China continues to mark progress in its efforts to boost oil and gas reserves and production. The petroleum sector of the world's most populous country is struggling to keep up with rocketing domestic oil and gas demand paced by one of the world's fastest growing economies. In recent years, Chinese petroleum demand had outstripped domestic supply. The result has been a rising volume of oil imports.
This imbalance in turn led Beijing, out of concern for an overheating economy, to clamp down on petroleum trade and consider market reforms and changes in petroleum investment policy (OGJ, May 15, p. 12).
All of this underpins a more aggressive effort by China to attract foreign petroleum investment in frontier exploration and development and sustain production and reserves life in mature producing areas.
Officials have described this new strategy as "stabilizing the East while developing the West." That spells a heightened emphasis on exploring the remote basins of Northwest China, encouraging offshore development, and allowing foreign participation in increasing recovery from mature producing fields (OGJ, July 3, p. 31).
Reserves, production
After almost 4 decades of development, China's oil and gas reserves growth hit a slump during the late 1980s.Additions to reserves flattened during the seventh 5 year plan, while production growth largely remained flat.
Since 1990, however, China has logged significant growth in what its petroleum scientists refer to as "geologic reserves" -- roughly equivalent to original oil in place (OOIP). Oil & Gas Journal estimated China's proved reserves at 24 billion bbl of oil and 59 tcf of natural gas as of Jan. 1, 1995.
Additions to crude oil OOIP in China slipped below 500 million metric tons/year during the late 1980s before rebounding in the early 1990s and jumping to 700 million tons in 1994. A similar pattern could be seen for natural gas.
Annual production of oil and gas rose during the same periods steadily, if marginally.
Upstream status Wang Tao, president of state oil and gas company China National Petroleum Corp. (CNPC), notes that hydrocarbon resources have been found in 24 provinces, autonomous regions, municipalities and coastal areas.There are more than 340 oil and gas fields operating from 21 oil and gas production bases that are linked with oil terminals, petrochemical plants, and refineries by a 17,000 km network of pipelines.
Eastern China contains most of the country's big oil and gas fields. Daqing oil producing complex, discovered in 1959 and put into production in the early 1960s, has been the country's largest crude producer. Its 1994 output totaled 51.2 million tons after exceeding the 50 million ton mark each year for a decade.
But aging Daqing is depleting its reserves and faces increasing difficulty in producing at that level. The same problem, if to a less urgent degree, is occurring in other eastern fields. That led Beijing to focus more on finding oil and gas in its western regions, especially in Xinjiang Uygur autonomous region, while bolstering output in the eastern fields.
"Since the beginning of the eighth 5 year plan (1991-95), this strategy has served as a guiding principle for China's oil and gas exploration," said Ding Guiming, director of CNPC's exploration administration.
Three prospective exploration targets in eastern China offer promise for sustaining reserves in that region. What's capturing attention in the East are unexpected discoveries in previously explored oil bearing strata, a series of significant finds in the tidelands area of Bohai Bay, and promising preliminary results from exploration in frontier basins.
That said, Beijing is counting on Xinjiang's Tarim, Turpan-Hami, and Junggar basins for new oil and gas reserves to support its petroleum industry well into the next century. A major expansion of the region's transportation facilities is under way in support of that effort.
1994 exploration results
According to Ding Guiming, Chinese exploration teams discovered 700.7 million tons of crude oil and 113.5 billion cu m of natural gas last year -- again, expressed as geologic reserves. "The amount of oil reserves the teams discovered is the largest in a decade, while the gas reserves they found have exceeded 100 billion cu m for the fourth consecutive year," he said. In 1994, China's oil and gas industry spent 13.3 billion yuan ($1.6 billion) on exploration, conducting 110,000 line km of 2D seismic surveys and 10,000 sq km of 3D seismic and drilling 85 wildcats.Ding also noted that additions to oil and gas geologic reserves in eastern China reached what he termed "a minor peak" of 500 million tons last year, compared with an average 300 million tons/year in recent years.
