According to Oil & Gas Journal (OGJ), China had 18.3 billion barrels of proven oil reserves as of January 2006, flat from the previous year. EIA estimates that China will produce 3.8 million barrels per day (Mmbbl/d) of oil in 2006, slightly higher than the previous year. Of this, 96 percent is expected to be crude oil. EIA estimates that China will consume 7.4 Mmbbl/d of oil in 2006, representing nearly a half million barrels per day increase from 2005. For 2006, EIA data forecasts that China’s increase in oil demand will represent 38 percent of the world total increase in demand.

China's petroleum industry has undergone major changes over the last decade. In 1998, the Chinese government reorganized most state owned oil and gas assets into two vertically integrated firms: the China National Petroleum Corporation (CNPC) and the China Petroleum and Chemical Corporation (Sinopec). Each of these companies operates a range of local subsidiaries. The other major state sector firm is the China National Offshore Oil Corporation (CNOOC), which handles offshore exploration and production and accounts for roughly 15 percent of China's domestic crude oil production. CNPC, Sinopec, and CNOOC all carried out initial public offerings (IPOs) of stock between 2000 and 2002. However, the government maintains a majority stake in each through state-owned holding companies bearing the same name.

In general, CNPC and its affiliates tend to dominate in the north and west, Sinopec companies in the south, and CNOOC in offshore regions. Historically, CNPC has focused mainly on oil and gas exploration and production while Sinopec had been engaged in downstream activities such as refining and distribution. This pattern still somewhat exists, however restructuring during the 1990s helped to reduce this trend. CNPC and Sinopec operate virtually all of China’s oil refineries and the domestic pipeline network.

The intention of the restructuring and IPOs was to make these state-owned firms more like vertically integrated international oil companies (IOCs) elsewhere. In connection with this process, the firms have been spinning off or eliminating many unprofitable ancillary activities. In early 2000, CNPC separated out most of its high quality assets into a subsidiary called PetroChina, and carried out its IPO of a minority 15 percent interest on both the Hong Kong and New York stock exchanges in April 2000. Sinopec also offered a 15 percent stake in its operations in its October 2000 IPO on the Hong Kong and New York stock exchanges. In February 2001, CNOOC held its IPO of a 27.5 percent stake after an earlier attempt in September 1999 was cancelled. In all of these stock offerings, only minority stakes were sold and the IPOs did not offer foreign companies a major voice in corporate governance.

As a net oil importer since 1993, China's petroleum industry is focused on meeting domestic demand. Retail prices for petroleum products are regulated, with variations based on location and the type of consumer. The Chinese government maintains domestic price ceilings on finished petroleum products which, despite several decisions to increase domestic prices over the last couple years, have not kept pace with price increases in international markets. The Chinese government provides refiners with subsidies to ease the gulf between low domestic rates and high international oil prices. The eventual goal is to eliminate subsidized prices, but given the dependency of vulnerable segments of the Chinese population on cheap fuels, particularly in agriculture, it will likely take at least several years to accomplish this goal.

Roughly 85 percent of Chinese oil production capacity is located onshore. China’s largest oil producing field, CNPC’s Daqing field in northeastern China, accounts for more than 900,000 bbl/d, or one quarter of China’s total crude oil production. Daqing is a mature oil field, and production levels have been reduced since 2004 while CNPC works to extend the life of the field. In April 2004, Chinese authorities announced several new oil discoveries in the existing Shengli field in northeastern China. These finds helped make Shengli, which is operated by Sinopec, the country’s second-largest oil producing field, supplying more than 500,000 bbl/d according to OGJ’s most recent estimate. CNOOC also produces more than 500,000 bbl/d from its offshore oil fields in the Bohai Bay and South China Sea.

Major Chinese Oil Fields by Production , January 2006
Field	Production (bbl/d)
China National Petroleum Corporation (CNPC)/PetroChina
Daqing	929,268
Liaohe	256,991
Xinjiang	222,524
Changqing	162,422
China Petroleum and Chemical Corporation (Sinopec)
Shengli	535,531
Sinopec Star	78,567
Zhongyuan	67,092
China National Offshore Oil Corporation (CNOOC)
Total offshore	519,108
Source: Oil & Gas Journal

Many foreign companies have been contracted to undertake oil exploration and production activities in China. According to Chinese law, however, China’s national oil companies are entitled to take a majority (51 percent) stake in any commercial discovery, although they can choose to take a minority stake if they wish. The national oil companies can also take over field operations once the contracted firm has recovered its development costs. In offshore zones, CNOOC reserves the right to take over operations at any new discoveries, although certain shallow water locations such as the Zhao Dong field in the Bohai Bay are exempt. The Chinese government typically mandates a royalty fee of 12.5 percent for foreign companies involved in the oil sector, although discounts have been offered for development and exploration in more remote onshore areas, such as the western provinces of Qinghai and Xinjiang.

