OGPSS - China's offshore oil

The recent post on Chinese claims to territory in the China Sea, mentioned the rush to plant flags on different islands in the South China Sea portion, as a sign of the ongoing nature of the disputes that continue to develop in the region. That status has continued with protests this last weekend in China over Japanese flag-waving over an island in the East China Sea. The islands are called Diaoyu or Senkaku, depending on whether the report is Chinese or Japanese.

Figure 1. Location of the Senkaku/Diaoyu Islands in the East China Sea (Google Earth). The yellow patch shows the rough location of the Shirakaba/Chunxiao gas field. The Japanese claim runs through the center of the field, China says the boundary is to the East of the field (half way between the disputed islands and Okinawa).

CNOOC, the China National Offshore Oil Corporation, and the company designated to handle their offshore deals, has been producing oil and natural gas from the field since at least March of 2011. Back then:

"China has complete sovereignty over the Chunxiao oil and gas field and administrative authority," Chinese Foreign Ministry spokeswoman Jiang Yu told reporters at a regular news briefing.”

The gas field is 7 minutes flying time for the new Chinese air base at Shuimen.

CNOOC has just released their Mid-year Review noting that they are on track to produce between 330 and 340 million barrels of oil equivalent (mboe) this year. They have 10 new discoveries and 18 successful appraisal wells, and have signed an agreement to co-operatively develop coalbed methane onshore in China. (Their realized gas price is $5.90/kcf up from $4.92 over the same period last year.) However they are running about 4.6% down in production y-o-y, which they blame partly on the production outage at the Penglai 19-3 oilfield, in Bohai Bay, due to the oil spill last year. The shut-down reduced overall company production by 40,000 bd, from a field which has been producing at some 160 kbd.The field, the largest offshore discovery in China is run in partnership with ConocoPhillips, came on line in 2002 and was the site of another small spill this June. Production at Penglai 19-3 was restarted in March, with the intention of ramping up to close to the original flow volumes.

The review notes that of the three appraisal wells drilled in Bohai Bay , Penglai 9-1 was the largest oilfield in recent discoveries in the Bay, and it tied in with the discovery of oil at Penglai 15-2 which is some 8 km south. When included with a third successful appraisal in the Bay (Qinhuangdao 29-2) they have collectively expanded the reserves in the Bay area. CNOOC also note new discoveries further north in the Bay at Luda, which originally came on stream at 11 kbd in 2009.

The second largest oilfield in China, the Shengli field, lies just to the West of Bohai Bay but the onshore fields will be covered in more detail in a later post.

CNOOC is also producing oil from the Xijiang oil field in the East South China Sea. This field started production in 2008, when it was projected to produce 40 kbd from fifteen wells.

(Note this should not be confused with the Xinjiang Oil Province in northern Xinjiang Uygur Autonomous Region, which is a heavy oil deposit which the Chinese are developing using a SAGD technique.)

However, oil fields off the China coast have been in development sufficiently long that some are now depleting. The Lufeng 22 field some 150 miles south-east of Hong Kong has been officially shut down in June 2009. It had 5 long horizontal wells, which ran up to 2 km in the lateral.

Thus when one compares production from the different CNOOC sources in the first half of this year, relative to last year, the increasing role that overseas investments will be called up to maintain overall production levels becomes more evident. Those investments are in the Long Lake Oil Sands in Canada which they acquired with Nexen, and the Missan Oilfield in Iraq. It should be noted, however, that this is still up considerably from the 469,407 bd that the company averaged in 2007. However the 450 kbd anticipated from Iraq is sure to help more.

Figure 2. Comparative production from the various CNOOC operations, 2012 v 2011. (CNOOC Midyear Review)

When one realizes that about 25% of the oil comes from the South China Sea, this tends to draw a little emphasis to the ongoing disputes in that region. There are four projects scheduled for production in the region this year, they are Weizhou and Yacheng in the Western South China Sea, and Panyu and Liuhua in the Eastern. Added to these are the discoveries at Enping in the Eastern South China Sea, and Dongfang in the Western.

