Chinese crude production peaked at some 4.3 mmb/d in 2015, capping off a long and steady rise that saw output rise from 3 mmb/d in 1996. But since then, output has fallen sharply. By 2017, the average output of Chinese fields was 3.8 mmb/d and by late 2018, production had fallen to 3.6 mmb/d. The issue is replenishment – the long and established Chinese oil fields in Bohai Bay are now way past their prime, and there have not been enough new fields joining the crowd to keep output at a steady level. Hopes that the American shale revolution could be repeated in inland China proved to be in vain, as geography stood in the way, and the world’s largest energy market is now more and more dependent on imports.
CNOOC plans to change that. After President Xi Jinping called for greater self-reliance and improving national security by boosting domestic reserves in August, the national upstream company CNOOC has now unveiled ambitious plans to boost capital spending with an eye to raise its production. Encompassing both domestic and international assets, CNOOC wants to boost its total capital budget by 14% to its highest level since 2014 to raise net production by 15%.
CNOOC’s focus will remain domestic, but international projects will assume greater importance as it aims to reduce its domestic share of total production from 65% to 63%. Within China, CNOOC will be looking at continuing shallow water exploration in the Bohai Bay and deepwater exploration in the Pearl River Mouth Basin, where it has recently signed strategic exploration deals in Areas A and Areas B. The integrated Huizhou 32-5/33-1 development has also started production, adding 19,200 b/d of output by 2020. It could move even further south, as China and The Philippines agreed to embark on joint exploration activities in disputed areas of the South China Sea. Opportunities exist where China and Vietnam have overlapping claims as well – but diplomatic relationships are more complicated there – and China is also continuing to use its muscle to claim purported oil-rich areas in the middle of the South China Sea around the Spratly Islands.
But while the domestic focus is aimed to meeting the Premier’s requests, it is internationally that the greater opportunities lie for CNOOC. Starting up this year will be the Egina oilfield in Nigeria, part of the OML130 block in which CNOOC has a 45% that includes the Akpo, Egina South and Preowei fields, with the Akpo producing 56,000 b/d last year. Promising assets in Uganda’s Lake Albert Basin, as well as Algeria, Gabon, Senegal and the Republic of Congo have also capped off a decade of growing investment into African upstream. Through its US$15.1 billion acquisition of Nexen in 2013, CNOOC has access to Canadian oil sands – which could make a comeback with the rise in crude prices – and it also has stakes in promising projects in Eagle Ford shale and deepwater Gulf of Mexico. But by far the best investment CNOOC has made is in Guyana, where it is a minority partner in ExxonMobil’s major discoveries in the Stabroek block – acquired when CNOOC decided to retreat from volatile Venezuela. With Guyanese production on track for 2020, CNOOC’s ambitious targets could be exceeded – and that’s good news for President Xi Jinping, who wants his state oil companies to grow from being domestic giants to international behemoths.
CNOOC Capital Expenditure Plans 2019-2020
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Headline crude prices for the week beginning 9 September 2019 – Brent: US$61/b; WTI: US$56/b
Headlines of the week
Detailed market research and continuous tracking of market developments—as well as deep, on-the-ground expertise across the globe—informs our outlook on global gas and liquefied natural gas (LNG). We forecast gas demand and then use our infrastructure and contract models to forecast supply-and-demand balances, corresponding gas flows, and pricing implications to 2035.Executive summary
The past year saw the natural-gas market grow at its fastest rate in almost a decade, supported by booming domestic markets in China and the United States and an expanding global gas trade to serve Asian markets. While the pace of growth is set to slow, gas remains the fastest-growing fossil fuel and the only fossil fuel expected to grow beyond 2035.Global gas: Demand expected to grow 0.9 percent per annum to 2035
While we expect coal demand to peak before 2025 and oil demand to peak around 2033, gas demand will continue to grow until 2035, albeit at a slower rate than seen previously. The power-generation and industrial sectors in Asia and North America and the residential and commercial sectors in Southeast Asia, including China, will drive the expected gas-demand growth. Strong growth from these regions will more than offset the demand declines from the mature gas markets of Europe and Northeast Asia.
