OIL AND NATURAL GAS IN CHINA: DOMESTIC SUPPLIES, PRIVATE WELLS, OIL SPILLS, EXPLOSIONS AND PIPELINES

OIL AND NATURAL GAS IN CHINA

20080312-Daqing5.jpg
Daqing poster
China has a huge appetite for oil and natural gas and this hunger will no doubt increase no matter how high the price of oil goes. To meet demand China has invested billions of dollars in pipelines, oil storage tanks, liquid natural gas terminals and other oil- and natural-gas related infrastructure. It is also taking measures to conserve energy such as imposing fuel economy standards on new cars, so it doesn’t have to buy so much imported oil and natural gas.

The government controls oil and natural gas prices and has kept them artificially low through subsidies. Raising prices is very risky politically. This policy has created shortages by giving domestic oil companies and suppliers incentive to sell oil and natural gas abroad at high international prices rather than sell them at home at artificially low prices. In 2005 oil exports jumped by 30 percent as China was reaching around the globe to meets its domestic demand

China began filling the tanks for its first strategic oil reserve in January 2001. In 2004, it began work on building dozens of large oil storage tanks for strategic oil reserves that could keep China going for as long as three months if imports were suddenly to dry up.

In 2005, 60 people died in 161 accidents in petroleum and petrochemicals operation, 29 percent more than in 2004.

Websites and Resources

Chinese Oil and Natural Gas Companies: U.S. Energy Information Administration Report on Oil in China eia.doe.gov/cabs ; U.S. Energy Information Administration Report on Natural Gas in China eia.doe.gov/cabs ; Fueling the Dragon iags.org ; China’s Growing Demand for Oil pdf file cbo.gov/ftpdocs ; Good Websites and Sources: Oil Refining Business in China pdf file eneken.ieej.or.jp ; China National Petroleum Corporation (CNCP) cnpc.com.cn/en ; Wikipedia article on CNPC Wikipedia ; China Petroleum and Chemical Corporation (SINOPEC) english.sinopec.com

On Energy and Electricity: U.S. Energy Information Administration Report on Energy in China eia.doe.gov/cabs ; U.S. Energy Information Administration Report on Electricity in China eia.doe.gov/cabs ;China Sustainable Energy Program efchina.org ; China Energy Report pdf file piie.com/publications ; Another Lengthy Energy China Report ieej.or.jp ; China Energy Production Statistics indexmundi.com ; Beijing Energy Network (a Chinese grassroots environmental group) greenleapforward.com

Links in this Website: ENERGY AND ELECTRICITY IN CHINA Factsanddetails.com/China ; DAMS AND HYDRO POWER IN CHINA Factsanddetails.com/China ; THREE GORGES AND THREE GORGES DAM Factsanddetails.com/China ; COAL IN CHINA Factsanddetails.com/China ; COAL MINE DEATHS IN CHINA Factsanddetails.com/China ; OIL AND NATURAL GAS Factsanddetails.com/China ; CHINESE OIL AND NATURAL GAS COMPANIES Factsanddetails.com/China ; NUCLEAR POWER AND ALTERNATIVE ENERGIES Factsanddetails.com/China ; WATER IN CHINA Factsanddetails.com/China

Oil Consumption in China

China consumes about 8 million barrels of oil a day, compared to 20 million a day in the United States. Put another way China with nearly a quarter of the world’s population consume less a tenth of the world’s oil while the United States with less tan 5 percent of the world’s population accounts for nearly a quarter of global oil consumption. [2010]

In 2005, China consumed 6.5 million barrels a day, compared to 20.4 million barrels in the United States, 5.5 million barrels in Japan and 2.7 million barrels a day in Germany and Russia. China meets 23 percent of its energy needs with oil. It currently consumes about 6 percent of the world’s oil. This figure is expected to rise to 9 percent in 2020.

China doubled its oil consumption between 1985 and 1995 and doubled it again between 1995 and 2005, rising from 90 million tons in 1985 to 209 million tons in 2004, with an average annual increase of 6.7 percent. Even if China’s oil consumption doubles a third time is will be half that of the United States. Per capita gasoline consumption in China is 10 gallons, compared to 459 gallons in the United States.