At the same time, western basins contributed geologic reserves totaling about 200 million tons of oil and nearly 10 billion cubic m of natural gas to the nation's hydrocarbon resource. "With the improvement of technical standards, we aim to enhance the average reserves per well to 1 million tons this year," Ding said.
The CNPC official pointed out that 19 significant discoveries were made last year, with one exceeding 100 million tons and five others more than 50 million tons each.
Chinese exploration made significant progress in seven areas -- the Two-Rivers area and Northeast Rift and Basin group in Northeast China, the Bohai Bay tidelands along the Yellow Sea, Tarim and Junggar basins in Xinjiang, Sichuan basin in Southwest China and the Shaan-Gan-Ning basin in North China.
Crude oil geologic reserves discovered in fields in the first five regions were 40-300 million tons/field. The latter two basins yielded mostly natural gas. "Discoveries in these areas will provide a solid basis for further exploration in the next 2
years," Ding said. He also noted preparations are under way for fresh exploration campaigns in six major provinces across the country.
The near term exploration focus is on the Northeast Rift and Basin group, Bohai Bay tidelands, North China Paleozoic Erathem structures, Southeast Jurassic system, South China carbonates, and North Tibet basin.
Ding said, "With the high degree of prospecting now going on in eastern China, we will concentrate more on exploration in western China."
Offshore update
Although characterized by high technology, high investment, and high risk, China's offshore petroleum industry has made rapid progress since 1979. That's when China decided to open its offshore oil resources to foreign capital and technology, said Cao Sanyong, an international liaison department official with China National Offshore Oil Corp. (Cnooc).Since the promulgation in 1982 of a law allowing foreign participation in offshore petroleum exploration and development, Cnooc has held four rounds of bidding on contracts for the work. About 100 contracts have been signed with 59 companies from 16 countries and regions, covering a total area of 350,000 sq km.
"At the moment, 40 of these contracts are still in effect," Cao said. "By the end of September 1994, overseas companies had invested $4.295 billion in China's offshore oil and gas, spending $2.681 billion on exploration and $1.614 billion on extraction."
"At present, there are 12 offshore oil and gas fields in operation in China's waters." Cao said.
Bohai Bay has five oil and gas fields in production. Among them, three oil fields are cooperative projects with Japanese companies: Bozhong 28-1 and Bozhong 34-2/4 with Japan-China Oil Development Corp. and Chengbei with Japan Chengbei Oil Development Corp.
Cnooc unit Bohai Oil Co. alone operates Jinzhou 20-2 oil and gas field and Suizhong 36-1 oil field.
In the South China Sea, Cnooc participates with foreign partners in four producing oil fields: Huizhou 21-1 and Huizhou 26-1 with the ACT Operating Group of Agip SpA, Chevron Corp., and Texaco Inc., Lufeng 13-1 with Japan's JHN Group, and Xijiang 24-3 with Phillips Petroleum Co.
In the Beibu Gulf, Cnooc unit Nanhai West Corp. operates all three producing oil fields -- West 428, Weizhou 10-3, and Weizhou 11-4.
Cnooc and foreign operators currently operate 25 platforms and seven single point mooring/floating production, storage, and offloading (FPSO) systems off China.
Offshore plans
Cnooc is poised to boost China's offshore crude oil production this year. Plans call for 1995 crude output to reach 7 million tons, up from 1994's record flow of 6.47 million tons.Offshore output is projected to peak in 1997 at 12 million tons of oil and 4 billion cu m of gas.
"Our aim is to stabilize the annual output at 10 million tons by the end of the century," Cao said.
