HOW IT WORKS
China's Heavy Demand for Heavy Oil

Oil consumption in China is nearly double that of its oil production per day—6.3 million versus 3.5 million barrels per day (b/d), respectively. How long can the country sustain this rate without losing energy resources? Notwithstanding China's push to increase oil imports, this quandary is driving its interest in producing heavy oil.

Most of China's heavy oil reserves lie in offshore reserves. The country's oil industry is beginning to place more emphasis on producing heavy oil—viscous crude that does not flow easily because of its low API gravity—even though it's more costly and difficult to extract. Although only 15 percent of China's oil production capacity is located offshore, it's growing fast. "China's move to heavy oil is most recent," said George Haley, director of the Center for International Industry Competitiveness and author of The Chinese Tao of Business. "It's the fastest rising area of production, but it was starting from a low base."

Seeking better recovery
China's heavy oil fields are located in the northern area of China: Liaohe in the northeast, Bohai Bay in the north, and Keramay in Xinjiang in the northwest. In 1955, oil and gas exploration began in Liaohe oilfield with oil flow revealed in 1969. Heavy oil dominates this vast oilfield—covering an area of 112,800 square kilometers across 13 cities. The field's proven heavy oil represents 50 percent of its total oil reserves.

By 1997, heavy oil accounted for nearly 60 percent of the overall oil production in the reserve. Lioahe is the third-largest oilfield in China, but it is the largest heavy oil production base in China. Today heavy oil production in Liaohe, Bohai Bay, and Keramay represents 7 percent (250,000 b/d) of China's total oil production.

Luda is one China National Offshore Oil Corp. (CNOOC) offshore field in the Liaoxi block (northern part of China) that began its heavy oil production in January 2005. CNOOC officials said it took 22 months to bring Luda 10-1 into commercial operation, which was actually two months ahead of its original schedule. In 2005, the field produced 18,870 b/d from 15 wells. Luda 4-2 went into production ahead of schedule in June 2005, with seven wells producing approximately 5,600 b/d. A third field, Luda 5-2, started production in November 2005 at a volume of more than 2,200 b/d from four wells. Its peak production capacity is 9,600 b/d, with 22 producing wells online.

The U.S. Department of Energy's Energy Information Administration (EIA) reveals Luda's production equaled approximately 40,000 barrels per day near the end of 2005. China's heavy oil production techniques are limited based on the geography and location of the oilfields. Thermal recovery methods, such as "huff and puff" (cyclic steam injection), are not cost-effective, said Arthur Yan, manager of the Houston-based China Gateway Consulting Group, based on the great distance between wells, which typically exceeds 300 meters offshore compared to 100 meters onshore. Salty water limits the ability to use the polymer method, he says.

"CNOOC drills side tracks along horizontal wells to improve the oil flow and allow certain controlled amounts of sands to lift up with the oil," Yan said. This hydraulic method developed by CNOOC has a recovery rate of approximately 20 percent, he added. It is being applied on a trial project basis at Luda. Total reserves in the Liaohe oilfield can reach 100 million tons using Steam-assisted Gravity Drainage (SAGD), which reportedly increases the recoverable rate from 23 to 50 percent.

CNPC and CNOOC
Nearly 85 percent of China's heavy oil production belongs to China National Petroleum Corp. (CNPC), equaling roughly 210,000 b/day. Heavy oil represents 10 percent of the company's crude oil production.

Roughly 4.5 percent of resources in Xinjiang province are heavy oil compared to its total estimated oil reserve. Haley said this area is estimated to have 6.3 billion barrels available, although only 1.7 billion barrels are proven. Currently, Xinjiang is the third-largest source of domestic petroleum supply to China; but, production is increasing 1 million barrels a year. According to Haley, the province should soon emerge as the top producing area in China.

Chinese regulations designate CNOOC as the only Chinese oil company that foreign companies can partner with. CNOOC signed a production-sharing deal with Devon Energy, for example, in the South China Sea in 2006. It also owns two other deepwater blocs in the South China Sea with Kerr-McGee, Devon, and Canadian independent Husky Oil. CNOOC is interested in teaming up with many foreign companies to explore and develop other deepwater oil fields because they need the technology, CNOOC Vice President Duan Cheng Gang said in an interview last December. China's technology is not sufficient to remove heavy oil without the technology, software, and equipment from foreign companies.

High cost, meager return
The cost of exploring and developing heavy oil is high, Yan said, but heavy oil production will definitely become more important. He added that the economic benefit is not that great. In Bohai Bay, for example, it's difficult to remove, transport, and refine the heavy oil because China is not an oil-rich country. With its declining eastern fields, China is starting to move west to remove oil, but that's proving difficult based on the harsh environment and geographical difficulties.

Haley said that even if oil prices drop substantially, heavy oil is going to be developed in China. Because the major Chinese oil companies are state-owned, they don't have to make a profit and will develop the resource anyway.

Vicki Powers is a Houston-based freelance writer with credits in business and trade publications including Business 2.0, Entrepreneur, and Wealth Manager. She worked in the oil service industry in the early 1990s for a Houston-based firm.

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