Heavy Oil May Play Bigger Role in China's Oil Output Growth

BEIJING May 18, 2007 (Dow Jones Newswires)

China is showing increasing interest in developing its domestic reserves of heavy-grade crude oil as it struggles to line up energy supplies to feed its booming economy.

Although China has substantial heavy oil reserves, their development has been hindered by high extraction and processing costs and a lack of technical skills. But due to current high oil prices and China's dwindling reserves of lighter grades of oil, the sector is getting a boost.

The latest evidence of growing enthusiasm for heavy oils is an agreement in early May signed by Citic Resources Holdings Ltd. (1205.HK), a subsidiary of Chinese conglomerate Citic Group.

It'll pay $150 million to buy a stake in the heavy-oil Hainan Yuedong block in the Liaohe oil field in northeastern China, the country's largest reserve of heavy oil.

The Liaohe field produces around 161,000 barrels a day of oil, and the Hainan Yuedong block is expected to add a further 30,000 barrels a day. Sources familiar with the field say the block's development has up to now been hindered by a lack of funds.

Heavy oil, which has lower commercial value than lighter grades, is generally defined as having and American Petroleum Institute gravity of lower than 22 degrees.

Apart from Citic, China's three largest oil producers, PetroChina Co. (PTR) and China Petroleum & Chemical Corp. (SNP), or Sinopec, and Cnooc Ltd. (CEO), all have a long involvement in heavy oil projects domestically.

And all have new ventures in the pipeline and in some cases, are looking for new investments abroad.

China has five main heavy oil fields - PetroChina's Liaohe field and in Xinjiang in northwestern China, Sinopec's Shengli and Henan fields in eastern China, and Cnooc's Bohai Bay project off the eastern coast.

Their combined output was nearly 482,000 barrels a day in 2005, accounting for about 13% of the country's total crude production, said Jia Chengzao, vice president of PetroChina, speaking at a World Heavy Oil Conference in Beijing six months back.

This year, PetroChina aims to drill 164 horizontal wells in its Xinjiang fields, three times more than in 2006, according to China Petroleum Daily, a paper backed by China National Petroleum Corp., the parent company of PetroChina.

Horizontal wells can allow drillers to extract higher volumes of oil than conventional vertical ones.

High Costs, Technical Difficulties

China has an overall crude oil production target of 200 million tons, or some 4.02 million barrels a day of crude oil by 2015, according to Zhang Guobao, a vice minister of the National Development and Reform Commission.

While 2006 output of 184 million tons wasn't far short of this, bridging the gap won't be easy without pushing ahead rapidly on heavy oil development.

Although PetroChina recently made a big find of high-quality light oil in Bohai Bay, it is also seeing slowing flows from its older fields, including its flagship wells at Daqing in the north.

High costs and technological difficulties need to be overcome if heavy oil output is to take off.

"It's difficult for China to reach the goal only by developing conventional oil given limited resources. Heavy oil is a good option so long as the oil price remains above at $50 (per barrel)," said an official with French oil company Total SA (TOT), who declined to be identified.

According to PetroChina's Jia, China's onshore heavy oil reserves are around 19.8 billion tons, of which 2.06 billion tons are proven. He said that the proven reserves figure will likely rise to 7.95 billion tons, without giving a timeframe.

The estimated reserves account for about 20% of China's total oil reserves, said Jia. It is unclear how much heavy oil lies in offshore fields.

In the first quarter of 2007, PetroChina's heavy oil output accounted for only 10.3% of its total output, down from 13.2% the year before, according to a report posted recently on CNPC's Web site.

Over 80% of heavy oil resources in China are below 800 meters underground, with some in Xinjiang's Tarim Basin as deep as 5,300 meters. Extraction at such depths in sometimes difficult geological structures requires advanced technology, CNPC said.

China has made some progress on technology. For example, PetroChina has developed steam-assisted gravity drainage in the Liaohe field, which it believes will increase its recovery rate by nearly 30%.

Given that some developers of heavy oil reservoirs could go into the red if oil prices fall below around $45/barrel, predicting future output is fraught with difficulty.

"It's hard to predict how much China's heavy oil output will grow in the next decade, as it largely depends on oil prices," said an official with CNPC.

China's oil producers have been looking abroad - CNPC has invested in several blocks in Venezuela, including the Orinoco River basin, home to some of the planet's largest deposits of heavy crudes and bitumen.

And Chinese companies have long been sniffing around Canada's huge reserves of oil sands.

China Petrochemical Corp., or Sinopec Group, the parent company of Sinopec, now has a 40% interest in the Northern Lights project with Calgary-based Synenco Energy Inc. (SYN.T).

Synenco has said its best estimate of the resources in the Northern Lights project lands is 1.67 billion barrels of bitumen, of which 1.3 billion barrels is recoverable.

Copyright (c) 2007 Dow Jones & Company, Inc.