November 25, 1979, the "Bohai No. 2" drilling ship of the Offshore Oil Exploration Bureau of the Ministry of Petroleum capsized during the towing operation of the relocation well in Bohai Bay, killing 72 people and causing economic losses of more than 3700 million yuan.

In addition to the huge loss of personnel and property, the Bohai No. 2 shipwreck also dealt a huge blow to the morale of the national oil industry. Low morale, exploration and development investment reduction, resource reserves decline, production decline... Multiple negative factors alerted the oil and gas authorities at that time must make reforms.

Combined with the macroeconomic environment and the situation of the oil industry at that time, the Ministry of Petroleum put forward the reform idea of 0.1 billion tons of crude oil production contract. On June 3, 1981, the General Office of the State Council issued the "Notice of the General Office of the State Council on Forwarding the Report of the State Energy Commission on Coordinating and Organizing the Export Arrangements of Over-produced Crude Oil and Refined Oil by the Ministry of Petroleum." The circular proposes that the former Ministry of Petroleum Industry shall contract an annual output of 0.1 billion tons of crude oil, and the excess shall be allowed to be exported by the former Ministry of Petroleum Industry. 85% of the difference shall be used as a fund for oil exploration and development, and 15% shall be used as a collective welfare and individual bonus fund for employees. The amount of foreign exchange shall be retained for the import of equipment and technology.

After the implementation of the policy of 0.1 billion tons of crude oil production, the oil industry has increased its enthusiasm. From 1981 to 1985, the investment in exploration increased by 19.5 per cent annually. At the same time, oil production stopped falling and rebounded, from 0.101 billion tons in 1981 to 0.125 billion tons in 1985.

The transformation of Shengli Oilfield during this period is the most obvious. The oil field produced 19.45 million tons of crude oil in 1978 and fell by more than 300 million tons to 16.11 million tons in 1981. During that period, some oil experts believed that the exploration of Jiyang depression had entered the "no whole zero stage", and the annual crude oil output of Shengli Oilfield should be reduced to 11 million tons to stabilize. However, after the implementation of the production contract policy, Shengli Oilfield reorganized the leadership team, mobilized the enthusiasm of employees, and worked hard to explore the compound oil and gas accumulation zone. Crude oil production gradually increased, rising to 33.55 million tons in 1991, and maintained a production of more than 24 million tons for nearly 30 years.

In the 1980 s, the oil industry also gave birth to the Tarim Battle, which was no less influential than the Daqing Battle. In 1984, oil was produced from Well Sha Ginseng 2 of the Ministry of Geology and Mineral Resources of the Tarim Basin. In 1989, China National Petroleum Corporation launched the Tarim Oil Battle with the policy of "two new and two high" (that is, adopting new technology and new management system to organize a high-level and high-efficiency oil exploration and development battle). On the other hand, the Ministry of Petroleum directly hired 10 seismic teams from abroad in 1983 to use the world's most advanced technology and equipment to conduct exploration in China, and three of them were deployed to the Tarim Basin.

The Tarim Oil Battle not only opened the door to oil development in the Tarim Basin, but also became a pioneering test point for the oil industry to introduce foreign capital after the reform and opening up. After that, in 1985, the State Council decided to open the oil resources of 11 provinces in the south to foreign investment and carry out foreign cooperation. In 1993, the field of foreign cooperation was further expanded to 10 northern provinces and regions, forming a pattern of comprehensive opening up of land oil resources.

The opening of offshore oil resources to the outside world is also taking place at the same time. On January 30, 1982, the "Regulations on the People's Republic of China Foreign Cooperation in the Exploitation of Offshore Oil Resources" and its supporting more than 30 general laws and regulations were issued. On February 8 of that year, China National Offshore Oil Corporation was established in Beijing and began to exercise the franchise of offshore oil exploration, development, production and sales in accordance with the regulations and supporting laws and regulations.

After 1981, China's oil industry has achieved a growth cycle of more than 30 years. At the same time, the natural gas industry has also accelerated its development since the 1990 s. In 2010, China's oil production jumped to 0.2 billion tons, and since then, oil production has continued to grow for five years. By 2015, the total domestic crude oil production reached an all-time high of 0.215 billion tons.

Energy Transition Era: Production Reduction or Increase?

