China’s $468 Billion Energy Drive Sparks Global Oil Market Shakeup
A month ago, Chinese oil heavyweight CNOOC boasted its pipeline network had hit 10,000 kilometers. That network was going to further grow to 13,000 km, the company said soon after it announced a fresh offshore discovery in the South China Sea. What CNOOC is doing is what all Chinese oil majors are doing: ramping up domestic supply of oil and gas. It is the safest kind of supply.
Chinese state energy companies have spent some $468 billion on exploration and production since 2019, Bloomberg reported earlier this month, noting that the amount was 25% higher than E&P spending in the previous six months. It was, in fact, enough to make PetroChina the biggest investor in exploration and production globally, Bloomberg wrote—and there is a very good reason for this.
State-owned oil giants Sinopec, PetroChina, and CNOOC recently suspended purchases of Russian oil, at least in the short term, until the sanctions situation and implications become clearer, media reported following Washington’s decision to make a new attempt to squeeze Russian oil revenues by sanctioning two of the biggest exporters directly. Takers en route to Chinese ports were turning back, reports said, and orders were being canceled.
China’s crude oil imports in October averaged 11.4 million barrels daily, down slightly from the 11.5 million barrels daily in September but still higher than a year ago. Indeed, after a slow start to the year, China has been importing crude oil at elevated rates even as the immediate demand for the commodity remained weaker than in previous years for much of the year. There was one driver behind those higher import rates: stock-building.
China has crude oil inventories that analysts estimate at between 1.2 billion and 1.3 billion barrels. It has been building them at a rate of close to one million barrels daily. It is also building new storage capacity, meaning it would continue building its oil stocks in the future as well. At a planned 169 million barrels in total, the new storage capacity will be built this year and next, and compares with some 180-190 million barrels in new storage space built between 2020 and 2024.
So, China is simultaneously boosting domestic production of both crude oil and natural gas, and ramping up import supply for a comfortable supply cushion in case of disruptions. “In the last few years, we have seen an energy crunch all around the world,” Huang Yingchao, vice president of natural gas at PetroChina International, the state major’s trading arm, said at a recent industry event as quoted by Bloomberg. “Gas and LNG are like tap water and bottled water. Tap water is cheaper and is more reliable, and the logistics are easier. So we push for domestic production.”
Of course, this is not such good news for Big Oil, Bloomberg noted in its report on China’s energy supply strategy. The country has been the biggest driver of global demand growth—and profits for the industry—for a couple of decades. The recent trends in demand growth there have become a major drag on prices as market perceptions change, and this has affected Big Oil’s bottom lines, it seems. Per Bloomberg, China has driven 60% of global oil demand growth over the past 10 years—but now this demand growth is slowing and more of it is getting covered with domestic supply.
Then there is the gas issue. China is not just boosting its oil output. It is also boosting its gas output—and imports from parties other than Big Oil. Two months ago, China and Russia finally struck a deal for the construction of the Power of Siberia 2 pipeline. That second pipe would result in over 100 billion cu m in export capacity annually. Yet Big Oil is counting on China to drive demand for LNG in the coming years and decades—and it might get disappointed.
China is building up its energy self-sufficiency. This is what wind and solar, and EVs were all about, as well. With energy demand growing as fast as it used to grow in China, import dependence was inevitably going to become a problem at some point. So China began tackling the problem from several sides at once.
It built out the biggest wind and solar capacity in the world, which climate advocates may hail as a major achievement in emission reduction, but arguably has a lot more to do with domestic versus imported energy supply. It also became the largest EV market in the world, reducing oil demand from the transport sector. Of course, demand continued to grow in petrochemicals, so Beijing had to double down on that self-sufficiency and long-term import security.
“The Chinese oil majors have surprised not just the market, but they’ve surprised themselves by exceeding production targets,” Michal Meidan, director of China research at the Oxford Institute for Energy Studies, told Bloomberg. “It gives China a sense of control, especially as oil demand is declining.” In truth, oil demand is not yet declining. It is slowing down, for now. And China is meeting more of it, and gas demand, with local supply.
