China Oil & Gas Report Q3 2012

While China is increasingly dependent on imported oil and gas owing to rapid growth in energy demand, there is upside risk in terms of its domestic resources, particularly in view of shale gas and oil potential A more open relationship with foreign partners could also greatly reduce exposure to the import market In the meantime, oil and gas demand risk could surprise to the downside if market reform continues and economic expansion comes under pressure

The main trends and developments we highlight for Chinas Oil and Gas sector are: - Much of the countrys upside production potential is provided by the Tarim field, for which state company China National Petroleum Corporation (CNPC) has set the ambitious target of increasing oil production from around 115,500 barrels per day (b/d) in 2011 to almost 600,000b/d in 2020 Although we are cautious about this target, we expect Chinese production to rise over the next few years, peaking at 4 46mn b/d in 2016 before declining to 4 34mn b/d in 2021

- A report by Chinas Ministry of Land and Resources has estimated Chinas technically recoverable shale reserves at 25 1trn cubic metres (tcm), significantly lower than the 36 1tcm estimate made by the US Energy Information Administration (EIA) in April 2011 The discrepancy reflects the limitations of resource estimations at such an early stage of appraisal Further changes in reserves estimates are therefore likely as operators understanding of Chinas various shale basins improves The ministrys report considered a number of barriers to realising this vast shale gas potential In particular, it highlighted Chinas complicated geology and lack of domestic technological expertise

- The National Development and Reform Commission (NDRC) has submitted plans to overhaul Chinas current refined fuel pricing scheme to the state council The reforms, according to a Reuters report, would raise retail fuel prices by making them more reflective of international crude prices The move would limit refiners losses and might even allow them to make small profits Higher fuel costs could weaken the impressive trend in oil demand growth which would benefit the Chinese economy

However, in January 2012, the China Petroleum and Chemical Industry Federation estimated that apparent crude consumption will increase by 5 3% y-o-y in 2012 BMI forecasts that Chinese oil demand should reach 12 54mn b/d by 2016 Consumption is put at 14 69mn b/d by 2021

- Crude imports alone are expected to cost China some US$268 3bn in 2012, which could climb to US$304 8bn in 2016 Some refined product imports are also expected during the period, reflecting a shortfall in adequate domestic capacity Net gas imports are expected to rise to 80 8bn cubic metres (bcm) in 2016, costing some US$39 8bn, using BMI base case assumptions This suggests a total oil and gas import bill of US$344 6bn by 2016 At the time of writing we assume an OPEC basket oil price for 2012 of US$111 47/bbl, falling to US$107 00/bbl in 2013

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