Huge growth in transportation and plastics production have doubled oil consumption and caused oil imports to increase sixfold in a decade. China’s consumption is expected to double by 2025. The increase is a result of industrial growth and an increase in the number of automobiles. By 2010, China will have 36 times more cars than it had in 1990 and 90 times more by 2030 when it is expected to have more cars than the United States.

In November 2010 a nationwide shortage of diesel caused gas stations to close and long lines to form outside ones that were open. The Longxing Funeral parlor in Chongqing stopped cremations. A dozen or so bodies had to be “put back in the freezer” until enough supplies could secured.

Demand and Prices for Oil in China

In 2008 China spent 33 times more on crude oil than it did in 1999. Demand for oil has increased at a rate of 24 percent in the late 1990s and early 2000s. The increasing demand for oil has created higher prices and shortages. Higher world oil prices have caused oil prices in China to rise. But at the same time increased demand for oil from China has caused world oil market prices to rise. The slowing of China’s growth beginning in 2008 was one factor that caused the global price oil to fall.

China will nearly double its demand for oil over the next quarter-century, according to the International Energy Agency in Paris. Its demand for natural gas is projected to more than quadruple. Andrew Higgins wrote in the Washington Post, With consumption soaring and the price of imports rising, China is desperate for new sources to boost its proven energy reserves, which for oil now account for just 1.1 percent of the world total---a paltry share for a country that last year consumed 10.4 percent of total world oil production and 20.1 percent of all the energy consumed on the planet, according to the BP Statistical Review of World Energy. [Source: Andrew Higgins, Washington Post, September 17 2011]

China is relaxing controls on fuel prices while oil prices are relatively low and easing curbs on refiners to allow them to set prices and not lose money. In June 2008, after years of keeping gasoline prices artificially low to the point refineries lost money, Beijing raised gasoline prices 16 percent and diesel prices by18 percent due to hikes in the price of oil. It was the first increase in eight months and the sharpest increase ever. The move was somewhat of surprise. Many thought that Beijing would wait until after the Olympics out of concern that higher energy prices might stir up discontent but oil prices of $140 a barrel were simply too high to subsidize. The decision caused global oil prices to drop by $5 and th estocks of top refiner Sinopec to soar.

Gasoline prices in Beijing rose from 91 cents a gallon in 1999 to $2.30 in 2006. Taxi drivers estimate that they have to work an extra hour a day to make ends meet. When oil rices were peaking in 2005 about a forth of the service stations in Guangdong were closed. Many industries that rely on oil have been forced to shut or run at lower-than-desired capacity because there is not enough gasoline and heavy oil to keep the machinery going..

In November 2007, the price of diesel and gasoline was raised by almost 10 percent to tackle the problem of fuel shortages resulting from a lack of refining capacity and the steep rise in oil prices. At that time shortages were so severe that there was rationing, long lines at gas stations and disruption of trucking in key export areas. Commenting on the long waits in gas lines because of chronic fuel shortages in 2007, one Chinese truck driver said, “When a truck driver is not eating rice, he’s eating diesel.”

Although consumption of oil is decreasing in the United States the price is rising because of demand in China and other developing countries.

Oil Production in China

China is the world's fifth largest oil producer. It produced 3.63 million barrels of oil a day in 2005, compared to 2.3 million barrels a day in 1984. Up until fairly recently most of the oil that China produced was exported, partly because China had so few motor vehicle and oil exports brought in large amounts of foreign currency.

Proven Oil reserves (2004 estimate): 24 billion barrels. Enough to last until 2020. Most of China has been thoroughly explored for oil, which means that significant new reserves are unlikely to be found except for offshore.

Domestic oil production is peaking and will soon decline. While demand has risen 6.7 percent a year between 1985 and 2004, domestic oil output has only increased an average of 1.8 percent over the same period. Some fields have run dry prematurely because of poor production methods in the past.

