Is China Driving the Global Oil Markets?
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IS CHINA DRIVING THE GLOBAL OIL MARKETS? ICIS White Paper by Julien Mathonniere ICIS WHITE PAPER IS CHINA DRIVING THE GLOBAL OIL MARKETS? BY JULIEN MATHONNIERE NOVEMBER 2017 China has been the world’s largest oil consumer since 2011 THREE CHINESE OIL MAJORS ACCOUNT FOR 92% and became the biggest crude oil net importer in 2015. OF 2016 DOMESTIC CRUDE OIL PRODUCTION Since then, the Middle Empire has built increasing clout in the global oil markets, with domestic demand surging more than five-fold since 1990, to 12.4m bbl/day, and crude oil imports growing at a double-digit rate in 2017. While the rest of the world has struggled to run down its crude oil inventories, China has continued to build up its stocks, somehow mopping up large volumes of crude from several big producers which, failing that, might have fallen short of their pledged output cuts. As a result, China has taken the driver’s seat of global energy demand growth. Given the glut that has plagued the markets since late 2015, Chinese demand has proven key to helping restore the world’s oil supply and demand Source: Company reports, ICIS balance. CHINA’s CRUDE OIL DEMAND HAS INCREASED FASTER In the meantime, the country has shown a steady concern THAN DOMESTIC OUTPUT for its growing import dependency and the potential vulnerability of its oil supplies. While this is not an entirely new fixation for China, lower oil prices have somewhat changed the country’s stance on how best to secure this supply. China’s rising thirst for oil has closely dovetailed the structural reforms of its domestic oil industry, in particular the emergence of competition in the Chinese downstream segment under the guise of independent refiners, known as ‘teapots’ because of their size and shape. Thanks to the development of its own resources from the 1950s, China remained self-sufficient until the early 1970s and became a net exporter of oil in 1993. However, the Source: BP Statistical Annual Review situation changed that year when demand growth shot up to a double-digit figure, surging above domestic production. In the following years, China’s oil demand growth remained up of domestic refining capacity that would increase the strong at an average 6.1% while on the other hand, Chinese presence on international crude oil markets as a domestic oil production stagnated at an average of 1.4%. big buyer. This triggered two fundamental developments. First, a THE ALIGNMENT OF DOWNSTREAM CAPACITY drive to secure oil at any price that would prompt the ON OIL IMPORTS foreign asset acquisition binge of the 1990s and end with At the end of 2016, the country’s refining capacity the initial public offerings (IPOs) for all three Chinese exceeded 730m tonnes/year, or about 15m bbl/day, national oil companies (NOCs) in 2000. Second, a build- which is already above oil needs of around 12m bbl/day. Copyright 2017 Reed Business Information Ltd. ICIS is a member of RBI and is part of RELX Group plc. ICIS accepts no liability for commercial decisions based on this content. Nevertherless, additional capacity is under construction, After an initial row between the Chinese government and and is expected to reach 18m bbl/day in the next few the NOCs on who should assume the financial burden of years. building the SPR, Beijing eventually committed $1.6bn to the construction costs. It paid fees to China National Teapots were initially granted crude import quotas to offset Petroleum Corporation (CNPC), Sinopec and Sinochem to the decline of domestic production. By the end of 2016, 19 oversee the construction of the four SPR sites, and also independent refineries had been granted quotas totalling agreed to pay for the oil that would fill the SPR. an estimated 1.5m bbl/day. As a result, they became a new engine of Chinese demand growth. In 2004, the three Chinese NOCs agreed to help fill the SPR with equity oil from their overseas assets. The creation As imports swelled, so did the production of refined of a strategic reserve would fit well with the China Bank products. With over 24m new petrol cars on Chinese of Development’s energy-backed loans (EBLs) that were roads in 2016, the demand for gasoline has remained initiated in the aftermath of the 2008-09 financial crisis. robust. However, demand for diesel has weakened somewhat, less as a result of a weakening growth than of EBLs helped China secure set volumes of oil from the state’s attempts to curb air pollution. countries like Brazil, Ecuador, Venezuela or Turkmenistan. As increased volumes were being purchased, domestic oil The SPR stock building subsequently combined with the brokers started to take advantage of the two-tier pricing further opening up of the Chinese oil