Gabe Collins, The Diplomat, 7 July 2015
Intense focus on the North American shale boom, Saudi Arabia, and ISIS obscures an important emerging energy trend: China’s oil production is peaking. This has profound implications for the world oil market, because China is not just a massive importer of crude; it is also among the world’s five largest oil producers, trailing only the U.S., Russia, and Saudi Arabia, and virtually neck-in-neck with Canada.
China’s oil industry has delivered impressive oil and gas production growth over the past decade. Yet a range of data and historical analogies increasingly suggest that, at global oil prices between $50-to-$100 per barrel, China’s oil supply capability is plateauing and may peak as soon as this year. Lower or higher prices would accelerate or extend this timing.
China’s crude oil output has stagnated for the past two years despite intense drilling activity on land and offshore. In late 2014, CNPC essentially threw in the towel on its workhorse field, Daqing, announcing that it would allow the field to essentially enter a phase of managed decline over the next five years. Under this new approach, the field’s oil production will fall from 800,000 barrels per day (kbd) in 2014 to 640 kbd by 2020: a 20 percent decrease. To highlight the importance of PetroChina’s decision, consider that Daqing currently accounts for approximately one in every five barrels of oil currently pumped in China – on par with the role Alaska’s massive Prudhoe Bay field has played in U.S. oil production.
While Daqing’s output has thus far declined less steeply than Prudhoe Bay’s, the Prudhoe experience shows that for even a massive field, once the steep stage of the terminal decline output phase begins, there is generally no turning back (Exhibit 1).
Exhibit 1: Oil Production Trajectories of Daqing and Prudhoe Bay, ‘000 bpd
Daqing Prudhoe Bay
Source: Alaska Oil & Gas Conservation Commission, PetroChina, EIA, Author’s Analysis