See Oil Imports Below.

China hopes to increase its refining capacity by a third between 2006 and 2010 to around 400 million tons with major oil-processing centers slated to be built in Sichuan and Guangxi.

Oil Production Areas in China

The Daqing Field---near Daqing in the Heilongjiang Province in Manchuria---is the biggest and oldest oil field in China. It produced 318 million barrels of crude in 2006. The first oil wells in China were sunk in Daqing in the 1950s, when workers carried 60-ton oil rigs in pieces with their backs and pack animals and roughnecks and engineers that developed the Daqing oil fields slept outdoors in sandstorms and survived on a diet of grapes and melons. The Soviets assisted the Chinese until 1959 and most of the major oil discoveries were made after they left.

In 1975 the Daqing area produced 80 percent of China's crude oil. In 2005 it still accounted for a third of China’s production but production levels are falling and other Chinese fields are expected to surpass it soon. Discoveries of new reserves have helped to avert cuts.

The are large deposits of oil sands in Xinjiang and Sichuan. The Chinese government and BP/Shell formed a venture to extract oil from oil shale and sand on northeastern Jilin province. The shale oil reserves there are estimated at 300 billion tons.

Most of China’s proven reserves are in Xinjiang Province in western China. There is also oil east of Beijing and in Heilongong province and off the east coast of China. Th 518-square kilometer Ordos Basin which stretches across the provinces of Shaanxi, Shanxi, Gansu, Ningxia and Inner Mongolia is reported to have 60 billion barrels of oil.Changqing is China’s third largest onshore oil deposit. Liaohe is another larger field. In April 2004, the Chinese government announced the discovery in the Sengi oilfield in northeast China. Many promising offshore deposits are in waters claimed by both China and Japan. See Below

Oil in Xinjiang

The oil fields in the Tarim Basin and Taklimakan desert in Xinjiang Province are among of the world's largest, most remote and expensive to develop. By some estimates they contain at least 74 billion barrels of oil---three times the proven reserves of the U.S. and one third of the proven reserves of Saudi Arabia. To get to the fields Chinese trucks are transported across the dunes by huge American-built trucks with colossal tires on roads made with sand-stabilizing plastic and tons of gravel brought in by yet more trucks. Reeds planted in nets are used to keep the dunes from covering the road.

Much of the oil lies in fields around Koral, in north-central Xinjiang, a so-called “instantaneous city” that has sprung up over night and filled with trading companies, shopping malls, a large nightclub district, a new airport and a population largely made up of Han Chinese hoping to seek their fortune. Between the mid 1990s and mid 2000s Koral grew from 100,000 residents to 420,000 residents and is growing by 20 people a year. Most of the jobs are going to Han Chinese not local Uighurs and Kazakhs.

Many are skeptical about the oil and gas potential of the region. Claims that the Taklamakan Desert and Tarim Basin contains as much oil as the United States appear to be overstated. Many of the deposits are more than 5,000 meters below the surface and are very expensive to harvest.

Several hundred successful wells have been sunk at Tarim No. 4 Field, where workers labor every day in temperatures that reach 104̊F in the summer and drop to -22̊F in the winter. A worker at the field told National Geographic, "There are sandstorms. You can't see farther than one meter. Then the cars stop, and the exploration stops. But the drilling always goes on." The oil men here refer to themselves as China's "soldiers of oil."

More than 60 companies from 16 countries shave expressed interest in developing oil in the Tarim basin. In December 1993, Exxon and a Japanese-Indonesian venture won the right to explore the first block. Texaco, Japan petroleum and Elf Aquitaine won the right to search in the second block.

