Over the past couple of years, China’s oil industry has revealed a peculiar trend, with production maintaining an upward trajectory that seems to defy falling oil prices. Under normal circumstances, oil and gas producers tend to cut back output whenever prices fall too much in a bid to cut their losses. For instance, several U.S. shale producers are signaling production cuts due to low oil prices: back in May, Diamondback Energy (NASDAQ:FANG) chair and CEO Travis Stice warned that the Shale Patch had reached a “tipping point” with production set to decrease going forward amid low oil prices.
To understand the situation in China, you have to not only look at the country’s unique position as a major oil producer and importer but also at the outsized role that the government plays in the oil and gas sector (national oil companies produce 85% of China’s oil). China commenced oil production in the 1960s and managed to achieve energy self-sufficiency by the mid-1990s, producing more oil than it consumed. This allowed the country to reduce its need for oil imports for a period.
However, this changed three decades ago, with China becoming a net importer of oil since 1994 as consumption overtook domestic production thanks to a booming economy. However, consumption has risen much more rapidly than production, and the gap keeps widening: Last year, China produced nearly 5 million barrels of crude per day (mb/d), but consumed more than 16 mb/d. To date, China remains the world’s largest importer of crude oil, relying heavily on imports to meet its high consumption levels.
China’s oil production increased steadily over the next two decades until it declined sharply in 2016, thanks to the international oil price crash. Domestic production started recovering in 2019, and continued growing through the pandemic despite global oil prices sinking to historic lows. The decoupling between production and oil prices in recent years has mainly been driven by pressure from the Chinese government to boost domestic exploration and production under its “Seven-Year Action Plans to Enhance Oil and Gas Exploration” of 2019-2025. Beijing is focused on boosting its energy security through increased domestic production and building up strategic oil reserves to mitigate potential disruptions from international supply channels.
Source: Oxford Institute For Energy Studies
Over the previous decade, Beijing was predominantly focused on shale gas production. However, in 2019, rising trade tensions with the U.S. prompted China’s president, Xi Jinping, to call for a ramp-up in exploration and production of both oil and gas. In the same year, the government held a meeting with China’s leading national oil companies (NOCs), wherein it launched the 7-Year Plan. In 2020, Beijing introduced several amendments to the Resource Tax Law, cutting the resource tax rates by as much as 40% for heavy oil. The government also waived import duties and VAT for a range of imported oilfield equipment where such equipment was not locally available or did not meet the required performance standards.
