About China : Oil & Gas Industries

Industry Background

The government of the People’s Republic of China has taken a number of steps to encourage the exploitation of oil and gas within its own borders to meet the growing demand for oil and try to reduce its dependency on foreign oil. Most importantly, the government has reduced complicated restrictions on foreign ownership of oil exploitation projects and has passed legislation encouraging foreign investment and exploitation of oil and gas.

Strategic reorganization of oil industry in China has taken place by means of market liberalization, internalization, cost-effectiveness, scientific and technological breakthrough and sustainable development. Changes were made in the structures of oil reservation and exploration such as permitting more oil imports into the domestic market and allocating a greater percentage of oil and gas in non-renewable energy consumption. The reorganization was aimed at ensuring a smooth and sustainable oil supply, at low cost and meeting a goal for sound economic growth. The guiding principles of reform focused on developing the domestic market by expanding exploration efforts while practicing conservation and building oil reserves.  

The three major government-owned oil companies in China are (i) Sinopec, (ii) China National Offshore Oil Corporation, or “CNOOC,” and (iii) Petro Chemical China Limited, or “PetroChina,” or also some times referred to as “CNPC.” PetroChina is China’s largest producer of crude oil and natural gas. Sinopec is China’s largest refining, storage and transmission company. CNOOC is China’s largest offshore oil and gas exploration and development company. Each of these companies has been granted a charter by the Chinese government to engage in various stages of oil and gas procurement, transportation and production in China.  

Substantially all oil and gas exploration, storage and transportation conducted by foreign entities in China must engage in joint ventures with one of these companies or another Chinese company who has entered into an arrangement with one of these companies and has received authority from the appropriate government authorities to engage in oil and gas development activities in China.

Demand for Oil & Gas in China in 2009 and Beyond 

China consumes 8.5 million barrels of oil per day and is the world’s second largest consumer of oil after the United States (21 million barrels per day). In the run-up to the Beijing Olympics in 2008, China's demand for oil exploded adding to a multi-year build-up that paralleled the hyper-growth of the Chinese economy. In 2008, Chinese oil consumption grew 12% over 2007.

Estimates for the growth in Chinese consumption of oil in 2009 range from a high of 5.2%(OPEC) to as low as 3.5% (International Energy Agency) and lower.  Goldman Sachs estimates that Chinese demand will decline by 200,000 barrels per day in 2009. Rather than modest growth expressed by IEA and OPEC, the Goldman Sachs estimate represents a decline of about 2.5%. 

There are several factors mitigating against slower growth in oil consumption and overall energy demand in China.  The $586 billion Chinese stimulus program launched in November of 2008 includes development of public housing projects, infrastructure, new roads and bridges, new railways and airport development, new technology development, and other projects that require construction, building, and ultimately energy consumption including the consumption of oil.  The Chinese stimulus program includes energy efficiency infrastructure and the development of domestic energy production.  Increasing local sources of energy will drive down costs and increase demand for oil. In addition, China has price controls of energy products including gasoline and diesel. 

Historically, price controls have provided an advantage to Chinese end users as the cost of oil has skyrocketed in recent years.  Recently, price controls have become out-of-date as the price of oil has plummeted.  Businesses and consumers in China have just benefited from a 2% reduction in gasoline prices. Xu Kuning, deputy director of National Development & Reform Commission of China has recently said that the latest cuts were made to reflect declines in global crude prices. 

 “There is still room for a further cut in domestic oil prices despite recent fluctuations in global prices,” Xu Kuning has said.  

In this volatile environment, it is sometimes difficult to remember that over the long term, China is likely to continue to be among the fastest growing economies in the world and as such a key contributor to world energy consumption in the future. In 1990, China accounted for 8 percent of the total global energy consumption. By 2005, according to the US Energy Information Administration, China had grown to 15% of total global energy consumption.  

Even stronger growth is projected over the next 25 years. The worst case slow growth economic model developed by the US EIA indicates that China will more than double its consumption of energy.  The worst case projection is for China to increase its share of world energy consumption to 22%. In contrast, the U.S. share of total world energy consumption is projected to contract from 22% in 2005 to about 17% in 2030.   

Natural gas is currently a minor fuel in the overall energy mix of China representing only 3 percent total primary energy consumption. The US EIA predicts that natural gas consumption in China will rise rapidly, growing by 5.5 percent per year in China on average from 2005 to 2030, as liquefied natural gas imports and new domestic production help meet continued demand growth and the demand for a cleaner more environmentally friendly energy source.