油气行业的上游改革：机会终于来了？

In March Wood Mackenzie co-hosted the China Energy Week event in Beijing, where we interacted with a range of international oil companies (IOCs), domestic national oil companies (NOCs) and other local players. The timing could not have been better, as we also had plenty of opportunity to discuss the government's latest upstream reforms, announced that same week.
We fielded many questions on what the changes mean and the opportunities they might create, which we address below. We also share what we learnt about new-found challenges for China's shale gas industry, and what this all means for the IOCs already in-country.

Reading between the lines

Two unexpected changes to China's long-held upstream regulatory structure are attracting attention. Firstly, the administrative process of field development approval (ODP) for projects with foreign participants is being replaced by a process cryptically entitled 'filing'.
The other change is to lift existing upstream entrance restrictions. This was announced in the 2019 National Economic and Social Development Plan, at the 13th National People's Congress held earlier in March. The relaxation of entrance restrictions applies primarily to state-owned and domestic private companies, and does not explicitly mention international oil companies (IOCs). Exact details are thin on the ground, but we believe thresholds for capital requirements, exploration experience and technology have all changed.
Our view on what it means: Encouraging upstream investment is the primary driver for reform, to help achieve the longer-term goal of improving national energy security. Ultimately, the Chinese government wants a more diverse corporate landscape than it has at present, featuring NOCs plus other state-owned domestic entities and private companies.
However, all of the entities we spoke with shared one opinion – that the quality and prospectivity of the blocks currently being offered is not sufficiently attractive. Onshore acreage opportunities so far have been on the fringes of basins, far from the main fairways.
We believe stricter NOC relinquishment is required to release more prospective acreage. So far, the NOCs have avoided this step, circulating the better blocks internally and offering the leftovers for co-operation with domestic players. So although loosening entry requirements in a relatively 'closed' domestic market is a step in the right direction – and met with tentative optimism by IOCs – it’s not an open door. The real question remains: when will higher quality acreage be made available, and to whom?
The other change was to ODP approval. This has traditionally been a long, drawn-out process for PSCs with foreign participants, particularly CBM. Although its removal should help to speed up the regulatory process, the shape of what will replace it remains unclear. And we note approvals for environmental assessments, energy saving and land usage have been strengthened. As most of the major IOC projects in China are already in production, we do not expect this change to have a notable short-term impact.

China shale – complex like… crab?

At the China Energy Week event, it was fascinating to hear state player Sinopec talk frankly about where it saw China shale development heading next, and the biggest challenges to growth. Earthquakes were unsurprisingly front of mind following the three Richter 5 events that shook Sichuan province in February, disrupting nearby shale gas production in the process.

Local communities in the affected area have protested that NOC drilling operations are to blame. The official response is that the region has a long history of seismic activity, and while fracking could cause a 'mini-quake', it is extremely unlikely to have caused a Richter 5 event.
Sichuan's seismic past is both a short- and long-term issue. The thousands of quakes that have struck the mountainous zone over time have not only contributed to the intricate 'broken' geology that so complicates shale development, but also "destroyed a lot of our oil and gas resources", as one official put it. So what is left is not easy to find or extract.
We thought one memorable anecdote from an NOC executive nailed it. He suggested developing China’s marine-deposited shale was like eating crab – “you need lots of tools, it’s really hard work and all you get are these tiny slivers of sweet meat.” Developing US shale was a far easier feast by comparison.
The company acknowledged other challenges too. To our surprise, it admitted there was a clear knowledge gap in technology and reservoir management between China and the US. Well geosteering was called out as an area where it needs to catch up, specifically to navigate Sichuan's complex and convoluted reservoirs.
A third issue is government subsidies for shale production, which will end in 2020. Chinese NOCs rely on these subsidies to improve cash flow from what remain marginal projects. But the price support is ramping down, from US$2.2/mcf in 2012-2015 to US$1.1/mcf in 2019-2020.
Despite halving overall drilling and completion costs since 2014, shale gas economics remain marginal in China.  The NOCs are lobbying hard to have the subsidies extended, and it’s likely they will be. But again, at a slowly decreasing rate, forcing operators to continually cut costs and improve well economics.
Our view: The underlying message was one of reduced expectations. The Chinese government has set a 30-bcm (almost 3-bcfd) target for shale production by 2020, and we don't see that being achieved, by some margin. We model shale hitting 15 bcm (1.47 bcfd) by 2020.
The challenges are numerous but include well performance at Sinopec's projects, and supply-chain bottlenecks hampering PetroChina from hitting ambitious drilling targets. But from a slower start, the larger PetroChina is now catching up with Sinopec, and we expect China's largest NOC to overtake its smaller rival's shale output in 2020.
Wood Mackenzie will soon be completing a deeper dive report into how and why our shale gas forecast for China is changing.