Private Oil Wells in China

Near the city of Jiangbian in Shaanxi Province in the southern Gobi desert, a number of ordinary people, including farmers and truck drivers, borrowed all the money they could from friends and relatives, and drilled their own private wells on land their families had occupied for generations. The move was made possible in 1994 when the oil ministry and the oil company PetroChina allowed private citizens to prospect and drill their own wells in a 1,100-square-kilometer, 417-square-mile, area of Shaanxi

In many cases the oil wells were placed in corn fields and the oil was sold to a local refinery. One trucker who sunk $84,000 of his, his family’s and friend’ money in a 685 meter deep well told the New York Times the moment of truth came when he activated his derrick and sat by it all night worrying that his investment was for nothing. After the oil began to flow, at a rate of 21 tons a day, he said. “I screamed, I washed my hands on the oil, and I drank all night, but I couldn’t get drunk. I was too happy.”

Protests Over Private Wells in China

In the early 2003, local government officials began claiming thousands of the private wells in the Jiangbian area for themselves, paying their owners only a small faction of their value, in many cases much less than what the well owners spent setting up their operations. The local government rescinded the private prospecting rights without telling the owners. In some cases local government officials encouraged people to drill for more oil and when they found it the official seized the well.

Owners of the seized private wells filed a class action against the local government. It was the largest suit ever brought against a Chinese government and it received a lot of media attention. Those that had their wells taken away cited new government laws on private property adopted in 2003 and rules that allowed citizens to sue the government adopted in 1990.

Authorities invoked laws against public gatherings and disturbing public order. Private well owners were detained. Their primary lawyer, Zhu Jiuhu, was arrested. Feng Bingxian, a businesswoman who led a group of investors that had protested the seizure of the wells, was sentenced to three years in prison for disturbing social order. Others were convicted on similar charges.

Natural Gas and China

China gets three percent of electricity and two percent of it energy from natural gas. The government wanted to double that figure by 2010 and to increase natural gas's share of total energy supplies to 8 percent by 2020. China’s demand for natural gas is projected to more than quadruple in the next 25 years, according to the International Energy Agency in Paris.

Between 1985 and 2004, annual natural gas consumption tripled from 13 billion cubic meters to 31 billion cubic meters. Natural gas consumption was around 45 billion cubic meters in 2005. All of it was produced in China. Consumption is expected to rise to 117 billion cubic meters by 2010.

Demand is satisfied mostly by domestic fields for now. In the future, imports are expected to increase significantly.

China is building two medium-size, gas-fired power plants a week, adding a capacity comparable to the entire annual power production of the United Kingdom. That is more than double what it was building in the mid 2000s.

China has lots of natural gas (proven reserves of 8 trillion cubic meters) but much of it is in remote locations---particularly Xinjiang and Inner Mongolia---and require expensive pipelines to bring it to users.

There are large reserves of natural gas in the Chuandongbei gas field near Chongqing in Sichuan. A $400 million pipeline is being built there to carry the gas to central China. Beijing is currently getting natural gas from Shanxi. Natural gas is produced in the Yacheng gas field, 60 miles off the coast of Hainan Island.

Pipelines and Energy Transportation in China

China has 22,664 kilometers of pipeline for natural gas, 15,256 kilometers of pipeline for oil and 6,106 kilometers of pipelines for refined products as 2005. It plans to lay 150,000 kilometers of oil and gas pipelines between 2008 and 2020 to make sure energy supplies get to where they are needed.

The $5.2 billion, 2,486-kilometer oil pipeline between Xinjiang and Shanghai began operating in September 2004. Shell and Exxon and the Russian’s giant Gazprom have stakes in it. It follows parts of the Silk Road and crosses the Yellow and Yangtze Rivers.

Natural Gas Disasters in China

20080312-gas leak in Xuanhan Sichuan, china daily, env news22.jpg
Gas explosion at Xuanhan in Sichuan
In December 2003, an explosion of a natural gas well near Chongqing in Sichuan in central China, killed 198 people and produced poisonous fumes that caused 40,000 to be evacuated from their homes. Most died from inhaling the poisonous fumes, mainly hydrogen sulfide gas. The explosion was described as the worst industrial accident in China’s history.

Many of the dead were elderly people and children. In some cases entire families died. More than 9,000 people were treated for gas poisoning after inhaling hydrogen sulfide leaking out the well, which workers had great difficulty capping. Survivors said the gas smelled like rotten eggs and caused their eyes to burn as if someone had thrown hot pepper in them.

