Industry Overview

China’s oil & gas industry is subject to a high degree of government control. The market is dominated by three large SOEs: Sinopec, China National Petroleum Corporation (CNPC / PetroChina) and China National Offshore Oil Corporation (CNOOC). CNPC spun off most of its assets and liabilities related to exploration and production, refining and marketing, chemicals and natural gas businesses to PetroChina in 1999. PetroChina is the listed arm of CNPC. Sinopec’s activities are largely downstream (refining & petrochemicals), while CNPC’s and CNOOC’s are mostly upstream (exploration & exploitation); CNPC deals with onshore exploitation while CNOOC is engaged in offshore (and overseas) exploitation. In terms of processing, Sinopec controls 60% of total crude distillation capacity, while PetroChina accounts for 38%. The remainder is processed by smaller refineries. The natural gas market in China is developing rapidly due to increases in demand from the chemicals industry and household needs for heating and cooking fuel. Still, natural gas accounts for only 3% of the energy mix, though the government is seeking to increase that proportion.

I. Demand & consumption.
China’s economic growth has resulted in continually rising demand for oil. 350 million tons of crude oil was consumed in 2006 – a 7% rise from 2005 – but only 184 million tons was produced domestically. China’s dependency on oil imports is thus 47%, making it the world’s second-largest importer of oil, behind the US and ahead of Japan. The proportion of imports is expected to increase by 1% annually until 2010. This is an issue which the central government is eager to address by encouraging oil & gas substitutes, e.g. Coal-to-Liquids (CTL), Coal-Mine Methane (CMM), coal gasification, and biofuels.

In the past, consumption of oil has been dominated by industry, accounting for about 70% of the total demand in China. According to a report from Center for Strategic and International Studies and Peterson Institute for International Economics, growth in demand at the margin has come from burgeoning transportation needs, accounting for 42% of growth since 1995.

II. Regulatory Environment
In the Energy 11th Five-year Plan and Energy Conservation Plan, the government aims to:

• Emphasize the use of high-efficiency technologies to develop low-grade oil & gas resources and improve oil recovery ratios
• Encourage the replacement of fuel oil (light oil) with clean coal, petroleum coke and natural gas
• Accelerate Coal-to-Liquids projects
• Accelerate the construction of oil bases and to strengthen oil pipelines and networks
• Implement Petroleum Saving and Substituting Projects in the electric power, petrochemical, metallurgical, building material, chemical, and transport industries.
• Implement Fuel Economy Standards and Clean Automobile Action Plan for motor vehicles
• Substitute small oil burning units

Ultimately, through increasing efficiency and using oil substitutes, the government aims to save 38 million tons of crude oil by 2010. Foreign firms wishing to do business in this market are required to form JVs with one of the large SOEs to engage in onshore or offshore development. Currently, the five largest SOEs (CNPC, Sinopec, SinoChem, CNOOC, and Zhuhai Zhenrong Corp) are the only ones allowed to import crude oil. However, by the end of 2007, 15 other private companies should receive import licenses from the government, leading to increased demand for foreign partnerships, which can bring in advanced technology and know-how, efficient oil exploitation, and refining technologies.

III. Key suppliers of equipment / technologies.
SOEs, private Chinese, and foreign companies account for about 66%, 19%, and 15% of the market respectively. SOEs are very well-established for well-drilling equipment, small and medium sized private Chinese companies are producing mainly individual stand-alone equipment, while foreign companies supply advanced complete-set equipment. Key international players have established their presence in China mostly through partnering with Chinese companies.

Currently, most of China’s technology is focused on the exploitation and processing of its domestic light crude oil – domestic equipment accounts for about 90% of this sector. However, limited domestic reserves have forced China to exploit more of its heavy crude reserves and to import increasing quantities of heavy crude oil. This type of oil is more difficult to recover from the ground, more difficult to refine, and more polluting than light crude; thus requiring advanced technology.