IOCs in the mix

One takeaway from the week was that IOCs remain keenly interested in Chinese upstream opportunities, despite the obvious challenges. Frustration with the quality of the onshore opportunities being offered has led many to instead look at offshore or unconventional oil.
But there are issues here too. With a well-explored shallow water offering smaller pickings, most eyes are on the deep water. CNOOC has enjoyed exploration success over the past few years in the Lingshui area in the Qiongdongdan basin, south of Hainan island.
But while the prospectivity looks good for further discoveries, are the fields actually big enough to move the needle for the Majors? The 5.8 tcf found to date in the Lingshui area is from an accumulation of at least six smaller fields, and therefore not underpinned by one big find. Which in deep water spells extra cost and complexity, particularly given CNOOC will be using a semi-submersible floater for the first time.
Does that make Lingshui an IOC investment opportunity? To evaluate that, you have to first look at the bigger picture. Liwan was China's first deepwater development, found by Husky in 2007 and onstream by 2014. CNOOC operated the shallow-water element and Husky the deep water. Fast-forward to Q1 2018 and CNOOC sanctioned the country's second deepwater gas development – Lingshui – with a 100% interest. In our view, CNOOC is determined to prove to the outside world it is a credible deepwater developer, a key calling card for its ambitions in Mexico and Brazil.

Shale oil at Shengli

The other opportunity that is taking attention is Chinese unconventional oil potential. In April Shell signed a joint study agreement (JSA) with Sinopec to develop shale oil in the Dongying Sag area of the Shengli oil field. Shengli in Shandong Province is China's second-largest oil complex, after PetroChina's Daqing, and is Sinopec Corp's largest domestic upstream asset.
What does it mean: Shell becomes the second foreign company to sign an unconventional oil JSA with a Chinese NOC, following two Hess agreements with PetroChina earlier this decade. However, it will be hoping to be more successful, as both the Hess operations – one in Daqing, and the other in the Santanghu basin – were dissolved by end-2014 due to unsatisfactory progress.
Since then NOC development of shale oil has been slow, and it currently makes up less than 1% of China's crude output. The potential of the Dongying Sag area has been noted by Sinopec, who have already drilled over 20 wells but with mixed results.
The Chinese government has urged NOCs to lift domestic oil output, as most fields are depleting rapidly. The development of unconventionals could boost production, but there are questions over whether the NOCs have insufficient technology and expertise to capitalise. Shengli originally held over four billion barrels of commercial oil, but today we estimate there are less than 750 million barrels are left to be produced. With large in-place resources, but little upside from existing conventional production, there is potential for unconventional oil to turn the fortunes of this giant around.
Taking a step back, such opportunities offer a tantalising glimpse of the potential that could still lie within China's richest, most prospective basins. But the hurdles to gain access, and then come up with a business proposition that can compete within IOC's global portfolios are many. Ongoing upstream reforms may offer some encouragement, but they haven't changed the rules of the game so far.

Author |  Angus Rodger

Upstream research director, Wood Mackenzie