Figure 3. CNOOC fields scheduled for production in the South China Sea (CNOOC Midyear Review).

Weizhou is actually an old sandstone reservoir that has been in production for quite some time, but CNOOC now has an interest in some of the fields that are still being developed in the region, which lies in the Beibu Gulf. The reservoir has a relatively low permeability such that various different EOR techniques are being considered for the region. The new developments this year should add around 20,000 bd to production in the Beibu Gulf region.

Yacheng is a gas field that has just started production. It is anticipated to reach peak production of around 1 mcm/day next year.

Panyu is a field that CNOOC acquired from Devon Energy and ConocoPhillips has an interest as the operations move into an expanded Phase II, over the 11 kbd which has been achieved prior. Two new drilling and production platforms are being fielded. Weather in the region is considered a problem.

Liuhua, while one of the largest discoveries in the South China Sea, has a relatively heavy oil, with about a billion barrels in reserve, found in a carbonate reservoir. It was originally discovered in 1987, and was first developed in 1993. It was successfully restarted in 2007, with 25 wells producing some 23 kbd of oil, after being closed due to damage from typhoon Chanchu. The new development is Liuhua-4, which has low reservoir pressure, and so will require the use of electric submersible pumps.

OGPSS - Tensions over oil in the South China Sea

In the introductory remarks to these posts on Chinese energy supplies and usage, I mentioned that one of the concerns beginning to be evident lies in disputes over the ownership of some of the oilfields offshore. Disputes over ownership have been continuing for some time, and this week was no exception, with Chinese moves to create a new city, Sansha, on Woody Island and thereby strengthen their claim to the region. Woody Island, or Yongsing lies in the Paracel chain of islands in the South China Sea.
(The post has been slightly modified to recognize the speculative nature of the overall resource available.)

Figure 1. Location of the current region of dispute in the South China Sea (Agency France Press)

Ownership of the territory, and underlying potential hydrocarbon reserves, is a matter of dispute between several countries, although China has administered the region since a 1974 conflict with Vietnam.

The Chinese government declared the establishment of Sansha last month, saying its role is to administer the disputed Paracel and Spratly archipelagos and surrounding South China Sea waters, which are believed to hold oil and natural gas deposits. The islands are claimed in whole or in part by Brunei, China, Malaysia, the Philippines, Taiwan and Vietnam.

The China National Offshore Oil Corp (CNOOC) has recently sought foreign interest in exploring nine blocks in the region, coming as close as a mile to the Paracel Islands – a region that Vietnam claims lies within its territorial waters, and which it used to occupy.

Further south, near the Spratly Islands, the dispute switches to include the Philippines with the latter already getting bids for some of the blocks, which the Philippines also claims lie within their 200-mile territorial waters. The benefit that China achieves by claiming the Spratly Islands can be seen by looking at the change that this brings to their territorial waters, in contrast with those of the other adjacent countries.

Figure 2. Disputed territories around the Spratly Islands, and the territorial waters in dispute. (EIA ) The extent by which the Spratly’s extend Chinese territorial waters can be understood from the location of the red line showing their claims.

In more detail, the areas of dispute can be broken into more specific locations, names that will likely become more familiar as these disputes continue to fester. The actual amount of oil and gas that might be available is still relatively speculative, since there has been little actual drilling in the region, as yet. However, by some estimates, much of which is Chinese, the region is thought to hold up to 213 billion barrels of oil, more than that left in the Saudi reserve. On the other hand, as Joules and Art have reminded me, the USGS estimates put the total at only on the order of 20 -30 billion barrels. Only drilling into the putative fields will realize an answer to that question, but then this turns to the debate into who gets to sell the permits for such drilling.

Figure 3. Regional identifying names in the South China Sea. (Next Big Future )

The disputes are now moving to possibly bring in additional players, with China already accusing the United States of meddling, and this just after Secretary Clinton had appeared to make some progress in defusing the tensions.

