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China slowdown in refined oil

Hydrocarbon Engineering,

According to Business Monitor International (BMI), China’s total crude oil imports hit a new high of 308.36 million t of crude (approximately 6.19 million bpd) in 2014. This represented 9.30% year on year growth and a 51.32% increase from its total crude oil imports in 2009. December 2014 was particularly strong and saw crude oil imports hit a new monthly high of 30.37 million t.

However, this masks the steep fall in China’s total refined oil imports. In 2014, refined oil imports fell 24.28% year on year to 29.96 million t. Since 2009, refined oil imports have declined by 18.95%.

Downstream expansion

The trend of strong crude oil import growth and negative refined oil import growth will persist in China. The country’s crude oil import increase in the past five years is mostly a function of an expansion of domestic refining production, which has increased demand for crude feedstock. In contrast, growing domestic refined oil output has lowered China’s refined oil import requirement.

A weaker oil price environment from 2015 will hit China’s domestic crude production and support import demand. In the past five years, China’s crude production ahs been sustained by enhanced oil recovery (EOR) projects in its mature fields and the employment of more expensive horizontal drilling techniques. However, Chinese producers will be pressured by lower oil revenues into limiting these expensive efforts. For instance, PetroChina announced that it will be scaling down annual output from the Daqing field (which makes up about 18.91% of total domestic crude in China) that will see production fall by an average of 160 658 bpd between 2014 and 2020. Such cost cutting measures will likely also be applied to other fields in Chian, while tight oil projects providing future sources of oil output will also be scaled down. Thus, crude oil production will trend downwards over the BMI forecast period to 2024.

Import demand will also be supported by the continued expansion in refining capacity. New refineries in the pipeline will see Chinese refining capacity grow by 13.74% between 2014 and 2019. With falling domestic crude supply and growing crude domestic crude demand, China’s crude imports will continue to trend upwards.

Although BMI forecasts continued growth in Chinese crude imports, they do not expect China to sustain its 9.30% year on year crude import growth rate over the next five years. A significant cause of the country’s 12.80% year on year growth in crude imports between August and December 2014 was stockpiling, which was encouraged by the crash in oil prices and an expansion in domestic storage capacity. Lower oil prices and the country’s strategic reserves build up will support crude oil imports through 2015. However, there will be a significant slowdown once available storage facilities are full, and when offshore tanker rates are prohibitively high.

In contrast, domestic refining growth will continue to hit China’s import demand for refined oil. BMI forecasts refined oil production to grow slightly faster than local demand for oil. This will see China’s net refined oil import requirement narrow from an estimated 218 110 bpd in 2014 to 7320 bpd in 2019, at refinery utilisation rates of approximately 83 – 85%. While some of the increase in domestic production will be exported, BMI still expects gross import demand for refined oil products to fall.

China’s gas import growth is stabilising, after total imports almost quadrupled between 2010 and 2014. In the first 11 months of 2014, total gas imports rose 13.64% year on year to come in at 38.42 million t, compared to 33.81 million t in the first 11 months of 2013. For 2014 as a whole, BMI estimates that total gas imports came in at 52.54 billion m3, which is the equivalent of 47.33 million t of pipeline gas imports for the year.

BMI expects Chinese gas consumption to grow faster than gas production, which will see China gas import demand continue to rise over BMI’s forecast period from 2015 to 2024. Gas price reforms, which are moving China away from fixed prices towards a more market based price system, will improve incentives for domestic gas production. This will support gas production from tight formations, which have been the main contributor to China’s gas output growth in recent years. Nonetheless, the move away from coal fired power generation especially in Tier 1 cities will see gas consumption grow even faster than production and sustain widening shortfall in available domestic gas supply.

Pipeline gas suppliers will be the biggest winners in the long run. Pipeline imports are buttressed by long term supply contracts between China and its partners in Central Asia, Myanmar and Russia. Moreover, these contracts are often backed by political interests. As such, this would see China turn LNG only to make up for the demand that domestic gas and pipeline gas imports are not able to satisfy.

Adapted from a report by Emma McAleavey.

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