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Mar 30, 2012 06:15 PM IST | Source:

China's crude oil production challenges

The oil market's view of China is so focused on its rising demand, that its domestic production receives much less attention than it deserves.

The oil market's view of China is so focused on its rising demand, that its domestic production receives much less attention than it deserves.

The tabular content relating to this article is not available to view. Apologies in advance for the inconvenience caused.China is the world's fourth-largest oil producer, pumping more than all the members of the Opec oil cartel barring Saudi Arabia. The International Energy Agency puts Beijing's output at about 4.1m barrels a day, after steady growth over the last two decades. Yet, the upward supply trend has suffered a sudden interruption in recent months, with China witnessing the biggest year-on-year production falls since at least 1995.

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Chinese oil output peaked at around 4.3m b/d in early 2011 and fell back to nearly 3.9m b/d by late last year. Although output flows have recovered somewhat, production remains roughly 200,000 b/d lower than a year ago, the biggest annual drop in more than 15 years, according to industry estimates.

The fall explains in part why China is importing record amount of crude oil: Beijing now needs to fill a bigger gap between surging oil demand and falling domestic oil output. In February, China imported a record 5.95m b/d - 18.5 per cent more than a year earlier - according to official data from the country's General Administration of Customs. Domestic output has fallen 1.2 per cent in the January-February period compared to a year ago.

The import surge in early 2012 - and its impact on oil prices - underlines the importance of keeping tabs on Chinese domestic oil production.

Two factors explain the drop in Chinese production. On the one hand, Beijing state-owned oil companies are struggling to pump more from mature oilfields such as Daqing which were discovered in the 1960s. The drop is particularly important because most large Chinese onshore oilfields produce high quality low sulphur oil, or light sweet oil in the jargon of the industry, which is sought after by the country's refiners. On the other, China has been suffering from a large supply outage at a large offshore oilfield operated by ConocoPhillips.

The Penglai 19-3 field, in northern China Bohai Bay, was shut down in September after two major leaks, depriving the country from more than 150,000 b/d. After repairs, the field is slowly returning into production, with some officials saying it is now pumping about 50,000 b/d.

The recovery in Penglai, which is expected to continue in the first half of the year, would give China some breathing room, but the outlook for the country's domestic oil industry looks challenging. Oilfields such as Daqing or Shengli - the country's second largest field - will continue to produce less and less each year after 40-50 years of exploitation.

The future of Chinese oil output will depend of the success of state-owned companies exploring new offshore areas of Bohai Bay and the South China Sea, as well as onshore oil in western interior provinces such as Xinjiang and Inner Mongolia. New discoveries would be crucial to sustain local output and, thus, keep the gap between demand and domestic output to the minimum.

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