These tensions in the region are not new, and in his book “Resource Wars” Michael Klare listed some of the conflicts that had taken place between some of the involved parties in the years to 2001, when the book was written. In several cases shots had been fired and people died, as the different nations tried to establish claims, most particularly to various, otherwise uninhabited islands in the Spratly Islands.

In 1974 China seized the Paracel Islands from Vietnam, and in the resulting conflict a Vietnamese naval vessel was sunk, and several soldiers were killed.

In 1988 the Chinese and Vietnamese navies exchanged shots at Johnson reef (video here ) with Vietnam losing three ships.

In 1992 Vietnam accused China of landing troops at Da Luc Reef, and China seized 20 cargo ships in the ongoing dispute. Both parties have landed on different islands as a way of seeking to claim the territory and the Vietnamese Parliament has just (2012) passed a law establishing sovereignty over the Paracel and Spratly Islands. This has raised more tension with China.

The conflicts are not just between China and Vietnam, in 1995 the Phillipine government discovered that China had built a military base at Mischief Reef, which lies some 150 miles from Palawan Island, and as Michael Klare notes, well within the 200 mile territorial waters of the Philippines (which extend 200 miles – to simplify the explanation of the nuances of maritime law). Given that there are mutual defense treaties between the USA and the Philippines (dating from 1951) and that China militarily rebuffed the Philippine ships sent to investigate, created new tensions in the region. An Army War College review paper has noted the military buildup that is now occurring:

Aside from China's long-term modernization plan for both her Army and Navy, Brunei, Malaysia, and lndonesia have purchased aircraft from the United Kingdom. Malaysia bought guided missile frigates from the United Kingdom and lndonesia purchased sixteen corvettes from the former East Germany. Even the financially strapped Philippines is acquiring Italian aircraft and is also considering an additional $14 billion for defense modernization. The possibility of a regional arms race is clearly very real, if not already underway.

The situation at Mischief Reef has continued to evolve. As Strategy World notes:

For over three decades China has been using a gradual strategy that involves first leaving buoys (for navigation purposes, to assist Chinese fishermen), followed by temporary shelters (again, for the Chinese fishermen) on islets or reefs that are above water but otherwise uninhabited. If none of the other claimants to this piece of ocean remove the buoys or shelters, China builds a more permanent structure to aid passing Chinese fishermen. This shelter will be staffed by military personnel who will, of course, have radio, radar, and a few weapons. If no one attacks this mini-base China will expand it and warn anyone in the area that the base is Chinese territory and any attempts to remove it will be seen as an act of war. The Vietnamese tried to get physical against these Chinese bases in 1974 and 1988 and were defeated both times.

Since the initial incident the small base at Mischief reef has been expanded into a more substantial military base, whose presence is now being used to justify a Chinese objection to the Philippine authorized drilling for oil off Palawan Island. The Chinese have also prepared to start drilling around Palawan Island, bringing the Philippine Navy back into the dispute.

And further north the Chinese Drilling Ship the CNOOC 981 has begun (in early May) to drill around the Paracel Islands. This is the first deep water well that the company has drilled itself, the fifteen earlier such wells being drilled by CNOOC partners. The exploration vessel Ocean Oil 708 is now also working in the disputed region.

Although the tensions have not accelerated as swiftly as Michael Klare anticipated when he wrote “Resource Wars” over a decade ago, they are nevertheless indicative of the aggressive position that China is taking to secure as much oil and gas as it can for future needs. With the modernization of their navy there some quite serious concerns developing over their future plans, since territorial issues can lead on to much greater conflict that we have seen so far in the region.

The disputes has now spread to Scarborough Shoal where an initial arrival of Chinese fishing vessels has been followed by support vessels from Chinese government agencies. Scarborough shoal lies 124 miles from the main Philippine island of Luzon. However

China insists it has sovereign rights to all of the South China Sea, even waters close to the coast of other countries and hundreds of kilometres from its own landmass.

This makes claims for even the smallest piece of land projecting from the sea more critical.

Figure 4. Raising the Philippine flag over part of Scarborough Shoal. (News Com)

Figure 5. Chinese flag flying over Scarborough Shoal (or Reef) (Huang Yang Dao Google Earth)