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China Increasing Investment in Oil to Reduce Foreign Imports

"The establishment of a national oil and gas pipeline company would be subject to the reform of (the) national petroleum and natural gas system, and the proper timing of unveiling the national oil and gas pipeline company is under discussion"

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Tugboats dock an oil tanker on a crude oil quay at a port in Zhoushan, eastern China's Zhejiang province, Nov. 11, 2016. Pixabay

China is increasing investment in oil exploration to limit its dependence on imports, but forecasts say domestic production will keep declining as the country’s demand grows.

After years of warnings, it appears that China’s government is now taking the strategic implications of import dependence as a higher priority, spurred by rising reliance on foreign natural gas as well as oil.

On March 6, the South China Morning Post reported that China National Petroleum Corp. (CNPC) plans to boost its exploration budget fivefold this year to 5 billion yuan (U.S. $745 million), citing an interview with chairman Wang Yilin by the company’s online newsletter “China Petroleum Daily.”

The increase is aimed at reversing declines in domestic oil output, which has stagnated for over a decade due to diminished returns from aged oilfields and China’s difficult geology.

In 2018, production fell 1.4 percent to an average of 3.79 million barrels per day (mbpd), according to the National Bureau of Statistics (NBS). At the same time, China’s apparent oil demand rose 5.3 percent to 13.52 mbpd, Platts Commodity News said.

Using those figures, China’s import dependence for oil reached 72 percent, slightly more than CNPC’s calculations and those based on International Energy Agency (IEA) data.

Wang put the ratio at “almost 70 percent.”

Variations aside, China’s reliance on foreign oil has risen sharply since it first crossed the 50-percent threshold in 2008.

Yet, Wang’s remarks suggest that the national oil company (NOC) sees the deterioration of China’s energy security as a “political” issue driven by the government’s concerns.

“As energy is a lifeline of the economy, CNPC as a key state enterprise and the nation’s largest oil and gas supplier must carry out the political task of enhancing national energy security by having a sound resource development strategy,” Wang said.

While the rise of import dependence has been rapid, it shows few signs of changing course, according to projections.

In data released with its Oil 19 medium-term forecast on March 14, the Paris-based IEA estimated that imports will account for 72 percent of China’s oil demand this year, rising to 76 percent in 2024.

oil refinery
Lin held out little hope for gains in domestic oil production and instead urged increases in the amount of oil held in China’s strategic petroleum reserve (SPR). Pixabay

Domestic production will drop to 3.58 mbpd by that time, the IEA said. While demand is expected to grow by 10 percent during the period, production in China is slated to fall by more than five percent.

In a long-term forecast in November, the IEA projected the import proportion will hit 82 percent by 2040, even though demand growth is expected to slow.

 

No reason for optimism

Despite the increases in investment, there seems to be little confidence that more exploration spending will turn the situation around.

Edward Chow, senior associate for energy and national security at the Center for Strategic and International Studies in Washington, wondered whether the announced budget expansion would be devoted solely to domestic exploration or also to overseas resources.

“I don’t see any reason for optimism on large new domestic discoveries,” Chow said. “It isn’t like they hadn’t been looking before.”

Confidence may be lacking at the corporate level, as well.

Although the fivefold increase in the budget may make a numerical impression, the planned investment pales in comparison to the billions that CNPC promised to invest in foreign oil exploration and development in the 1990s under the government’s “go out” strategy.

In late 2017, CNPC argued that it would soon have rights to production of four mbpd overseas, or more than China’s output at home.

The suggestion was that import dependence was nothing to worry about, since nearly two-thirds of China’s demand would be covered by a combination of domestic production and foreign “equity oil.”

But from an energy security standpoint, the ownership of foreign oil may make only a marginal difference since it is still subject to cross-border risks and transit uncertainties on the high seas.

The government’s concern appears to have grown along with signs that import dependence for gas is quickly following the same pattern as authorities promote fuel-switching from coal to fight urban smog.

In his interview, Wang said that China’s reliance on foreign gas reached 45.3 percent last year. Based on RFA calculations from consumption figures, the import share stood at 39.2 percent in 2017.

