China’s oil and gas security: a challenge shared with the world

With a net import requirement of about 6 million barrels per day (300 million tonnes per year), China is the second largest net importer of oil after the USA. In the period 2001-2011 China’s net imports of oil quadrupled, with dependency doubling from 32% to 64%. Most of these imports are in the form of crude oil, as the country’s refining capacity has expanded to keep pace with demand. Nearly 80% of these imports cross the Indian Ocean and pass through the Malacca Straits on their way from the Middle East and Africa. It is quite understandable, then, that China’s government is concerned about security of oil supply, especially since the country’s domestic production of crude oil grew by only 25% between 2001 and 2011, during which time consumption doubled. But such is the nature of international oil markets that China’s problem is shared by all major importers of oil.


China started to import natural gas in 2006, but is already relying on imports for nearly 25% of its annual consumption. Domestic production of gas is growing rapidly, having doubled since 2005, but it cannot keep pace the demand which is being accelerated by the government’s quest for new sources of energy and cleaner energy. As is the case with oil, China is progressively being integrated into international gas markets.


As a consequence of its growing reliance on imported oil and gas supplies, China has every reason to be deeply concerned with the outlook for global oil and gas production. Conversely, China, India and Southeast Asia, as growing net importers of oil, are primary sources of concern for other energy importers, for the rapidly growing demand in Asia puts pressure on international energy markets.


The investment challenge


Aside from the rate of growth of demand, the main factor which will determine the level of security of oil and gas supply for China and for the rest of the world over the next 5-15 years is the quantity and quality of investment in new oil and gas production capacity.


New exploration and production techniques have opened up new geological opportunities. Better seismic imaging and deep-water drilling technology provided the basis for the discovery of the sub-salt oil and gas fields offshore Brazil. In the USA, innovative companies have combined advances in the 150-year old technique of hydraulic fracturing with those in chemistry, horizontal drilling and well completion to open up vast reserves of shale gas. A great deal of effort is being expended in improving technologies for the exploitation of oil sands and oil shale.


Whilst new technologies can and do open up new oil and gas reserves, they come with a cost. The full cost of exploration, development and production has risen continuously in the last ten years. Even in the Middle East and North Africa which hold a substantial proportion of the world’s oil and gas reserves, project costs have risen three-fold. These rising costs have their origins in the higher cost of new technology and difficult geology or terrain, the higher profits that contractors are able to demand at times of high oil prices, and risk premiums. In addition, the very large scale and testing conditions of some projects result in a massive escalation of costs. The prime examples of this is the Kashagan field in Kazakhstan where costs have risen from US $57 billion to US$ 187 billion and first production has been progressively delayed from 2005 to 2014.

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