industry, in particular system adopted in the 1990s and bought oil at government- the increased presence of teapots on the international oil set prices to resell at a higher price to small local refineries. markets. As a result, investors became increasingly wary that a slowdown in Chinese crude intake, as a result of full With close to 90% of Chinese refining capacity, Sinochem, storage capacity or reduced quotas for the teapots – or in particular, favoured the purchase of oil from the both – could be detrimental to global oil demand. international market when oil prices were lower than domestic prices, regardless of the import quotas set up by Earlier in the year, the director of global energy strategy at the country’s State Planning Commission. RBC Capital Markets, Michael Tran, said “at a minimum this market needs China to keep buying to stop the wheels But the fall in global oil prices following the Asian financial from falling off ”. In June 2016, analysts from JP Morgan crisis in 1997-98 tempered Chinese NOCs’ appetite estimated that stopping shipments for China’s reserve for foreign ventures. In the meantime, it changed the would wipe out about 15% of the country’s imports. government’s stance on how best to shore up a secure oil supply. In 1998, the price of Brent collapsed from $16.59/ The SPR has been planned to be developed until 2020 bbl on 29 January to a low of $9.75/bbl on 21 December. to contain the equivalent of 90 days’ worth of oil net imports, or about 720m barrels of crude. Based on implied At $9-10/bbl, the Chinese government realised that supply calculations, ICIS estimates that about 683m have purchasing oil from the market represented a much better already been stored, the majority in above-ground tanks in option than producing abroad and shipping the crude crowded coastal regions. back to mainland China. Not only did this warrant caution as to where to direct oil investment, but it increased the CHINA HAS BEEN FILLING ITS STRATEGIC country’s market focus on secure sourcing and hastened PETROLEUM RESERVE the setup of a strategic petroleum reserve (SPR). CRUDE IMPORT DEPENDENCY AND THE ATTEMPTS TO MITIGATE SUPPLY SECURITY CONCERNS Although the idea of a strategic oil reserve had been discussed from the mid-1990s, it came back at the forefront of the political agenda in 2002, ahead of the Iraq war (2003–2011) and compounded China’s concerns about the need to ensure a steady supply of oil. Back in 1959, China had learned the hard way when the Sino-Soviet discord prompted Moscow to withdraw its assistance from the nascent Chinese petroleum sector and left Beijing bereft of the much needed expertise to develop its own resources and ramp-up production. SOURCE: Chinese Government (ICIS calculations) Copyright 2017 Reed Business Information Ltd. ICIS is a member of RBI and is part of RELX Group plc. ICIS accepts no liability for commercial decisions based on this content. THE RESILIENT NEED TO FIND CRUDE SUPPLY CHINA IMPORTS LARGE VOLUMES FROM BIG PRODUCERS OUTLETS According to the Energy Information Administration (EIA), China – along with India – was expected to be one of the largest contributors to non-OECD crude oil consumption growth, with Chinese demand forecast to increase by 400,000 bbl/day annually in 2016 and by 300,000 bbl/day in the 2017 year to date. The EIA forecast another 300,000 bbl/ day increase in 2018. A larger use of gasoline, jet fuel, and hydrocarbon gas liquids (HGL) has boosted the country’s petroleum consumption, overtaking the US in 2017. After shooting up to 9.2m bbl/day, imports have come down, to about 8.2m bbl/day. A declining production at China’s main oilfields such as Daqing and Shengli, along SOURCE: China’s General Administration of Customs with lower oil prices, has provided further incentives to buy crude oil from the international market rather than producing it domestically at a higher cost per barrel. little-known Chinese oil company marks a departure from the traditional monopoly of PetroChina, Sinopec and the As a result, domestic production covers only a third of China National Offshore Oil Corporation (CNOOC) in the Chinese oil demand. Although consumption growth has purchase of foreign energy assets. slowed, it was still up by 2.9% in the first seven months of 2017, somewhat decelerating from the 3.25% and 6.4% There was also speculation that China might buy into growth posted in 2016 and 2015, respectively, according Aramco’s IPO next year, or even buy the Aramco 5% to ICIS calculations. that’s being put for sale outright in a bid to secure a substantial part of its oil needs. Holding shares from a Regardless of the SPR filling level, China is set to remain company that owns the world’s lowest-cost reserves might the biggest oil user in the next 10 years.