Last year, domestic gas production rose 7.5 percent while consumption climbed 18.1 percent, the NBS and the National Development and Reform Commission (NDRC) said.

The IEA has said that dependence on foreign gas will reach 54 percent in 2040, but if the current pace persists, that level could come much sooner.

“What is clear is that China has been unsuccessful in arresting the trend of increasing oil import dependency, which has now extended to gas,” Chow said by email.

“Short of technological breakthroughs in producing domestic energy or reducing demand, this has clear energy security and foreign/defense policy implications,” he said.

A worker fills an oil truck at a China Petroleum & Chemical Corp. filling station in Shanghai, China, March 22, 2018.
A worker fills an oil truck at a China Petroleum & Chemical Corp. filling station in Shanghai, China, March 22, 2018. RFA

‘A very unsafe source of risk’

Although the government is apparently pressing CNPC to do more, a commentary in the Communist Party-affiliated paper Global Times argued that the efforts are not enough.

Citing an interview with Lin Boqiang, dean of Xiamen University’s China Institute for Studies in Energy Policy, the paper said the estimate of 70-percent oil dependence may be “conservative.”

“More importantly, the government should be aware that such high oil dependency is actually a very unsafe source of risk,” the commentary said.

Lin held out little hope for gains in domestic oil production and instead urged increases in the amount of oil held in China’s strategic petroleum reserve (SPR).

The emergency stockpile is believed to hold only enough oil to cover 40 to 50 days’ worth of imports in case of disruptions, less than half of the coverage of SPRs in Japan and the United States, Lin said.

The timing of Wang’s interview on the sidelines of China’s annual legislative sessions is a sign that the exploration push is part of the government’s larger reform plan for the oil and gas sector.

 

It is unclear whether or how much the NOCs would be paid for their infrastructure assets, or whether they would be rewarded with shares in the new pipeline company.

But the proceeds from the pipeline spinoff could be used to fund exploration and development of more promising but challenging resources of shale oil and gas.

The South China Morning Post suggested that the restructuring could at least free up exploration funds.

“After the establishment of the new pipeline company and selling its pipelines to the firm, (CNPC subsidiary) PetroChina will no longer have to fund their expansion and have more capital to plow into resources exploration,” the paper said.

Also Read: Facebook Spent $20 mn on Mark Zuckerberg’s Personal Security in 2018

Xinhua cited remarks by CNPC’s Wang that suggested a more gradual approach.

“The establishment of a national oil and gas pipeline company would be subject to the reform of (the) national petroleum and natural gas system, and the proper timing of unveiling the national oil and gas pipeline company is under discussion,” Xinhua quoted him as saying. (RFA)

Next Story

Here’s how China Invaded India with Its Technology

Chinese invasion decimates Indian mobile players, automakers next?

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China has slowly but strategically spread its roots in the Indian IT/technology and allied sectors in India. Pixabay

BY NISHANT ARORA

The Great Wall has slowly but strategically spread its roots in the Indian IT/technology and allied sectors in India, and there is no stopping the dragon which has only grown fierce — threatening industries after industries across the spectrum as India celebrates its 71th Republic Day.

From smartphones to automobile/electric vehicles, from digital payments and consumer electronics to social media, Chinese companies have created massive ripples in the country in the last couple of years, while American giants like Amazon and Facebook/WhatsApp face the political heat.

China, which is a fastest-growing trillion-dollar economy with a current GDP of $14.14 trillion is on the path to become a $20 trillion economy by 2024 and India is its “sweet spot” — with millions of consumers buying Chinese goods which has decimated domestic players in certain sectors.

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Xiaomi, a Chinese company has also established itself well in the country. Pixabay

Take the case of smartphone industry. According to Hong Kong-based Counterpoint Research, Chinese smartphone brands captured 72 per cent of the market in 2019 compared to 60 per cent a year ago.

Behemoth like the BBK Group (the parent company of OPPO, Vivo, Realme and OnePlus brands) captured 37 per cent market share while Xiaomi (along with Redmi and POCO brands) came second at 28 per cent.