A “death zone” of 10 square miles was created around the well that exploded. The gas itself was heavier than air and thus stayed close the ground where its was most dangerous to people when it spread. Visitors to the area described dead people lying face down in front of their homes and dead livestock everywhere, many with white foam coming out their nostrils. One survivor said she grabbed her 5-year-old daughter and ran as fast as she could from the site but the child stopped breathing by the time they reached safety.

The disaster occurred after a drilling accident and was made worse by the remote location of the well. Six gas company workers were blamed for negligence and were given prison terms of between three and six years. To prevent the spread of toxic fume the gas was set on fire. The capping was done by men in earthmover equipment, dressed in protective suits and respirators, who poured concrete and mud down the well.

n 1997, a gas explosion in a gas field in Kaiching in Sichuan killed 11 people. A similar accident in September 1992 in Hebei killed six people.

Oil Spill from Pipeline Explosion in Dalian

China's worst reported oil spill occurred in July 2010, when two massive pipeline at Dalian, a busy northeastern port, exploded and oil poured into the sea, spreading over at least 165 square miles (430 square kilometres). The explosion produced a massive fire that burned for 15 hours. Two weeks after the explosion scars of the fire could still be seen on massive storage silos, covered in black soot. Five days afterwards Greenepeace estimated the oil had spread over 165 square miles (430 square kilometers) of water five days since

In late July, Chris Hogg of the BBC reported: “China is struggling to clean up what has being described as the country's worst oil spill, a fortnight after a fire at an oil depot caused crude to leak into the sea for several days. An army of volunteers and fishermen has been mobilised to help clean up the pollution from the area around the port of Dalian, one of China's most important strategic oil reserves.

“China says the oil slick is under control and has not reached international waters. That is thanks in no small part to the efforts of the fishermen. But conditions are grim for those involved. The scene at a small harbour where they are collecting the oil is like something out of the 19th Century. Fishermen covered in oil, some of them working just in their underwear, scrape up the toxic sludge that spilled out of the jars they have brought back from the open sea. No one is wearing protective goggles, facemasks or even gloves to protect them from the hazardous chemicals in the oil.It takes them four or five hours to sail back from where they collect the oil on the open sea. They have to wait until nightfall, when the temperature drops, and the oil is at its most viscous, to scoop it out.

Oil Spill from Offshore Platforms in Bay of Bohai

In July 2011, AP reported that Chinese newspapers such as Southern Weekend reported large oil spills occured in China's largest offshore oil field, in the Bohai Penglai 19-3 oil field in Bohai Bay off the northeast coast. The field is a joint venture between China National Offshore Oil Corp. and ConocoPhillips China. The first spill occurred around June 10 about 38 kilometres (25 miles) off the coast of Shandong province and was cleaned up in a few days. Another spill in late July was likewise said to be contained relatively quickly, the reports said. It was unclear what caused the spills, how many had occurred or if they were continuing.[Source: AP, July 1, 2011]

In late August 2011, ConocoPhillips said, it has discovered new oil seeps in an area of China's Bohai Bay where it faces a deadline to clean up spills from earlier this summer. Of 16 seeps found in the Penglai 19-3 oilfield, each about the size of a small coin, only two were still visible and known to be sometimes active, the company said in a statement.

AP reported in September 2011, “According to ConocoPhillips, the spills released about 700 barrels of oil into Bohai Bay and 2,500 barrels of mineral oil-based drilling mud, which is used for lubrication, onto the seabed. All but a small fraction of that oil and mud has been recovered, and the small amounts still emerging are from earlier seeps that have been shifting under layers of sand on the seabed, it says. [Source: Elaine Kurtenbach, AP, September 5, 2011]

But the State Oceanic Administration contends that monitoring by satellite, underwater robots and other means shows the oil is still seeping. It criticized ConocoPhillips' containment measures as stopgap and said the company may have caused oil to seep through faults in the seabed by putting too much pressure on the oil reservoir.

