Depth of experience

Heavy oil breakthrough

Shale and renewables have transformed the outlook for the energy industry, postulates Pulitzer Prize winner Daniel Yergin in his latest outing, The New Map: Energy, Climate and the Clash of Nations. Published last month, the book still concludes that oil will keep its preeminent position as “the primary fuel that makes the world go round”.

That didn’t seem to be the case in April, when crude crashed in price at the height of the world’s Covid-19 shutdown. It is now back to $40 a barrel, but that is still a huge drop on its all-time peak at the $147 level in 2008 (and more recently at about $73 in 2018).

The experience prompted BP to state that 2020 could mark peak demand for oil, a decade earlier than it forecast from last year.

Regardless of the UK oil major’s bearish verdict China’s government has spent much of the year taking advantage of low prices to build up its strategic reserve. As we reported in WiC489, by the time it is expected to complete the third phase of its storage capacity build out later this year, China should reach the International Energy Association’s (IEA) recommendation that it holds 90 days of the previous year’s net oil imports in strategic reserve. Energy analysts believe the government will also prioritise a further doubling of the reserve as part of China’s 14th Five-Year Plan for 2021 to 2025.

However, Beijing’s other priority is securing a more stable oil supply of its own. The country’s offshore energy giant, CNOOC, has just taken an important step in this direction by mastering the extraction process for heavy oil. This type of crude is more viscous, and sometimes described as “black mud’ because it is more difficult to extract. Heavy oil also accounts for about half of China’s proven reserves in the Bohai Sea (about 4.2 billion tonnes) with an estimated 19.9 billion tonnes available onshore too (3.55 billion tonnes proven).

This is an important national resource in the context of global heavy oil reserves, which stand around the 991 billion tonne mark – though only 126 billion tonnes of the total is thought to be recoverable because of technological limits.

CNOOC has been running pilot tests of heavy oil extraction in the Bohai Sea since 2008. Its new type of platform – which began operations last month – draws on technology adopted from onshore drilling and makes extraction costs much cheaper. A fifth the size and weight of existing platforms, it relies on seawater distillation systems and the injection of high temperatures via a thermal boiler to improve the fluidity of the oil during extraction.

To date, heavy oil production accounts for just 1% of the Bohai Sea’s annual output of 30 million tonnes. CNOOC wants to boost that to three million tonnes by 2025.

The company is also well placed to embark on an expansion cycle after a seven-year efficiency drive to reduce its production costs. It reported another improvement in production expenses in its first half results in August, with costs of $25.7 per barrel, compared to $29.78 at the end of 2019. Back in 2013, the figure stood at $45.02.

Some analysts believe that CNOOC could lead the world’s oil majors in production growth over the next few years if oil prices start to move back towards previous levels. But all three of China’s oil heavyweights have suffered from the implosion in the oil price this year, posting losses and cutting capital expenditures as lower demand for fuel torpedoed their revenues.

CNOOC’s shares are the worst-peforming of the trio, losing over 40% since January, compared to a drop of about a third at PetroChina, and a quarter at Sinopec. Over the longer term, capex will recover at the Chinese oil giants, however, underpinned by the country’s determination to improve its energy self-sufficiency and because of the need to replenish its reserves.

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