Fortunes change as China’s oil fields lose their promise
ZHOU Bo was a born oilman. His parents work for a state oil company in the northeastern Chinese city of Daqing, and during at least one summer break when he was a child, he tagged along with his father, an oil engineer, on an exploration mission. Humming oil pumps stood near his school’s playground, and propaganda posters emphasising steady production were ubiquitous. By the age of 10, he could reel off the complicated crude extraction process.
At 22, Zhou is finishing a bachelor’s degree in applied chemistry at a university in nearby Harbin. His parents hoped it would land him a job in the oil industry back home. But with domestic oil production declining and the Daqing oil field exhausting its supply, he and his parents are having second thoughts.
“The oil field will perhaps support the livelihood of my parents’ generation, but it can’t keep pumping out oil forever,” Zhou said. “Even my parents are telling me not to come back to find work.”
Daqing is home to China’s biggest oil field, and the city’s troubles reflect a broader reality for the country: Once a major exporter of oil, China is now one of the world’s biggest net oil importers. Fields like Daqing are ageing and becoming more expensive to pump, and buying oil elsewhere is often cheaper – and necessary to keep up with rising demand.
The country is already the world’s biggest auto market, and car sales continue to rise, driving gasoline sales higher. Demand for jet fuel is also strong as incomes advance and air travel becomes more affordable to a larger number of people.
In many ways, Daqing epitomises the changes.
A provincial leader named the city Daqing, which means big celebration in Chinese, after the discovery of the oil field there in 1959 created a swell of national exuberance.
In the decades since, the youths of Daqing followed in the footsteps of their forefathers. Destined for jobs in the petroleum industry, they are often nicknamed “the children of the oil field”.
The workers were treated as national heroes, their stories widely celebrated in textbooks, plays and songs. The city itself became a national symbol of endurance and industrial advancement, with Mao Zedong famously declaring, “In industry, learn from Daqing.”
And the city wants that legacy to live on.
Today, sleek oil museums stand to remind visitors of the glorious past, a former Chinese premier’s calligraphy praising the Daqing spirit hangs in the city’s petroleum university, and private tutoring schools post ads about courses tailored to job seekers in the oil industry.
But with oil prices at less than half of their multiyear peaks, Daqing’s oil boom has largely turned to dust.
The oil field’s production peaked about 20 years ago and has since been in a slow decline. The China National Petroleum Corp, the Chinese oil company that runs the field, reported a 98 percent drop in net profit in the first half of the year compared with a year ago.
The company said it was its “toughest time since going public”. Other significant Chinese oil companies have recorded losses during the same period.
More broadly, the country’s crude production fell 4.8 percent in the first six months of 2016 compared with the first half of last year, according to the National Development and Reform Commission, China’s economic planning body.
At Daqing in particular, the situation is dire.
New ways to enter
Jiang Wanchun, who was then the oil field’s party secretary and its most senior official, presented a dismal report card in March when he met with Chinese President Xi Jinping in Beijing: The oil field had suffered substantial losses, which he blamed on low global crude prices and high production costs, according to a transcript of the exchange posted on a government-run news website.
In just the first two months of the year, the field had lost more than 5 billion renminbi, or around $750 million, Jiang said, and production costs were almost equal to prices on global markets, leaving a razor-thin profit margin.
If current levels of oil output were maintained, the field would be com- pletely depleted in about five years. Energy Aspects, a market research firm based in London, predicted that output at Daqing would decline 7.2 percent this year, its fastest pace in the last 20 years.
And with oil revenue responsible for about half of Daqing’s economy, that poor performance has hit hard. The city’s gross domestic product contracted 2.3 percent last year, its first fall in 30 years, the state-run China News Service reported, citing government data.
A spokesman for Daqing oil field declined to comment. To make up for the falling domestic production, China has stepped up crude imports to unprecedented levels.
Imports of crude rose 14 percent in the first half of the year compared with the period in 2015, according to customs data, pushing China’s oil foreign dependency rate to a high of 64 percent.
Those purchases have largely been driven by a group of private refiners who were granted crude import quotas last year. The move was part of Beijing’s efforts to dilute the monopoly on the market held by stateowned energy companies.
These refiners – known as teapots because of their small size – had been struggling because of limited market share, but with the crude import licences, they quickly capitalised on low global oil prices. Having access to higher quality crude also meant they could compete with the state-owned behemoths on a more equal footing.
The rise of the teapots has had consequences domestically and further afield.
Global oil producers could benefit because they would have new ways to enter the Chinese market, according to Michal Meidan, an analyst at Energy Aspects.
“It’s a boost to the global oil market because you have all these new buyers,” she said. And within China, the changes pile further pressure on already beleaguered state oil companies.