Gas supply to meet this demand will come mainly from Africa, China, Russia, and the shale-gas-rich United States. China will double its conventional gas production from 2018 to 2035. Gas production in Europe will decline rapidly.LNG: Demand expected to grow 3.6 percent per annum to 2035, with market rebalancing expected in 2027–28
We expect LNG demand to outpace overall gas demand as Asian markets rely on more distant supplies, Europe increases its gas-import dependence, and US producers seek overseas markets for their gas (both pipe and LNG). China will be a major driver of LNG-demand growth, as its domestic supply and pipeline flows will be insufficient to meet rising demand. Similarly, Bangladesh, Pakistan, and South Asia will rely on LNG to meet the growing demand to replace declining domestic supplies. We also expect Europe to increase LNG imports to help offset declining domestic supply.
Demand growth by the middle of next decade should balance the excess LNG capacity in the current market and planned capacity additions. We expect that further capacity growth of around 250 billion cubic meters will be necessary to meet demand to 2035.
With growing shale-gas production in the United States, the country is in a position to join Australia and Qatar as a top global LNG exporter. A number of competing US projects represent the long-run marginal LNG-supply capacity.Key themes uncovered
Over the course of our analysis, we uncovered five key themes to watch for in the global gas market:
Challenges in a growing market
Gas looks the best bet of fossil fuels through the energy transition. Coal demand has already peaked while oil has a decade or so of slowing growth before electric vehicles start to make real inroads in transportation. Gas, blessed with lower carbon intensity and ample resource, is set for steady growth through 2040 on our base case projections.
LNG is surfing that wave. The LNG market will more than double in size to over 1000 bcm by 2040, a growth rate eclipsed only by renewables. A niche market not long ago, shipped LNG volumes will exceed global pipeline exports within six years.The bullish prospects will buoy spirits as industry leaders meet at Gastech, LNG’s annual gathering – held, appropriately and for the first time, in Houston – September 17-19.
Investors are scrambling to grab a piece of the action. We are witnessing a supply boom the scale of which the industry has never experienced before. Around US$240 billion will be spent between 2019 and 2025 on greenfield and brownfield LNG supply projects, backfill and finishing construction for those already underway.50% to be added to global supply
In total, these projects will bring another 182 mmtpa to market, adding 50% to global supply. Over 100 mmtpa is from the US alone, most of the rest from Qatar, Russia, Canada, and Mozambique. Still, more capital will be needed to meet demand growth beyond the mid-2020s. But the rapid growth also presents major challenges for sellers and buyers to adapt to changes in the market.
There is a risk of bottlenecks as this new supply arrives on the market. The industry will have to balance sizeable waves of fresh sales volumes with demand growing in fits and starts and across an array of disparate marketplaces – some mature, many fledglings, a good few in between.
India has built three new re-gas terminals, but imports are actually down in 2019. The pipeline network to get the gas to regional consumers has yet to be completed. Pakistan has a gas distribution network serving its northern industrial centres. But the main LNG import terminals are in the south of the country, and the commitment to invest in additional transmission lines taking gas north is fraught with political uncertainty.
China is still wrestling with third-party access and regulation of the pipeline business that is PetroChina’s core asset. Any delay could dull the growth rate in Asia’s LNG hotspot. Europe is at the early stages of replacing its rapidly depleting sources of indigenous piped gas with huge volumes of LNG imports delivered to the coast. Will Europe’s gas market adapt seamlessly to a growing reliance on LNG – especially when tested at extreme winter peaks? Time will tell.
The point-to-point business model that has served sellers (and buyers) so well over the last 60 years will be tested by market access and other factors. Buyers facing mounting competition in their domestic market will increasingly demand flexibility on volume and price, and contracts that are diverse in duration and indexation. These traditional suppliers risk leaving value, perhaps a lot of value, on the table.
In the future, sellers need to be more sophisticated. The full toolkit will have a portfolio of LNG, a mixture of equity and third-party contracted gas; a trading capability to optimise on volume and price; and the requisite logistics – access to physical capacity of ships and re-gas terminals to shift LNG to where it’s wanted. Enlightened producers have begun to move to an integrated model, better equipped to meet these demands and capture value through the chain. Pure traders will muscle in too.
Some integrated players will think big picture, LNG becoming central to an energy transition strategy. As Big Oil morphs into Big Energy, LNG will sit alongside a renewables and gas-fired power generation portfolio feeding all the way through to gas and electricity customers.
LNG trumps pipe exports...
...as the big suppliers crank up volumes