In general, areas with high government support and low domestic product maturity offer the best prospects for foreign companies. Exploitation technologies enjoy strong government support. Specifically, Steam-Assisted Gravity Drainage (onshore), Geologic exploration equipment, position navigation systems, and deep-water drill systems (offshore) are technologies and equipment that enjoy high demand from Chinese companies.

Exploitation

I. Onshore Recovery

Overview. China has in the past restricted foreign access to its onshore oil and gas resources, but as demand for energy is booming, it has become more receptive to JVs between SOEs and foreign partners. Foreign expertise and know-how is needed in oil & gas recovery in geologically complex areas and for the extraction of heavy oil – which accounts for 20% of China’s onshore oil reserves. Due to the growing reliance on imports, heavy oil is expected to account for an increasing proportion of production. For example, PetroChina estimates its production of heavy oil will surge from the current 200,000 barrels daily to 500,000 by 2010.

Regulations. The Energy Conservation Plan states that optimization technologies should be applied to oil exploitation systems; energy saving supplementary technologies to heavy crude hot exploitation; optimized operation technologies to water filling systems; comprehensive energy saving technologies for oil and gas enclosed collection and transmission, and recovery and reutilization technologies for discharged natural gas.

Current technology & best prospects. The Chinese onshore recovery industry relies on domestic manufacturers for some 90% of its equipment. However, there is still a need for foreign assistance in geologically complex extraction technology and thermal recovery technology for heavy crude. To illustrate, PetroChina largely relies on heavy crude extraction through an old thermal recovery method (horizontal wells), which can only recover 5% - 10% of the oil. However, in recent years, it has implemented a more advanced thermal recovery method (Steam-Assisted Gravity Drainage (SAGD)) in the Liaohe field. This technology allows for some 50% of the oil to be recovered and boasts production efficiencies of more than 60%. It also uses substantially less water than traditional heavy oil recovery methods.

Another experimental heavy crude recovery method that is expected to begin commercialization is Toe-to-Heel Air Injection (THAI). It boasts an oil recovery rate of 70% - 80%, substantial quality upgrading during extraction, high thermal efficiency, and an overall 50% reduction in GHG emissions. Petrobank, the Canadian developer of THAI, has already signed a technology transfer agreement with PetroChina.

II. Offshore Recovery

Overview. Rising energy demand and an increasing reliance on foreign oil have prompted the government to develop its offshore oil recovery capacity. As 70% of offshore reserves consist of heavy oil and are located in deep water and geologically complex areas, recovery rates have been low. The offshore business is dominated by state-owned CNOOC, which cooperates with foreign firms to develop areas where domestic technology and know-how is lacking. Up to the end of 2006, CNOOC had signed 182 petroleum contracts and agreements with more than 76 petroleum companies from more than 20 countries. Of the 50 offshore oilfields in production in 2006, 27 were jointly developed with partners.

Regulations. Developing deep-sea oil reservoirs has become the government’s new strategy to increase oil production. The government plans to double the amount of offshore oil exploitation between 2003 and 2010. Since recovery is still highly dependent on foreign technology, the government gives favorable tariffs for imported offshore oil recovery facilities, and imports of key equipment is exempt from import taxes altogether.

Current technology & best prospects. China has experienced rapid development in the field of exploration and extraction technologies. Nevertheless, since domestic technology still has its limits CNOOC often opens blocks to partnerships with foreign companies. In 2007 an unprecedented 22 blocks, which are sub-divisions of oil fields that are open to bidding by companies, were developed with foreign companies. Partners capable of deep-water drilling, geologically complex reserves extraction, and enhanced oil recovery are in demand. Current foreign partners in production sharing contracts are British BP, Canadian Husky Oil and Australian Roc Oil. One drilling technique being applied by these JVs is multilateral wells; flooding techniques include water flooding and polymer flooding. In 2011, Aker Kvaerner will deliver a semi-submersible rig to China. Through production sharing contracts, China’s offshore industry is able to employ cutting-edge technologies. Over 50% of advanced offshore recovery equipment, however, still has to be imported. For example, high value-added core technologies such as geologic exploration equipment, system software, and positioning navigation systems are entirely dependent on imports.