Key to those plans are efforts by Cnooc and its foreign partners in developing five offshore oil fields: Caofedian 1-6, Xijiang 30-2, Huizhou 32-2, Huizhou 32-3, and Liuhua 11-1. ACT started up Huizhou 32-2 and 32-3 oil fields in the Pearl River Mouth basin in mid-June (OGJ, June 26, p. 22). Production is to peak at 60,000 b/d late this year.
Phillips started up Xijiang 24-3 last year (OGJ, Nov. 28, 1994, p. 32) and was scheduled to install a platform for nearby Xijiang 24-3 this year. Production is expected to peak at 66,000 b/d in 1996.
Cnooc operates Caofedian 1-6, a self-financed oil field development in Bohai Bay.
Also on tap is the imminent start-up of Yacheng 13-1 gas field in the South China Sea south of Hainan. Yacheng 13-1, a 100 billion cu m proved reserve gas field under development by ARCO and partners, is scheduled to begin supplying natural gas to Hong Kong in early 1996.
Liuhua development
Liuhua 11-1, under development by Cnooc and operator Amoco Orient Petroleum Co., is expected to start production by yearend 1995 or early 1996. Liuhua crude is slated to feed the 160,000 b/d refinery Royal Dutch/Shell and Chinese partners are building at Huizhou in Guangdong province.Liuhua 11-1, in 330 m of water in the Pearl River Mouth basin, is China's biggest offshore field. Oil reserves are pegged at 1.46 billion bbl. Gravity is 20, and the lack of associated gas calls for artificial lift.
Amoco and partners will develop the 35 sq km shallow reservoir in Liuhua 11-1 with a mix of 16-20 horizontal and vertical wells. Five wells have been drilled to date, tapping an average pay thickness of 80 m.
Production is to begin in the western half of the field from horizontal wells drilled to a true vertical depth of 770-870 m and horizontal displacement of 600-1,500 m. It is expected to peak at 65,000 b/d.
Luihua will be produced into an FPSO converted from a tanker (OGJ, Nov. 14, 1994, p. 39).
Offshore exploration
In 1994, Cnooc signed eight production sharing contracts and initial agreements with seven foreign companies, covering a total area of 35,000 sq km.The foreign companies, according to contract terms, will spend $200 million for exploration, drill 26 wells, and shoot 15,000 line km of 2D seismic and 800 sq km of 3D seismic. Cao noted Offshore China exploration peaked in 1984-85, when more than 40 wildcat and appraisal wells were drilled.
He predicts 1995 will be another banner year, with at least 30 exploratory wells being spudded. Foreign companies are to account for 20 of those wells. Eleven wildcats will have been spudded in the newest offshore frontier, the East China Sea.
Xinjiang update
Petroleum activity is simmering again in Xinjiang Uygur autonomous region of remote Northwest China.Most notable is the effort to expand the oil and gas transportation system in the Tarim, Junggar, and Turpan-Hami basins.
The rate of discoveries and field development work has been outpacing the region's ability to transport hydrocarbons. CNPC had originally targeted productive capacity of 100,000 b/d of oil in the Tarim basin by yearend 1995.
However, the lack of infrastructure led CNPC to reconsider its 1995 production goals. Those same transportation constraints forced CNPC to shut in a number of Tarim basin wells in 1994, resulting in a shortfall of 8,000 b/d from the target volume.
CNPC previously had aimed for production of 258,000 b/d of oil from Xinjiang region basins in 1995, an increase of 33,000 b/d from 1994. That was to break out as 166,000 b/d Junggar, 48,000 b/d Tarim, and 44,000 b/d Turpan-Hami.
Plans call for Xinjiang refineries to process 137,000 b/d of that local crude this year, with the remainder shipped to refineries in Lanzhou and to a lesser extent in Northeast China -- 4,000 b/d by truck and 110,000 b/d by rail.
Progress in expanding infrastructure in the region, which features some of the most forbidding terrain and harsh climate in the world, is keeping pace with government efforts to step up exploration and production. In June, CNPC unveiled an international tender that offered 12 blocks in the Tarim and Junggar basins to foreign companies.
