Boston, MA -- (ReleaseWire) -- 01/28/2014 -- 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.
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.
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