China’s NOCs to spend $120bn on drilling in effort to cut oil imports

The Chinese national oil companies (NOCs) are boosting spending in an effort to reduce rising dependence on imported fuels. Last year, 74% of China’s domestic oil demand was met by crude imports, the highest level on record.

A report by Rystad Energy estimates that CNPC, CNOOC (HKEX:883), and Sinopec (HKEX:386), , together will spend $123 billion on drilling and well services over the five-year period between 2021 and 2025, up from a total $96 billion between 2016 and 2020.

Of the 118,000 wells expected to be drilled, 88% will be development wells and 12% exploration wells, noted Rystad.

“Despite a strong policy push to electrify transport, China is still expected to use oil products to fuel its hundreds of millions of cars, buses and trucks for the next five years at least. Although the country’s electric vehicle market is projected to achieve a 20% market share by 2025, internal combustion engine vehicles are expected to account for most of China’s transport needs and to provide a backbone for oil demand through 2025,” said Peng Li, energy research analyst at Rystad Energy.

Chinese oil production has fallen from 1.55 billion barrels in 2014 to 1.43 billion barrels in 2020. Given that just 2.4% of the world’s proven oil reserves are located in China, the scope for dramatically increasing domestic production is limited. China’s reliance on imports – and associated energy supply security concerns – has led the government to push its domestic exploration and production companies to find new reserves and increase domestic output.

Meanwhile natural gas production remains modest compared to overall demand, but has expanded from about 120 billion cubic meters (Bcm) in 2014 to around 190 Bcm last year, said Rystad. This is still well short of 2020’s total demand of 330 Bcm, meaning the nation remains reliant on imported piped gas and shipped liquefied natural gas (LNG) for over 40% of its needs.

With gas consumption on the rise – especially as China looks to use more gas in place of coal in power generation to cut short-term emissions – the pressure to boost domestic gas production is an overarching imperative. This will also stimulate the exploration and production sector, especially if international LNG prices continue to track higher, as seems likely due to anticipated global supply constraints, said Rystad.

“As state-owned entities, China’s major operators are not solely profit-driven. They also play an important and integrated role in social economics. So even in a less-favourable oil price environment, we expect Chinese NOCs to perform in line with government expectations and to continue to make an effort to shore up domestic supply,” said Li.

Significantly, China has managed to maintain overall oil production while increasing gas production, despite drilling notably fewer wells in 2020. One of the main contributing factors has been advances in drilling and well services techniques, which is enabling China to drill an increasing number of deep and horizontal wells, noted the energy consultancy.

Improved well planning and advanced enhanced oil recovery (EOR) methods are also helping China increase its recovery rate, even at giant mature fields such as Daqing. Another game changer in the past decade has been the rising use of fracturing services, which has boosted development of unconventional oil and gas resources.

“With China focused on maintaining or increasing production levels, service companies that bring innovative technology solutions to the table are likely to get a warm welcome in the Chinese drilling and well services market in the years to come, whether the field developments are conventional or unconventional, onshore or offshore,” added Rystad.