Recent oil exploration efforts have centered on developing onshore oil and natural gas fields in the western provinces of Xinjiang, Sichuan, Gansu, and Inner Mongolia as well as offshore fields in the Bohai Bay, Pearl River Delta, and South China Sea. In July 2006, PetroChina announced that it would open nine blocks in the Tarim basin in northwestern China’s Xinjiang Uygur Autonomous Region for foreign companies to explore. The nine blocks cover more than 42,000 square miles and according to CNPC hold an estimated 43.9 billion barrels of potential oil reserves. Despite the lure of large potential reserves, previous bidding rounds in the Tarim basin received a tepid response from foreign companies, because potential bidders thought that its remote location and difficult geological structures would make exploration and development difficult.

Recently, offshore oil exploration in China has been the greater focus of the oil majors. CNOOC has initiated several Production Sharing Contracts (PSCs) with international oil companies for exploration and development in the Bohai Bay region. ConocoPhillips holds the largest acreage in the area, with total discovered reserves estimated at 732 million barrels. ConocoPhillips has a 49 percent stake in the Bozhong 11/05 block and has produced 30,000 bbl/d of crude oil from its Peng Lai 19-3 field since 2002, which it expects will eventually produce 140,000 bbl/d. Other companies involved in oil exploration and production activities in the Bohai Bay region are Kerr-McGee, Apache, Chevron, and Royal Dutch Shell. Some independent analysts estimate that the Bohai Bay area holds more than 1.5 billion barrels of recoverable oil reserves.

CNOOC holds a 51 percent stake in the CACT Operators Group, which includes Eni and Chevron that produces 110,000 bbl/d from five offshore fields in the South China Sea. Several other oil exploration and production projects are underway in the South China Sea and Pearl River Delta area. Husky Energy, Devon Energy, and Kerr-McGee established a joint venture with CNOOC in December 2005 for deepwater oil and gas exploration in the South China Sea. CNOOC officials have announced that deepwater exploration is a major priority for the offshore oil company. CNOOC is also involved in exploration activities in the East China Sea, although territorial disputes with its neighbors have so far limited large-scale development of fields in the region.

With China's expectation of growing future dependence on oil imports, the country has been acquiring interests in exploration and production abroad. CNPC has acquired exploration and production interests in 21 countries spanning four continents. During 2005, CNPC announced its intentions to invest a further $18 billion in foreign oil and gas assets between 2005 and 2020. In Sudan, CNPC has invested more than $8 billion in the country’s oil sector, including investments in a 900-mile pipeline to the Red Sea. In October 2005, CNPC finalized the purchase of PetroKazakhstan, whose assets include 11 oil fields and licenses to seven exploration blocks. In December 2005, this purchase was complemented by the completion of the 600-mile Sino-Kazakh oil pipeline that will deliver 200,000 bbl/d of crude oil to China by the end of 2006. In 2005, some of CNPC’s other overseas investments included purchasing Encana’s oil and gas assets in Ecuador and PetroCanada’s oil and gas assets in Syria.

Sinopec has also looked overseas for oil exploration and production opportunities. In June 2006, Sinopec acquired a 97 percent stake in Udmurtneft, a mid-sized unit of BP’s Russia vehicle TNK-BP, for $3.5 billion. Udmurtneft produces 120,000 bbl/d of crude oil and holds 1 billion barrels of proven reserves in Russia. In October 2004 Sinopec signed a Memorandum of Understanding (MOU) with the Iranian government to acquire a 51 percent stake in the large Yadavaran oil field, which industry reports suggest could produce 300,000 bbl/d. Both China and Iran are still considering the possible $70 billion deal, which would reportedly also include a commitment by China to import liquefied natural gas (LNG) from Iran. Sinopec has also acquired a 40 percent stake in Synenco Energy’s $4.5 billion Northern Lights oil sands project in Canada. The company expects the project to produce a total of 100,000 bbl/d of synthetic crude oil in 2010 when commercial operations are scheduled to begin.

CNOOC is also working to expand its international oil production and exploration assets. In August 2005, CNOOC withdrew its $18.5 billion bid to acquire Unocal after facing scrutiny from U.S. politicians. In 2005, CNOOC purchased Repsol-YPF’s oil field interests in Indonesia, making CNOOC the largest operator in the offshore Indonesian oil sector. In January 2006, CNOOC acquired a 45 percent stake in an oil and gas field in the Niger Delta for $2.3 billion. CNOOC has also reached smaller deals for exploration and development rights in Equatorial Guinea and Kenya, among other countries.

