2014-01-23 18:01:05 - New Energy research report from Business Monitor International is now available from Fast Market Research
While China is increasingly dependent on energy imports - particularly gas - owing to rapid growth in its energy demand, there is considerable upside potential from its unconventional oil and gas resources. However, a more open environment to foreign investment is needed in order to meet the ambitious production targets set by the state, especially if its vast unconventional resources are to be maximised in light of difficult below-ground conditions. In the meantime, oil and gas demand could surprise to the downside if economic expansion comes under pressure.
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The main trends and developments we highlight for China's oil and gas sector are:
* Much of the China's crude oil production upside will come from increased
output from fields yet to reach peak capacity, such as Tarim. Enhanced oil recovery (EOR) measures will also help to maintain production levels at older fields, such as PetroChina's Daqing and Sinopec's Shengli. We expect Chinese production (less refining gains) to rise over the next few years, peaking at 4.44mn barrels per day (b/d) in 2017 before declining to 4.31mn b/d in 2022.
* We expect refining growth to flatten out towards the end of our 10-year forecast period in 2022 especially as environmental pressures put a halt to further newbuild projects. In the next five years, refining capacity will rise from the completion of upgrades and newbuild projects to reach 11.9mn b/d in 2017 from the current 10.8mn b/d. Future growth will likely come from expansion in existing plants than from greenfield projects.
* Despite a narrower room for refining capacity expansion, investment opportunities still exist as China enforces its refineries to produce fuels that are compliant with Euro-V standards by January 2018 in a move to curb the country's growing pollution. Modernisation of plant equipment could translate into contract awards for services, though this could again be dominated by state-owned engineering enterprises.
* Weaker global economic growth, higher fuel prices and energy efficiency will contribute to slower oil consumption growth. Although we expect oil consumption to continue rising from 10.2mn b/d in 2012 to 12.1mn b/d in 2017 and 13.8mn b/d by 2022, it will be at a slower rate of growth of about 3% per annum in the next 10 years.
* A report by China's Ministry of Land and Resources has estimated China's technically recoverable shale reserves at 25.1trn cubic metres (tcm). This is significantly lower than the 37.4tcm estimate made by the US Energy Information Administration (EIA) in June 2013. The discrepancy reflects the limitations of resource estimations at such an early stage of appraisal. Further changes in reserves estimates are therefore likely as operators' understanding of China's various shale basins improves.
* The ministry's report considered a number of barriers to realising this vast shale gas potential. In particular, it highlighted China's complicated geology and lack of domestic technological expertise. In view of these challenges, we expect shale gas production to only slowly make its impact felt from 2018. Gas production will continue to grow, based on conventional and deepwater production, from 108.4bn cubic metres (bcm) in 2012 to 135.7bcm in 2017.
* However, a growing involvement of international oilfield services companies in the emerging Chinese shale gas scene could help domestic companies plug their technical and knowledge gap. This could accelerate the growth of Chinese shale gas production, though it would likely still fall short of the 60-100bcm of shale gas that the government wishes to produce by 2020.
* Gas consumption is set to grow owing to the combination of economic growth, increasing use of gas as a cleaner energy alternative and government policies tailored to encourage gas usage in industry and households. It could grow from 145.9bcm in 2012 to 221.7bcm in 2017, rising further still to 311.0bcm by 2022 as the use of domestic gas in households and industry accelerate.
At the time of writing we assumed an OPEC basket oil price for 2014 of US$101.80 per barrel (bbl), falling to US$100/bbl in 2015. Global GDP in 2014 is forecast at 3.1%, up from an assumed 2.6% in 2012. For 2015, growth is estimated at 3.3%.
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