Refining

I. Heavy Crude Refining

Overview. As domestic light crude (low viscosity, low sulphur) reserves dwindle and international light crude prices rise, China is using more heavy crude (high viscosity, high sulphur). This has forced China’s refiners to shift their focus to more complex refining methods. At the same time, introduction of more stringent transportation fuel standards is also forcing refiners to include equipment to filter out pollutants. Some $6.2 billion in investments is required to meet the 2010 Cleaner Fuel targets. PetroChina, for example, has set aside RMB 20 billion to upgrade its refineries by the end of 2009.

Regulations. Currently, a EURO III–equivalent standard is in effect across China. The city of Beijing is to implement EURO IV standards in 2008 as part of its drive for a Green Olympics. Other large cities are expected to follow suit, and the standard will be adopted nationwide in 2010. Refinery capacity is to increase 31% during the 11th Five-year Plan so as to reduce dependence on imports of refined products. There are plans to increase the number of refineries from 9 in 2006, to 20 refineries by 2010, and 31 by 2015 – each with a capacity of 10 million tons of crude oil per year.

Current technology & best prospects. At the end of 2006, there were 9 refining facilities with an annual capacity of 10 million tons. Sinopec and PetroChina have plans to build and expand more refineries than the government targets specified. Sinopec will focus on expansion of existing refineries while PetroChina will focus on building new plants.

Refineries that are upgraded or expanded and newly built refineries will need hydrocrackers and delayed cokers to process increasing amounts of heavy crude. Hydrotreaters are needed to filter out pollutants, such as sulphur and nitrogen, to comply with EURO III standards and to increase combustion efficiency. For example, in 2007 the Jinzhou Refinery invested $168 million in an expansion that included a hydrocracker and hydrotreater with the capacity to filter 1.5 million tons-per-year of pollutants.

II. Petrochemical Refining

Overview. In 2005, China overtook Germany as the world’s third-largest chemical producer, behind the US and Japan. Output is expected to increase at about 10% annually until 2016 – compared to about 4% globally. The industry is dominated by SOEs, namely Sinopec, PetroChina and SinoChem. Nevertheless, foreign investment has been substantial with over 2,000 projects. Among the world’s top 50 oil and petrochemical companies, 40 have set up JVs or WOFEs in China. China’s petrochemical industry is centered on the Yangtze and Pearl River Deltas.

Regulations. The National Climate Change Plan places special emphasis on the production of one petrochemical: ethylene. This substance is the most important synthetic organic chemical in terms of volume, sales value and number of derivatives. In the Energy Conservation Plan, the government aims to optimize raw material (ethylene) structure, retrofit ethylene cracking furnace with advanced technology, optimize quenching system operation, and improve facilities management. Also, it plans to have 30 one-million ton ethylene plants in China by 2015, of which about 11 million tons in capacity must be completed by 2010. [Among this, 6.2 million tons is to be added by seven major ethylene projects while retrofitting and expansion will contribute 4.4 million tons]. Foreign companies must form JVs with a Chinese partner in order to produce ethylene (and the Chinese partner must hold a majority share). Foreign investment is encouraged as a means to provide raw materials and advanced technology.

Current technology & best prospects. Sinopec and PetroChina have announced major programs to expand their olefins and derivatives capacity. However, the biggest growth area is ethylene production. All major Chinese producers already use ethylene steam cracking technology constructed by or licensed from foreign companies, such as Linde, Shaw Group, and Shell.

JVs with SOEs are the main market expansion strategy for foreign companies, for example BASF and Shell. In 2006, ABB Lummus and Sinopec jointly developed cracking heater technology to produce polymer-grade ethylene. This shows that SOEs are not so much interested in purchasing separate units as they are in acquiring patented technological processes and technical expertise.