Taken together, these activities represent only a sample of the patchwork of international partnerships and acquisitions that Chinese oil and gas firms have made in recent years. While Chinese purchase of oil and gas assets abroad has received much attention, their total contribution to Chinese oil imports in mid-2005 was less than 300,000 bbl/d, or 8.5 percent of total oil imports at that time. It is not clear if new Chinese investment in oil exploration and production assets overseas during the last year has increased this percentage.

Angola surpassed Saudi Arabia as China’s largest source of crude oil imports in February 2006. According to one industry report, in May 2006 China imported 750,000 bbl/d of crude oil from Angola, a 70 percent increase from the same month in 2005. According to the same report, between January and May 2006 China received 46 percent of its crude oil imports from the Middle East and 32 percent from Africa, while its neighbors in the Asia-Pacific region only supplied 5 percent of China’s imports.

Given the soaring demand for oil and petroleum products in China, the country is firmly committed to improving its oil and gas transport infrastructure.

China has a large expanse of domestic oil pipelines, although the large national oil companies are working to establish a more integrated and complete oil pipeline network to better satisfy growing demand. CNPC’s PetroChina currently owns and operates more than 6,000 miles of crude oil pipelines and more than 1,200 miles of refined product pipelines, with plans to build several new systems in the coming years. In 2005, less than half of the crude oil transported domestically by CNPC traveled via pipeline, while the rest typically traveled by rail. Among other plans, in January 2006 PetroChina received government approval for two trans-China pipelines. One will start from Lanzhou, in northwest China’s Gansu province, with a capacity of 160,000 bbl/d and the second will begin at Jinzhou, in the northeastern Liaoning province, with a capacity of 80,000 bbl/d. Both pipelines will converge in Zhengzhou in central Henan province with a total projected cost of $1.5 billion. PetroChina also hopes to begin operations in August 2006 at a new, 1,200-mile pipeline bringing 400,000 bbl/d of crude oil from Urumqi in the Xinjiang Uygur Autonomous Region in the west to Lanzhou.

Sinopec, China’s largest oil refiner, is also actively expanding its pipeline network. In June 2006, the company announced plans to construct a 140-mile crude pipeline connecting its storage terminals at Tianjin’s Nanjiang port with its petrochemical complex in Beijing. In October 2004, Sinopec began constructing a 600-mile crude oil pipeline that will eventually connect Yizheng with Changling. The first phase of the project, which connects Yizheng and Jiujiang, began operations in May 2006. Once completed, the final pipeline is expected to supply 540,000 bbl/d of oil to Sinopec’s five refineries along the Yangtze River. It will also link up with Sinopec’s pipeline network in northeastern China.

In July 2006, China began receiving crude oil imports from its first transnational oil pipeline. The new pipeline spans 620 miles, connecting Atasu in northern Kazakhstan with Alashankou in the Xinjiang Uygur Autonomous Region. The pipeline was developed by the Sino-Kazakh Pipeline Company, a 50:50 joint venture between CNPC and Kazakhstan’s KazTransOil. The project has an initial capacity to transport 200,000 bbl/d of crude oil, with plans to double the capacity by 2010. Half of the imported oil comes from Kazakhstan and half from Russia.

Russia’s Far East may also one day be a source for Chinese crude oil imports. Russian state-owned oil giant Transneft began construction in April 2006 on a pipeline that will reportedly span 2,500 miles from the Russian city of Taishet to the Pacific Coast (see Russia Country Analysis Brief ) . According to Transneft officials, the first 1500-mile stretch is expected to be completed in 2008 and reach Skovorodino, which is only 30 miles from the Chinese border. The second stretch of the Eastern Siberia-Pacific Ocean (ESPO) pipeline will presumably reach the Pacific Coast on Russian soil, although no final decision on end-points has been made. Likely candidates are Perevoznaya or Nakhodka, and Russian officials say they favor a route that would allow oil shipments to both China and Japan . Once completed, the project is expected to carry 1.6 million bbl/d of crude oil . News reports suggest that the first phase of the ESPO to Skovorodino will include a spur to Daqing, carrying as much as 600,000 bbl/d to one of China ’s major downstream oil centers. Russia ’s Eastern Siberia region has 7 billion barrels of proved oil reserves, with one exploration company in the area reporting that it contain s 75 billion barrels of potential reserves.

In April 2006, China’s National Development and Reform Commission (NDRC) reportedly approved a feasibility study to construct a new crude oil pipeline from Myanmar to China. As Myanmar does not produce significant amounts of crude oil, the pipeline is envisioned as an alternative transport route for crude from the Middle East and Africa that would bypass the choke point of the Strait of Malacca . Contradictory news reports have suggested that Chinese planners do not consider the Myanmar-China route economically attractive and so far have no plans to build such a pipeline.

