Comments: China's Strategy
Authors: Donnelly John 
Published: February 2015

News that China is negotiating directly with OPEC for future oil supplies underscores how big a concern security of supply has become for the globe's fastest-growing energy user. Economic growth has been at about a 10% clip since 2004, and the country's surging energy appetite—one of the main causes of the steep rise in oil prices over the past 3 years—shows little sign of slowing.

China's oil consumption should increase almost a half a million BOPD in 2006, according to a U.S. Dept. of Energy forecast. China is now the world's third-largest net importer of oil, behind only Japan and the U.S. Since becoming an oil importer in 1993, the gap between domestic supply and demand has widened sharply. China, with about 18 billion bbl of reserves, currently produces 3.8 million BOPD and consumes 7.4 million BOPD. Oil demand has risen roughly 7% per year since 1993.

The negotiations with OPEC are but the latest step China has taken to trans-form its energy picture. The country has established a strategic oil reserve, similar to the one the U.S. has in place, and has been courting Latin American suppliers aggressively. It also has shaken up its energy company structure. China Natl. Petroleum Corp., China Petroleum and Chemical Corp. (often referred to as Sinopec) handle most of the state's energy assets. Another firm, China Natl. Offshore Oil Corp., takes care of offshore E&P, currently only about 15% of total domestic production. All three firms were partially privatized, though the government continues to control a majority stake in each. The key strategy appears to be improved use of technology to stabilize mature assets and develop new ones, explore new areas, and lock up sources of supply abroad.

At last month's International Oil & Gas Conference and Exhibition in Beijing, co-organized by SPE and the Chinese Petroleum Soc., executives for the major Chinese oil and gas firms spoke of their plans for increasing output not only domestically, but abroad. As with other national oil companies (NOCs), Chinese firms have become more nimble and are searching for ways to secure oil supplies from places such as west Africa, the Middle East, and Asia. That is changing the energy landscape, not only for NOCs but for international oil companies (IOCs), as IHS' Pete Stark points out in this month's Guest Editorial.

Major oil producers, some of them familiar exporters to North America, are beginning to see that their future may lie east. Angola is now China's largest supplier of oil, although its decision to join OPEC this year could have implications for both China and IOCs. That move will bring more of the world's production under OPEC's influence and thus subject it to potential production cutbacks to prop up prices. That would likely affect the numerous partnership ventures Angola has with private firms such as ExxonMobil, BP, and Total. In fact, Angolan production of just under 2 million BOPD is dominated by output from IOCs—almost 80%.

With China's dependence on oil imports forecast to grow to 70% by 2020, it may find itself in the same position as the U.S.: increasingly dependent on oil supplies from OPEC, as well as sometimes unstable regimes, and often subject to trends in international geopolitics. But the steps it is taking—searching for new sources of supply outside of the country, creating reserve stockpiles at home, improving technology applications to stabilize and enhance domestic production, and planning more offshore development—will be key to its continued energy and economic growth.