Ron Patterson sends me the occasional e-mail when he sees something of interest. Portions of his email are below.
Dennis, I thought you might find this interesting.
China’s Decline in Oil Production Echoes Globally
Aug. 25, 2016 6:53 a.m. ET
BEIJING—China’s struggling oil sector has entered a challenging new phase: long-term decline of its domestic production.
Oil production in China likely peaked last year at around 4.3 million barrels a day, according to new data and interviews with industry executives. The development has significant implications globally, including the potential for higher crude prices over time as China steps up imports to meet rising demand at home.
“The turning point that we’ve been searching for, for years, is happening now,” said Kang Wu, vice chairman for Asia at energy consultancy FGE. As an oil producer, he said, “China is entering long-term stagnation and decline.”
For years, the world’s second-largest economy eked out gains from its aging oil fields as demand surged. But new discoveries haven’t been enough to keep production growing, and the crash in commodities prices led the state-owned oil giants to sideline less-productive wells.
At the same time, China will be forced to boost imports. As domestic production falls, additional barrels of oil that China needs to fuel the new cars hitting its streets will come from overseas.
That marks a fundamental shift for a country that not long ago saw energy independence as a key part of national security. It also deepens China’s exposure to global hot spots. Among its biggest suppliers today: Saudi Arabia, Russia, Angola and Iraq.
The global energy industry typically thinks of China as a huge oil consumer, second only to the U.S. It will also soon overtake the U.S. as the biggest importer in terms of total barrels purchased from abroad.
Yet, China is also the world’s fourth-largest producer, which has helped it keep a lid on imports. Oil prices could over time be given a lift by rising Chinese demand, although prices are determined by a wide variety of factors related to global supply and demand.
“China is clearly part of the crude-rebalancing story,” said Michal Meidan, an oil analyst at consultancy Energy Aspects in London. “This is certainly what will ultimately drive prices back higher.”
The changes in China’s energy sector have been on full display this week as the country’s main oil producers reported weak earnings amid the global oil slump. U.S. benchmark oil prices have fallen below $50 a barrel, from more than $100 two years ago.
PetroChina, the country’s biggest oil producer by volume, said Wednesday that domestic oil output fell 4% in the first half, double the pace of decline from a year earlier. Its rival, China Petroleum & Chemical, said earlier that domestic crude production fell over 12% in the same period.
The data so far this year paints a picture of an industry in decline. China’s domestic crude output fell about 5% in the first half compared with a year earlier. Then, in July, output plunged 8% to 16.72 million metric tons, or 3.95 million barrels a day, its lowest daily average in nearly five years.
The decline in domestic oil production stems from a dearth of new discoveries. Even if oil prices unexpectedly rebounded, China would unlikely be able to quickly ramp up its output.
“It doesn’t matter what the oil price is,” said Gordon Kwan, head of Asia-Pacific oil-and-gas research at Nomura in Hong Kong. “There has been no oil discovery.”
While some exploration continues, increasingly domestic growth is focused on tapping potentially vast natural-gas reserves, including those from shale.
Mr. Kwan projects that falling production in China will spur a 30% jump in crude imports by 2030, or the equivalent of over two million barrels of extra demand a day. China’s oil companies have beefed up their international trading divisions in London and elsewhere to prepare for the uptick.
More fundamentally, the declining domestic reserves pose an existential question for the future of China’s oil giants. The companies, born out of economic overhauls by China’s Communist government, once had a simple mission: produce as much as oil as possible to fuel China’s growth.
Today, the impetus is changing as China’s economy slows. PetroChina has ambitions to more closely resemble Exxon, with diversified business lines combining upstream oil- and gas-producing assets around the world with huge refining and sales operations.
Among the many options oil executives are considering is whether they can open up Chinese-branded gas stations from New York to Southeast Asia as one way to grow sales.
The expanded global operations would help them to stave off revenue declines at home from decreased crude output. Increasingly, Mr. Wu said, those declines look inevitable.
“The question only becomes: How much every year?” he said.