Led by Xiaomi and BBK Group, the Chinese brands have invested heavily in manufacturing devices and accessories in India.

Xiaomi currently has seven smartphone manufacturing plants in India in partnership with Taiwanese multinational electronics company Foxconn and Singapore-based technological manufacturer Flex Ltd.

More than 99 per cent of smartphones that are sold in India are manufactured locally. Across these seven plants, Xiaomi has employed more than 25,000 people.

Xiaomi also locally sources and assembles PCBA (Printed Circuit Board Assembly) in India. It has invested in setting up smart TV manufacturing plant in partnership with Dixon Technologies in Tirupati, Andhra Pradesh. The company last year infused Rs 3,500 crore into its Indian business unit.

Vivo has committed Rs 7,500 crore as part of its India expansion plan while Chinese company TCL is investing Rs 2,200 crore in Tirupati for plants that will produce mobile handsets and TV screens.

Amid the onslaught, where do you see domestic players like Micromax, Intex, Lava and Karbonn (known as ‘MILK’ brand)?

According to Navkendar Singh, Research Director, IDC India, while we cannot rule out any player making a comeback, especially in such a dynamic market like India, it looks nearly impossible for Indian mobile phones brands to win back any relevant portion of the market.

“China-based brands have been in India for almost 5 years plus now. In this time, apart from snatching the market share almost entirely from the other brands, they have gained immense knowledge about the workings of the India market in terms of consumer thinking, preferences, channel dynamics and marketing interventions,” Singh told IANS.

The Chinese brands are continuously committing resources and investments in all these key areas.

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As China keeps introducing its technology in India, automobile makers will be affected. Pixabay

“Moreover, with more than 3/4th of the market being with 5 players, it is becoming increasingly challenging for any new or old brands like Indian brands to attempt any sustained comeback,” Singh elaborated.

So what are the options for the Indian smartphone players?

“Indian brands can surely look at the feature phone segment, where almost all major China-based brands have chosen to stay away from (expect Shenzhen-based Transsion Group which is the leader). Also, their brand salience remains strong with that consumer segment and Tier II and III markets,” said the IDC executive.

Cut to the Auto Expo 2020 and you will have a better understanding of how Chinese companies muscle their ways.

Top Chinese firms such as SAIC (owner of MG Motors), BYD (maker of electric buses and batteries), Great Wall (which is the biggest SUV maker in China) and FAW Haima, among others, have reserved nearly 20 per cent space in the annual jamboree of carmakers and industry leaders, at a time when the Indian automobile industry is going through a severe slowdown.

Bucking the slowdown trend, SAIC has recorded healthy sales ever since it launched the Hector SUV. At present, the carmaker’s first offering SUV Hector has an order book of 20,000 bookings. It has till date sold nearly 16,000 units of Hector since its launch in July 2019.

The Chinese automobile major has now launched its first electric offering called ZS EV, at a starting price of Rs 20.88 lakh. The company said that it has secured an overwhelming response for the new-age electric SUV, with over 2,800 bookings in 27 days.

To let its EVs run smoothly in India, MG Motor India is building a five-way EV charging ecosystem in association with major domain players.

China’s leading EV company, Sunra, has expressed interest in setting up a factory in the country as it sees India emerging as the world’s biggest market for electric bikes in the next four to five years.

The EV firm has partnered with 16 private companies in Delhi. Nearly six e-bike models of Sunra are under the Automotive Research Association of India (ARAI) test and two of its models are available in some of the showrooms.

Also Read- New Stretchable Battery Can Safely Store Power for Wearables

According to a TechSci Research report, electric vehicle market in India is forecast to reach nearly $2 billion by the financial year 2023.

As the Indian government firms up its EV plans, Chinese companies have already set their eyes on the EV sector roadmap in the country. (IANS)

One response to “Here’s how China Invaded India with Its Technology”

  1. This is a win-win relationship.Is India losing anything? Indians get job, foreign investments, latest technology from China. Do you think local Indian companies have the latest technology? Of course not. Its time for India to open up more, absorb these technologies and then go for home grown solutions. In short do to China what Chinese did to West.