After 2015, international oil prices fell from high levels and the overall supply of the world oil market was loose. In this context, domestic oil companies have implemented a limited production policy. In 2016, domestic oil production fell below 0.2 billion tons, and the annual oil production was 0.1996 billion tons, which was the largest annual reduction since the founding of new China. That year, national natural gas production also fell by 1% year-on-year.

Beginning in 2016, the three major domestic oil companies cut the amount of investment in upstream exploration and development programs and took the initiative to reduce the development of inefficient oil fields. PetroChina set a hard target of internal investment rate of return, in Liaohe, Xinjiang and other oil fields to reduce ineffective production. Shengli Oilfield, Sinopec's main oilfield, has also shut down a number of inefficient and ineffective blocks.

In 2017 and 2018, domestic oil production continued to decline, falling to 0.192 billion and 0.189 billion tons respectively.

In the past three years of domestic crude oil production reduction, the world and the country have opened a new era of actively promoting energy transformation. Low-carbon, clean energy products are seen as the main energy of the future. Oil is a high-carbon fossil energy, so consumption should be controlled and the proportion of energy should be reduced.

At the same time, the objective conditions of China's oil fields are also difficult to support the continued growth of oil production. A number of major oilfields such as Daqing Oilfield and Shengli Oilfield have entered the stage of medium and high water cut as a whole, and the difficulty of exploitation has been increasing. There have been situations such as inferior resources and natural decline in production.

However, based on the trend of clean energy transition, unlike oil, natural gas is regarded as clean energy and is still actively promoted. In recent years, China has made great progress in the development of unconventional natural gas based on shale gas, and the total output of natural gas has increased significantly.

After a slight decline of 1% in 2016, natural gas production quickly returned to the upward channel. In 2017, the country produced 133.007 billion cubic meters of natural gas, up 8.0 percent year-on-year. In 2018, the country produced 141.512 billion cubic meters of natural gas, up 6.4 percent year-on-year. Consumption is growing faster than production. In 2018, the national natural gas consumption reached 280.8 billion cubic meters, up 17.7 percent year-on-year. The annual growth rate was 42.2 billion cubic meters, a world record.

Wang Zhen, chief expert of the national high-end think tank of the China National Petroleum Corporation Institute of Economics and Technology, told a reporter from Caijing that there is no major global controversy about the trend of energy transformation, but the pace of transformation in each country depends on the level of economic development, energy infrastructure, and policy support. Strength and speed of technological breakthroughs. In China, in the next 10 to 15 years, fossil energy will still be the main force, and fossil energy consumption will account for about 80% of the total. The increase in the scale of renewable energy mainly replaces the decrease in the proportion of coal, and it is structurally difficult to achieve large-scale substitution of oil and gas in the short term. Despite the rapid growth of new energy vehicles, oil consumption will remain stable after reaching its peak, and natural gas consumption will increase significantly. In the next 15 years, clean energy will meet the new energy demand. After 2035, the replacement of fossil energy by renewable energy will accelerate and will gradually become one of the main energy sources.

At present, the Chinese government's general idea for oil and gas consumption and production is "stabilizing oil and increasing gas". In the case that renewable energy is difficult to replace oil and gas in a large amount in the short term, the consensus in the industry is that China's oil production should remain stable at present, while natural gas production can continue to grow.

Since the end of last year, a new round of oil war aimed at "increasing production and storing reserves" has begun throughout the country. In the first half of this year, the effect has been shown. PetroChina, Sinopec and CNOOC all achieved growth in domestic crude oil production in the first half of this year. Statistics from the National Development and Reform Commission show that domestic crude oil production in the first half of the year was 95.04 million tons, an increase of 0.8 percent over the same period last year.

The "World and China Energy Outlook 2050 (2019 Edition)" released by the PetroChina Institute of Economics and Technology predicts that domestic crude oil production is expected to remain at around 0.2 billion tons by 2030. Natural gas production will increase steadily, reaching 300 billion cubic meters by 2035, with an average annual growth rate of 2.8 per cent. After 2035, the production of unconventional natural gas such as shale gas will be comparable to that of regular gas.