Natural Gas

Natural gas is the fastest growing fuel in China's energy mix, but it is not increasing fast enough to meet demand. Natural gas consumption in China is expected to rise to over 10% by 2020 in light of increasing LNG imports as well as domestic discoveries. According to industry sources China will require around 200bcm of natural gas per year by 2020, a four-fold increase from current consumption. From 2006 to 2020, China's natural gas infrastructure construction will have to involve CNY 220 billion of investment to meet this skyrocketing demand. The Chinese government is continuing its efforts to create a more transparent gas environment to encourage investment by creating a gas law and appropriate downstream gas regulations.

Major Trade Shows

This section provides a listing of upcoming oil and gas-related events in China, including industry shows and trade missions. While FCS China is directly involved with some of these events, the others listed here have no direct relationship with the FCS and are listed solely as a convenience to our users.

For more information, please contact the organizing group as listed in the event description. Verify the information before making any commitments - we are not responsible for accuracy of information or changes in events' schedules.

The 7th Xinjiang International Petroleum & Petrochemical Equipment and Technology Exhibition (XJPPE)
Date: July 22-24, 2008
Venue: China Xinjiang International Exhibition Center
Organizer: Xinjiang Zhenwei International Exhibition Co., Ltd.
Address: M, 15th floor, Huifeng Mansion , No.56 Zhenxie Road , Urumqi,China Post code: 830002
Tel: 86-991-2321006
Fax: 86-991-2321606
Contact: Betty Tian (86013579925722)
Addia Ma (86013999102038)

2008 Shanghai the 3rd International Oil and Gas Pipeline and Storage Technology Equipment Exhibition (SIPE 2008)
Date: August 20-22, 2008
Venue: Shanghai International Exhibition Center
Organized by: Shanghai Pudong Exhibition Co., Ltd.
Address: RM501-509 NO.501 GUANGYUE ROAD SHANGHAI, CHINA
Post Code: 200434
Tel: 86-21-65929965
Fax: 86-21-65282319
E-mail: info@N0SPAM.aiexpo.com.cn

The 7th China (Dalian) International Oil Processing & Chemical Industry Exhibiton 2008
Date: TBD
Venue: Dalian Xinghai Convention & Exhibition Center
Contact: Zhang Hong Ling
Tel: 86-411-82644428
Fax: 86-411-82645808
Email: zhanghongling.8@N0SPAM.126.com
Website: zhanghongling.8@N0SPAM.126.com

Useful Websites

Links to non-Commercial Service organizations are provided solely as a convenience to our users. The Commercial Service makes no representations about the accuracy or suitability of the information provided on the following web sites. The FCS is not responsible for the content of the individual organization webpages found through these links, and their inclusion here should not be understood as an endorsement of these organizations.

Pipeline and Valve:
http://www.cnpv.com/
http://www.chinapipe.net/

Petroleum and Petrochemical Equipment:
http://www.wwce.net/
http://www.chemnet.com.cn/
http://www.jx.cn/
http://www.oillink.com.cn/
http://www.oilinfo.com.cn/
http://www.sinopec.com.cn/
http://www.cnpc.com.cn/
http://www.petrochina.com.cn/
http://www.cnooc.com.cn/
http://www.sinochem.com.cn/

U.S. Commercial Service Contact Information for Oil and Gas

The U.S. Commercial Service offers a broad array of market entry services to U.S. companies in the oil and gas industry. Please refer to the following relevant contacts for additional information on how we can help you expand your business in China.

Beijing Office:
Tel: (86-10)8531-3000
Fax: (86-10)8531-3701
Bryan Larson
Wang Jianhong

Shanghai Office:
Tel: (86-21)6279-7630
Fax: (86-21)6279-7639
Eric Hsu
Stellar Chu

Guangzhou Office:
Tel: (86-20)8667-4011
Fax: (86-20)8666-6409
Lena Yang

Chengdu Office:
Tel: (86-28)8558-3992
Fax: (86-28)8558-3991
Cui Shiyang

Shenyang Office:
Tel: (86-24)2322-1198x8142
Fax: (86-24)2322-2206
Liu Yang