Will China cease oil production in 5 years? Russia in 19?

Photo: © AP Photo, Hassan Ammar, File

This is a debatable prediction, to say the very least. Contrary to the Crown Prince’s forecast, China is actually well-positioned to significantly increase its domestic oil output, while markedly reducing its reliance on imports. Russia’s status as an oil exporter will depend on the ability of its petroleum industry to adjust to new market realities.

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The Chinese market is of extreme importance to oil-exporting countries. Any reduction in Chinese petroleum imports as a result of enhanced domestic production will have a major impact on the international status quo.

Unlike Russia, China doesn’t participate in the oil export market. As of today, the country produces 3.5 million barrels per day, while importing about 9 million barrels. And the demand for imports is growing stronger by the day. The super-giant Daqing and Shengli oilfields, which once were the nation’s main producers, are now depleted. Developing the enormous resources of highly viscos heavy oil and natural bitumen in the Junggar and Tarim basins will require the application of frontier, innovative, and cost-effective technologies that China currently lacks. In addition to the assets of these basins, China also possesses an abundance of shale oil and gas resources as well as the world’s largest reserves of lignite and bituminous coal. The technologies to commercially produce them already exist and could immediately be applied to the benefit of the Chinese economy.

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Major oil exporting countries, including Russia and Saudi Arabia, are entirely dependent on world market demand. Europe imports upwards of 19 million barrels per day. In spite of record (and growing) levels of shale oil production, the US still imports about 10 million barrels daily. India, Turkey and a large number of other developed and developing countries with increasing demand for energy have failed to make the best use of their own domestic resources, and remain overly reliant on imports. Total world demand for hydrocarbons is in excess of 100 million barrels. Import-dependent countries could overcome the lopsided nature of this demand/supply equation by fully exploiting their own resources. but they can only do so through the application of advanced, yet currently available, technologies.

In many parts of the world, there is a growing movement to replace hydrocarbon-based energy with greener “renewable” resources. However, as the Saudi crown prince asserted in his Bloomberg interview, we are nowhere near to satisfying the growing world-wide oil demand while meeting stringent environmental requirements. At the same time, the expanding petrochemicals market has sparked a universal increase in demand for overall petroleum production. In other words, future demand for petroleum products will only increase. But, as the Crown Prince assured, Saudi Aramco will reliably supply the market with any foreseeable quantities of oil despite the perceived future oil production problems of other nations. In fact, Saudi Aramco continues to ship oil in defiance of its international partners, and is on the verge of announcing an IPO.

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Last year, in pursuit of joint national and corporate interests, Saudi Aramco and TOTAL signed an agreement to mutually develop the huge petrochemical complex on the Arabian Peninsula.

In Kazakhstan, this strategy is still under discussion. Although potential crude sources for the prospective oil refinery in the Mangystau region have been identified and most start-up impediments have been surmounted, an official decision has yet to be made. Kazakhstan no longer has the luxury to dawdle – to wander absent-mindedly between a rock and a hard place – while the mammoths of the petroleum exporting community move to the next level. The potential creation of 5–8 thousand new jobs in the socially tense Mangistau region is no small matter.

But the crown prince’s logic is missing a very important consideration: the technology necessary for cost-effective production of hard-to-recover hydrocarbons, including the remaining in place oil reserves of depleted fields, previously unrecoverable high-viscosity oil and natural bitumens, and the resources of low formation energy and lack of natural-drive reservoirs etc., currently exists and will soon become a major factor in the world petroleum market. This is bad news for His Royal Highness –and not just for him – since imports by countries that implement these technologies will progressively decline and world prices will experience significant downward pressure. Those who fail to recognize this new reality will soon fall from the ranks of successful oil producers. On the other hand, those who seize these opportunities and quickly reorient themselves to cost-effective, commercially sustainable production technologies will control the market. The key word here is competitiveness.

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China has stolen a march on much of the rest of the petroleum-producing world in this regard, as evidenced by the recent announcement by PetroChina (CNPC) of plans to invest $22 billion to develop advanced production equipment and methodologies for the Junggar and Tarim basins. SINOPEC is also actively pursuing groundbreaking disruptive oil recovery technologies. Not only is China poised to maintain its position as an oil producer, but is well-positioned to become sufficient supplier of oil and gas domestically to satisfy its growing demand for hydrocarbons. As for Russia and Saudi Arabia – we’ll see.

The next few years will show who gets it and who doesn’t. The race is on.

Alex Barak, CEO, Galex Energy Corporation (Houston TX)