High degree of external dependence is not terrible

In 1993, China became a net importer of oil. Since then, the degree of dependence on foreign oil has risen rapidly. In 2005, China's dependence on foreign oil exceeded 50 percent, reaching 51.88 percent. In 2018, China imported 0.44 billion tons and its dependence on foreign oil rose to 69.8 per cent. The import time of natural gas is relatively short, but the rate of increase in external dependence is no less than that of oil. In 2018, China imported 125.4 billion cubic meters of natural gas, and its dependence on foreign countries rose to 45.3 percent. It took less than 15 years from the first import of natural gas to nearly half of the dependence.

In the short term, the external dependence of oil will remain high, and the external dependence of natural gas will continue to rise.

In 2018, natural gas accounted for 7.8 percent of the country's total primary energy consumption, and oil accounted for 18.8 percent. The "2050 World and China Energy Outlook (2019 Edition)" released by the China National Petroleum Corporation Economic and Technological Research Institute predicts that China's oil consumption will reach a peak of 0.705 billion tons around 2030. China's primary energy demand will enter a peak plateau in 2035-2040. Oil and gas are expected to account for 17.4 percent and 14.2 percent of primary energy demand, respectively, in 2035. The proportion of non-fossil energy has increased from less than 15% to 28%. After 2035, the total share of oil and gas will remain at about 31.5 per cent.

That said, 2035 is a critical watershed. After that, the external dependence of oil and gas is likely to be significantly reduced.

"The use of different, renewable energy to replace oil is difficult, oil is the focus of China's energy security field. Natural gas is relatively more alternative space, easier to replace, natural gas external dependence higher is relatively controllable." Lin Boqiang, dean of the China Energy Policy Research Institute of Xiamen University, told the Caijing reporter that the high degree of dependence on foreign oil and gas does not mean that it is necessarily unsafe. On the whole, China's primary energy self-sufficiency rate is still at a high level, and energy security is still controllable.

Due to the uneven geographical distribution of oil and gas production and consumption in the world, international trade in the oil and gas industry is very developed. Looking at the world, China's oil and gas dependence on foreign countries is not the highest. China's neighbors Japan, South Korea, and Europe's France, Germany and other countries all rely on imports for oil consumption, and the degree of dependence on foreign countries is basically 100 percent.

Compared to these highly import-dependent countries, "our society is different, and China's oil and gas imports are more influenced by geopolitics. And China imports much more oil and gas than they do, making it more difficult to import." Lin Boqiang said that in order to ensure the safety of oil and gas imports, we should continue to increase the sources of imports and strive to solve the "Malacca Strait dilemma". At the same time, we will accelerate the improvement of the capacity of domestic strategic oil reserves and accelerate the development of high-speed railways, rail transit and electric vehicles.

In fact, those developed countries with a high degree of external dependence also attach great importance to the construction of strategic oil reserves and natural gas emergency peak shaving capacity. Wang Zhen said that Japan, for example, was once the world's largest importer of natural gas. China surpassed Japan last year, but Japan is still the world's largest importer of LNG (liquefied natural gas). Japan's foreign LNG import contract is basically a long association, the core to protect the volume-based, the price of the second. Japan's strategic oil reserves are huge, converted to consumption days is the world's highest. And Japan belongs to the OECD countries, based on the International Energy Agency's collaborative safeguard mechanism, coupled with Japan's continued investment in overseas equity oil, its oil and gas security has been effectively guaranteed.

Wang Zhen believes that China is the world's largest manufacturing country and the largest trading country, and its products are exported to all parts of the world. China has a large population base, and the endowment of oil and gas resources is not dominant. It is inevitable that oil and gas are highly dependent on foreign countries, so we should not panic too much psychologically. At present, domestic oil production is steadily recovering after a decline due to the impact of low oil prices in the past few years. There is still a large potential for tight oil and offshore production, and natural gas production is still in the growth stage with great growth potential. In the future, the national strategic oil reserve will be further constructed, and with the advancement of the oil and gas system reform, the construction of the natural gas production, supply, storage and marketing system is increasing, which is conducive to ensuring the healthy and stable development of China's oil and gas market and ensuring supply security.

On the other hand, some people in the industry believe that the real number of China's oil and gas dependence on foreign countries is not high. If China's exports of refined oil are discounted, China's dependence on foreign oil can be reduced by about 11 percentage points. When the output of overseas equity owned by Chinese enterprises is taken into account, the degree of external dependence falls further to about 33%. (From China Energy Network)

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