Tarim overview
Domestic and foreign exploration and production companies have high hopes for elephant class discoveries in the Tarim basin.Chinese geologists estimate the basin's postulated oil equivalent resource at 144 billion bbl. Proved and probable oil reserves found to date total 1.46 billion bbl.
The second largest sedimentary basin and the biggest intermontane basin in the world, Tarim covers 560,000 sq km, about the size of Texas. Two thirds of the basin is covered by the Taklimakan Desert, a region too harsh to allow unsupported human access.
Even so, CNPC has invested 15 billion yuan ($1.8 billion in current dollars) in Tarim E&P during the past 5 years. That includes a $1.2 billion loan from the Bank of China. CNPC has started up five major fields in the Tarim basin: Lunnan, Donghetang, Sangtamu, Jiefang Qu Dong, and Tazhong 4. Those fields and others in the basin produced 39,000 b/d in 1994.
CNPC is proceeding with exploration of another 19 potentially hydrocarbon bearing structures in the basin.
Junggar basin
The Junggar basin consists of an extensive accumulation of lacustrine sediments, largely originating from the Tianshan Mountains, which form a boundary to the basin's northwest perimeter.Located in North Central Xinjiang, the basin covers about 200,000 sq km. Karamay oil field, the Junggar basin's major producing area, lies in the northwest part of the basin. It is estimated to contain as much as 9 billion bbl of OOIP.
Karamay production is from a complex series of structural and stratigraphic traps related to late Paleozoic and later thrusting of the northwest margin.
Exploration is spreading from the northwest fringe to the center of the basin. A number of other oil fields, notably Caiman and Shixi, have been found recently, accenting the basin's still largely untapped potential.
Pipeline expansion
CNPC's priority in Xinjiang is to expand hydrocarbon transportation capacity in the region, especially to and from the Tarim basin.The region's earliest pipeline, a 250 km, 529 mm, 80,000 b/d capacity crude oil line from Karamay area oil fields to the 50,000 b/d refinery at Urumqi in the Junggar basin, was built in 1982.
That was followed by a 90 km, 40,000 b/d crude oil pipeline, completed at yearend 1993, that extends from Lunnan to Korla in the Tarim basin.
Other Xinjiang pipelines under construction or planned are:
- A 90 km gas pipeline from Lunnan to Korla, with proposed diameter of 325 mm and undisclosed capacity. The proposal is awaiting approval by Beijing's State Planning Council (SPC).
- A 310 km gas pipeline from Shanshan to Urumqi that is designed to handle 153 MMcfd. It is under construction, with completion scheduled soon.
- A 315 km, 426 mm gas pipeline from Tazhong 4 field to Lunnan that will have a capacity of 38 MMcfd. Paralleling the Tazhong 4-Lunnan gas line is a 426 mm, 60,000-80,000 b/d crude oil pipeline and fiber optic cable. Work began at the end of July on all three lines, the first to be laid in the Taklimakan Desert. They are expected to be ready for start-up in August 1996.
- A 491 km, 610 mm crude pipeline with design capacity of 200,000 b/d to be laid from Shanshan to Korla. A feasibility study is under way.
- A proposed 4,200 km pipeline that would carry as much as 200,000 b/d of Tarim basin crude oil to Chengdu and then Baoji in Shaanxi province before veering south to feed a proposed 100,000 b/d refinery at Pengxian in Southwest Sichuan province.
Pipeline controversy
The latter four pipelines are not without controversy.Total cost of the two pipelines plus Tazhong 4 development is pegged at about $600 million. However, CNPC got the green light last July 1.
The Shanshan-Korla pipeline is pending final approval from SPC and being designed by Italy's Snamprogetti SpA. Again, CNPC and SPC are at odds over the project.
CNPC sees the 200,000 b/d crude line as critical not only to move Xinjiang crude to market but also to help attract foreign E&P investment in the region.