Dong Xiucheng, a professor at the China University of Petroleum, described the accident as "unusual." "It is hard technically to find the reason and the exact location of the spill and to try to stop it since it is on the seabed not in a pipeline. Both ConocoPhillips and CNOOC must have tried to do it, but it takes time," Dong said.

Clean Up of the Oil Spill from Offshore Platforms in Bay of Bohai

AP reported in September 2011, “The oil spills from offshore wells operated by ConocoPhillips in China's Bohai Bay are posing political and technical challenges for the oil company far messier than the crude and drilling mud seeping from the seabed. The company said Monday that it had complied with a government order to suspend all drilling, water injection and production at the affected Penglai 19-3 oil field, one of China's biggest. [Source: Elaine Kurtenbach, AP, September 5, 2011]

Operations are currently stopped at 180 producing wells and 51 injecting wells, for a total of 231 wells, said a statement by Houston, Texas-based ConocoPhillips, which operates the field in a venture with state-owned China National Offshore Oil Corp. CNOOC, which owns 51 percent of the venture, said the suspension of production in Penglai 19-3 would reduce output by 40,000 barrels a day, in addition to the 22,000 barrels a day lost with the shutdown of the two wells where the spills occurred.

For such big oil companies, the loss is not a major blow, though for ConocoPhillips, Penglai 19-3 is its largest project in China, noted Thomas Grieder, analyst for Asia-Pacific energy at IHS Global Insight. Regardless of the tensions provoked by the spills, China is relying ever more heavily on foreign partners for the technology it needs to tap difficult to exploit deepwater oil reserves, said Grieder.

Criticism Over the Handling of the Oil Spill in Bay of Bohai

The spills have unleashed a flood of criticism inside China over how ConocoPhillips has handled the cleanup. The State Oceanic Administration rejected the company's assertion that it had met an Aug. 31 deadline to completely clear up any damage and prevent further seeps.

Chinese maritime authorities facing pressure from fisheries and environmentalists to minimize further damage to the already heavily polluted Bohai appear to have lost patience with the prolonged effort to staunch the oil seeps. "ConocoPhillips has not been able to address this problem for two months and the Chinese authorities are losing face. It's kind of an inevitable reaction to something that's been going on a while," Grieder said.

ConocoPhillips has pointed to safety concerns and other difficulties in capping and cleaning up the oil and mud in murky seas with minimal visibility. "Addressing the issue is rather complex," Grieder said. "They're trying to identify small cracks on the sea floor in a situation where you can't see much." The company said that divers searched the ocean floor and that remote-controlled robots were taking seabed samples to monitor the situation. The company said it was working with CNOOC on a plan to reduce pressure in the oil reservoir and was preparing a revised environmental impact report.

The maritime authority has said it is preparing to file lawsuits on behalf of those who suffered losses due to pollution from the spill. Apart from frictions over the pace and progress of the cleanup, state-run media and environmentalists have been lobbying for harsher penalties for such accidents---current law calls for maximum fines of 200,000 yuan (less than $31,000).

The official newspaper China Daily, in a harshly worded commentary said that a joint investigation by seven government departments found ConocoPhillips China had "seriously violated operating rules." "Not only is the oil spill worse than the company reported but, despite its assurances to the contrary, it has failed to bring the situation under full control and find and stop the sources of the spills," it said. "Obviously, China needs to learn a lesson from this incident."

ConocoPhillips has denied allegations that it sought to mislead the maritime authority by falsely claiming to have stopped and cleaned up the oil seeps. The company said it was committed to complying with the law and conducting "all business activities with the highest ethical standards." "This commitment fully applies to how we conduct our business in China," it said.

Image Sources: University of Washington; Landsberger Posters http://www.iisg.nl/~landsberger/

Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, National Geographic, The New Yorker, Time, Newsweek, Reuters, AP, Lonely Planet Guides, Compton’s Encyclopedia and various books and other publications.

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© 2008 Jeffrey Hays

Last updated July 2011

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