According to official data, Chinese-owned ships carried only 9 percent of the crude oil the country imported in 2005. For its overall market size, China’s tanker fleet is relatively small, with 18 very large crude carriers (VLCCs), most of which are older than other countries’ fleets. Chinese planners reportedly want to expand the country’s tanker fleet in hopes of ensuring security of supply.

According to OGJ, China had 6.2 Mmbbl/d of crude oil refining capacity as of January 2006. Sinopec and CNPC are the two dominant players in China’s oil refining sector. The expansive sector is undergoing modernization and consolidation, with dozens of small refineries shut down in recent years and larger refineries expanding and upgrading their existing facilities. Domestic price regulations for finished petroleum products have hurt Chinese refiners because of the large difference between current high international oil prices and low domestic rates. According to the BP Statistical Review of World Energy, refinery utilization in China increased from 67 percent in 1998 to 94 percent in 2004. As China seeks to bring additional refining facilities online to meet growing demand for finished petroleum products, BP forecasts that the country will increase refining capacity by 1.8 Mmbbl/d between 2004 and 2008, a 32 percent increase in total capacity.

Major Chinese Oil Refineries
Refinery	Capacity (bbl/d)
China National Petroleum Corporation (CNPC) /PetroChina
Dalian	410,000
Lanzhou	250,000
Fushu	200,000
Heilongjiang	160,000 and 120,000
Liaoyang	200,000
Total CNPC/PetroChina: 2,415,000
China Petroleum and Chemical Corporation ( Sinopec )
Zhenhai	403,000
Ningbo	320,000
Maoming	270,000
Nanjing	270,000
Guangzhou	260,000
Shanghai	226,000 and 176,000
Zibo	210,000
Total Sinopec: 3,095,000
West Pacific Petrochemical Corporation
Dalian	160,000
Total China : 6,246,000
Source: O GJ ; FACTS, Inc. China Oil and Gas Monthly

China’s national oil companies are currently planning or building several new refineries and upgrading existing plants. In July 2006, PetroChina completed the expansion of its Dalian refining center, raising the plant’s capacity from 210,000 bbl/d to 410,000 bbl/d, making it the largest refinery in China. Also in July 2006, Sinopec completed the construction of a new 160,000-bbl/d refinery at Hainan. The unit is expected to begin commercial operations by year-end 2006, and will be capable of producing diesel and gasoline that meets Euro III standards. In May 2006, Sinopec finished an upgrade at its Guangzhou refinery, increasing the system’s capacity from 154,000 bbl/d to 260,000 bbl/d and adding additional petrochemical units.

In April 2006, the NDRC approved a joint PetroChina/Kuwait Petroleum Corporation (KPC) grassroots refinery at Nansha in the coastal city of Guangzhou. The project is anticipated to cost $5 billion and have a final capacity of 300,000 bbl/d. In August 2005, CNPC began building a 200,000-bbl/d refinery in the city of Dushanzi, located in the Xinjiang Uygur Autonomous Region. The facility is scheduled to be completed by 2007, with a co-located 1 million tons per year (Mmt/y) ethylene cracker to come onstream in 2008. In July 2005, Sinopec reached an agreement with ExxonMobil and Saudi Aramco to expand the capacity at its Quongang refinery in Fujian from 80,000 bbl/d to 240,000 bbl/d. CNOOC, which has historically focused on offshore exploration and development, has recently moved into downstream sector. In December 2005, CNOOC and Royal Dutch Shell began construction on a joint $4.3 billion refining and petrochemical complex at Huizhou in Guangdong province. Expected to be complete in 2008, the site will have a 240,000-bbl/d crude oil refinery as well as a 2.3 Mmt/y petrochemical facility.

A major issue for the Chinese downstream sector is the lack of adequate refining capacity suitable for heavier Middle Eastern crude oil, which makes up a large share of Chinese crude imports. Several existing refineries are being upgraded to handle heavier and more sour grades of crude oil. With consumption of petroleum products rising so rapidly, some interest is being rekindled in the construction of more modern greenfield refineries.

In China’s tenth 5-Year Plan (2000-2005), Chinese officials raised the possibility of building a national strategic petroleum reserve (SPR). The first of these facilities, located in Zhenhai, is expected to be complete by August 2006 and have the capacity to store 32 million barrels (Mmbbl) of oil. The NDRC has selected three other sites to have strategic oil reserves: Dalian (20 Mmbbl), Huangdao (25 Mmbbl), and Daishan (25 Mmbbl). There have been contradictory news reports regarding the overall capacity of the total SPR network, the anticipated storage tank filling rate, and numerous other project details. Chinese officials have variously indicated that the SPR system will eventually hold oil stockpiles covering 30 and 90 days supply.