SPC, however, wants to delay the project until enough reserves have been proved in the region to justify construction.
The council proposes to upgrade the existing Korla-Turpan railway to handle 100,000 b/d of crude, a project it contends is $24 million cheaper than the Shanshan-Korla pipeline. The big export trunk line to eastern China, with an estimate cost of $840-960 million, is not expected to be economic until it is supported by proved reserves in the Tarim basin of at least 4.75 billion bbl.
Other infrastructure
Other expansion plans for Northwest China's transportation infrastructure are in the offing. The 295 km transdesert highway stretching from Lunnan to Xiaotang on the northern edge of the Taklimakan Desert and on to Tazhong 4 in the middle of the desert is considered an engineering marvel in China.Eventually, Tazhong 4, the Tarim basin's biggest field, will be the centerpoint of the desert's transportation network. One proposal calls for extending the desert highway farther south to link with the state highway to Hetian on the southern edge of Xinjiang.
Only one railway serves the region solely from within, extending from Korla to Turpan. The Lanzhou-Urumqi railway is the only rail line connecting Xinjiang with the rest of the country. Construction of a parallel rail line to the Lanzhou-Urumqi railway is under way and targeted for completion by 1997, when freight handling capacity is expected to reach 50 million tons/year.
Wrangling over storage facilities in the Tarim basin also underscores the chicken-or-egg dilemma CNPC and SPC are grappling with.
Tarim has a total crude storage capacity of 2.336 million bbl. Six 365,000 bbl storage tanks lie along the route of the Lunnan-Korla pipeline, with four at Lunnan and two at Korla. In addition, two 73,000 bbl crude storage tanks are in service at Korla.
CNPC is more concerned about delivering Xinjiang crude to market and thus is eager to launch a massive program of infrastracture expansion. The state company is being pressed hard by Beijing to boost its crude oil production in Xinjiang in the light of production leveling off in East China. For CNPC, the question is not how much crude the Tarim basin can produce but how much it can deliver.
On the other hand, SPC, as a state economic planner, is more interested in how much crude oil CNPC can find in the Tarim basin to make the construction of more infrastructure viable.
Bid round starts
Despite complaints by foreign companies over the absence of adequate infrastructure near the 12 blocks opened to foreign bidding this summer, CNPC's International Exploration & Development Cooperation Bureau (Cnodc), is confident about the prospectiveness of the blocks on offer.A recent, self-financed CNPC discovery east of the Akesu River has rendered two of the offered blocks, T12 and T13, especially attractive. A wildcat that blew out less than 100 km away apparently found a major reservoir.
The 1 Dawanqi, spudded in June and projected to 3,500 m, blew out at 500 m, spewing gas and water plus some condensate. That's the shallowest depth reported for hydrocarbons in the Tarim basin. Drillers gauged a flow rate of 1.75 MMcfd and 166 b/d of condensate. The blowout was quickly controlled, and drilling resumed to target depth.
CNPC estimates the 1 Dawanqi discovery has a reserves potential comparable to that of Tazhong 4.
Cnodc said almost 30 foreign companies have registered for China's third onshore bidding round that opened June 8. Most are major companies, with small independents discouraged by the remoteness and harsh conditions of the acreage offered.
A Houston conference on Tarim bid acreage targeting small and medium sized companies drew little response. The response was enthusiastic, however, among bigger firms. At least seven companies have purchased data packages of the 12 blocks, spending a total of $2.8 million.
Among those registering or buying data packages are Agip, Amoco, ARCO, BP, Chevron, Exxon, Inpex, Itochu, Japan Energy, Japex, Maru- beni, Mobil, Phillips, Shell, Sumitomo, Texaco, and Unocal. A late entrant was Amerada Hess, which set up talks and data review arrangements with Cnodc Aug. 3.
