Report Published: "China Oil & Gas Report Q3 2013"

While China is increasingly dependent on energy imports - particularly gas - owing to rapid growth in its energy demand, there is considerable upside potential from its unconventional oil and gas resources. However, a more open environment to foreign investment is needed in order to meet the ambitious production targets set by the state, especially if its vast unconventional resources are to be maximised. In the meantime, oil and gas demand could surprise to the downside if economic expansion comes under pressure.

The main trends and developments we highlight for China's oil and gas sector are:

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* We have upgraded our liquids production forecast for China alongside a better-than-expected output increase in 2012. Much of the country's production upside will come from increased output from fields yet to reach peak capacity, such as Tarim. Enhanced oil recovery (EOR) measures will also help to maintain production levels at older fields, such as PetroChina's Daqing and Sinopec's Shengli. We expect Chinese production to rise over the next few years, peaking at 4.9mn barrels per day (b/d) in 2016 before declining to 4.8mn b/d in 2022.
* We expect refining growth to flatten out towards the end of our 10-year forecast period in 2022. In the next five years, refining capacity will rise from the completion of upgrades and newbuild projects to reach 12.3mn b/d in 2017 from the current 10.8mn b/d. Slower growth - particularly from newbuild plants - will see refining capacity rise more gradually to 13.6mn b/d by 2022, mainly from expansion in existing plants than greenfield projects.
* Nonetheless, despite a narrower room for refining capacity expansion, investment opportunities still exist as China enforces its refineries to produce fuels that are at least compliant with Euro-IV standards in a move to curb the country's growing pollution. Modernisation of plant equipment could translate into contract awards for services, though this could again be dominated by state-owned engineering enterprises.
* Weaker global economic growth, higher fuel prices and energy efficiency will contribute to slower oil consumption growth. Although we expect oil consumption to continue rising from 10.2mn b/d in 2012 to 11.9mn b/d in 2017 and 13.4mn b/d by 2022, we have projected a slower rate of growth of about 2.75% per annum in the next 10 years.
* A report by China's Ministry of Land and Resources has estimated China's technically recoverable shale reserves at 25.1trn cubic metres (tcm). This is significantly lower than the 37.4tcm estimate made by the US Energy Information Administration (EIA) in May 2013. The discrepancy reflects the limitations of resource estimations at such an early stage of appraisal. Further changes in reserves estimates are therefore likely as operators' understanding of China's various shale basins improves.

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