Review time for the data packages was June 19-Aug 31, with the deadline for bids set for Oct. 31. Bids are to be evaluated early in November, with negotiations to get under way by the end of that month. Contracts could be signed as early as December or January.
Acreage details, terms
The latest onshore bidding round, China's third, offers acreage totaling 112,739 sq km. On offer are Minfeng, Yutian, Luopu, Heitian, and Sangzhu blocks in the southern Tarim basin; Akqi, Wushi, and Shajingzi blocks in the Northwest Tarim basin; Dongdaohaizi in the eastern portion of the Junggar basin's central uplift; and DongWan and Qingshuihezi in the southern Junggar basin.CNPC's Tao notes that very little exploration has occurred in the areas offered in the latest round.
Under bid round production sharing contract (PSC) terms, foreign companies will assume all exploration risk. In the event of a commercial discovery, CNPC will take a 51% interest. PSC terms can vary according to individual contracts.
Generally, the contract term covers three periods: exploration, development, and production. The exploration period is for 8 years split into a first 4 year phase and two 2 year phases that follow. The foreign company has the option to terminate the contract at the end of each exploration period.
The production period is limited to 15 years and the overall contract term to 30 years. At the end of the first exploration phase, the foreign company is to relinquish 40% of the original contract area. At the end of the second exploration phase, the foreign company must relinquish 25% of the contract area, excluding each development or production area. At the end of the third exploration phase, the foreign company must relinquish all acreage not covered by an oil or gas field.
The foreign partner is to bid a minimum exploration work program in terms of line kilometers of 2D seismic survey and number of wildcats with minimum projected depths. In the production stage, 60% of the annual gross production of crude oil from the entire contract area will be used to recover general costs, including exploration costs. Development costs and field operating costs are to be recovered only from gross production of crude from the field in which the costs were incurred.
After cost recovery and payment of value added tax and royalties, the balance of annual gross production of crude oil from a field in the contract area will be divided into "share oil" for the Chinese side and "allocable remainder oil" for the foreign partner side. Multiplying the remainder oil by a factor to be negotiated in incremental tiers will yield the volume of production to be shared by both parties proportional to their interests.
Acreage selection
CNPC's third round is largely a response to complaints from foreign companies that China was reserving its most prospective acreage for state owned companies.CNPC's first round, in 1993, focused solely on the Southeast Tarim basin. Three of the five blocks offered were taken up by groups led by Agip, BP, and Exxon. The second onshore bid round offered 26 blocks, mainly in East and Northeast China, and included 11 enhanced oil recovery projects in mature eastern fields. In that round, only three blocks were taken by foreign companies amid complaints about inadequate geological data and poor quality reservoirs.
Many major companies registering for the third round had passed on the second. The question remains as to what extent CNPC is willing to share its best acreage with foreign companies. Although China needs foreign capital and expertise, the government is uncertain about how much and in which direction it should open its energy sector without causing domestic turmoil.
An overall guiding philosophy of self-reliance will continue to be a strong influence in coming years, a standard seen in the second bid round.
How strong that philosophy's influence will be poses a dilemma for multinational companies pursuing upstream investment in China. Issues of adequate investment incentives and uncertainty over price policies will remain key factors in evaluating investment prospects in China E&P, industry officials contend.
CNPC THIRD ROUND ACREAGE Area of Block Block Acreage cooperation number name (sq km) ------------------------------------------------------- South Tarim T6 Minfeng 14,207 T7 Yutian 15,335 T8 Luopu 13,668 T9 Heitian 10,918 T10 Sangzhu 7,906 Northwest Tarim T11 Akqi 16,708 T12 Shajingzi 10,982 T13 Wushi 10,571 South Junggar Z1 DongWan 2,620 Z2 Qingshuihezi 2,340 East Part Of Z3 Mosuowandong 3,800 Central Junggar Z4 Dongdaohaizi 4,300Copyright 1995 Oil & Gas Journal. All Rights Reserved.
