March 2017, Vol. 244, No. 3

Features

Eurasia Offers Most Diversity of Natural Resources

Among the world’s oil and gas regions none are more vast or diverse than Eurasia. Home to both the world’s largest importer of oil and the top producer of oil and natural gas, the immense geography and natural resources of the Russian Federation, and enormous population and thriving manufacturing sector of the People’s Republic of China position the region as one of the industry’s most active and pivotal.

Due to the uncommon characteristics of these centrally controlled and increasingly diplomatically aligned nations, this article will separately discuss the vibrant energy markets of Western Europe and Central Europe.

Consisting of 36.2% of the earth’s land mass and roughly 70% of the global population, Eurasia is generally considered to comprise the entirety of the continents of Europe and Asia. Covering about 21 million square miles, Eurasia stretches from the Arctic Ocean in the north, to the Mediterranean Sea and Indian Ocean across its southern coastline, and is bound by the Pacific Ocean on the east and Atlantic Ocean on its western coast.

Of the 103 nations comprising the imprecise geographic definition of Eurasia (geopolitical definitions have varied throughout history), China and Russia are by far the largest producers and consumers of energy, ranking in the world’s top five in petroleum, natural gas, coal output and electricity generation.

China: Growing Dominance

Until the 1990s, China was largely an energy isolationist, reserving most of its impressive coal, petroleum and natural gas production for domestic consumption. Due to its economic reforms of 1978, rapidly growing manufacturing and industrial sectors, and the rise of a consumer class, China began to gradually open its energy industry to foreign involvement, expanding its coal mining, and natural gas and oil extraction.

Beginning in the mid-1980s, direct foreign investment and joint ventures were permitted for the first time, helping to improve the operations and competitiveness of China National Petroleum Corp. (CNCP), and China National Petroleum and Chemical Corp. (Sinopec). In addition to more fully exploiting the primary oil fields in the east (Daqing), new projects were launched to tap reserves in the northwest Xinjiang basins (Tarim, Turpan-Hami, Junggar) and to explore the potentially massive offshore deposits (Bohai Bay) through China National Offshore Oil Co. (CNOOC Group).

Recently, the Liaohe field in the northeast, China’s largest heavy oil field covering 112,800 square miles, has reached an annual output of 5 million tons. Newly developed enhanced oil recovery techniques employed by PetroChina Liaohe Petrochemical Co., a subsidiary of CNPC, such as injecting boiler flue gas in combination with steam, has increased production of Liaohe by as much as 60%.

By 2002 China’s annual crude oil production had reached a level making it the third-largest non-OPEC producer behind Russia and the United States. Due to demand outstripping production by 2014, China was importing roughly 7 MMbpd of oil, making it the second-largest consumer of petroleum products after the U.S.

Russia: Geopolitical Clout

By any measure, the former Soviet Union is a major player in the global energy market. Russia has massive coal, natural gas and oil reserves, both in production and undiscovered. The U.S. Geological Survey estimates the 6.6-million-square-mile nation has the highest volume of undiscovered deposits of natural gas (estimated at 6.7 Tcm) and 22 Bbbls of oil, second only to the probable reserves of Iraq.

Although oil and natural gas production began in the late 1800s, output was modest until the then-ruling Romanov Monarchy solicited foreign investment and know-how to develop the Baku oil fields in Azerbaijan and the Volga-Ural Basin. Later, the oil sector helped shape the events that led to the Russian Revolution of 1917. In 1918, Bolshevik agitators drummed up support of the organized workers of the oil and gas industries, eventually setting the Baku oil fields afire in response to a political crackdown.

The modern age of massive Russian energy production and efficient delivery to market did not begin in earnest until after World War II. Centralized control and poor worker’s wages enabled Moscow to undercut oil from the Middle East by half, creating a strong hold on market share and the resultant economic influence over its satellite nations. By the 1960s, the Soviet Union had re-established its position as the second-largest producer, a standing that alternates between Russia, Saudi Arabia and the U.S.

With its economy largely dependent on energy exports that supplied half of the government’s annual budget, Russia has long used its influence as top-tier producer for geopolitical gain and leverage in its relations with the West. In addition to supplying one-third of Europe’s oil and gas needs, Moscow has increasingly become an important supplier to East Asian markets. Recently, President Vladimir Putin strengthened his alliance with Beijing, building a crude oil pipeline traversing the China-Russia border with a second under construction. In April, China’s imports of Russian oil hit an all-time high of 33,670,000 bbls, up 52.4% from the year before.

 

China Infrastructure Opportunities

Fast-paced economic growth and the dramatic shift from a rural agrarian population to a sprawling, city-dwelling middle class has transformed China into the world’s largest consumer of energy. As has occurred in other centrally controlled communist and socialist nations, reforms have been instituted to move the oil, gas, coal and hydropower sectors increasingly toward a free-market approach to encourage greater efficiencies and competition.

However, despite policies to loosen foreign investment restrictions, China’s energy sector continues to center around a handful of state-owned entities. The two largest, Sinopec and CNPC, parent company of PetroChina, are vertically integrated oil and gas producers, refiners and retailers with exploration and production (E&P) activities and operations throughout the world.

In 2014, Sinopec produced about 360 MMbpd of crude oil and 20 Bcm of natural gas, second only to PetroChina. Indicative of the competitive nature of China’s energy sector, the China National Audit Office last year found several subsidiaries of the Sinopec Group had inflated actual earnings by $3.04 billion through falsified fuel sales.

With the bulk of its oil and gas activities conducted through subsidiary PetroChina, CNPC remains China’s largest energy entity, producing 1.2 Bbbls of crude oil and 114 Bcm of natural gas in 2014, earning revenues of $425 billion. In 2015 its 4.4 MMbpd output ranked fifth behind Saudi Aramco, Gazprom, NIOC (Iran) and ExxonMobil. China’s other principal oil producer is CNOOC, an international offshore exploration and production entity.

As is the case in many hydrocarbon-rich nations, Beijing leadership and energy company executives have wrestled with an inadequate pipeline infrastructure and resultant takeaway challenges. China’s largest hydrocarbon basins are the Daqing field in the northeast Heilongjiang province, and the Changqing oil field, also to the north, inside Inner Mongolia, an autonomous region. Both have historically produced as much as 280-300 MMbbls of crude oil annually, output which must be moved thousands of miles inland to the south and west.

A variety of government agencies and the leadership at PetroChina have explored the potential for applied oil technology (AOT) to improve flow and mitigate pipeline capacity limitations.

Russia’s Evolution

The growth of the Russian energy sector has many parallels with China with the exception that it has perhaps more frequently suffered from inadequate capitalization and the effects of bureaucracy and political in-fighting. Russia’s largest, longest operating and biggest publicly traded oil company is Rosneft. Formed in 1933 with assets culled from the former Soviet Union’s Ministry of Oil and Gas, Rosneft’s operations were later spun off to create 10 separate but integrated energy companies.

In 2004, Rosneft grew dramatically through the acquisition of assets of Yukos, a once-dominant E&P company controlled by oligarch Mikhail Khodorkovsky. Throughout the 2000s, further assets were acquired and a 2006 IPO provided $10.7 billion in capital and a market valuation of $79.8 billion. In 2011, joint development projects with ExxonMobil were announced to share the output of fields on Russia’s Arctic shelf, a partnership that has grown to include Rosneft participation in projects in Texas and the Gulf of Mexico.

One of Russia’s most profitable and international oil companies is Lukoil, a publicly traded corporation formed in the 1991 merger of three state-run Siberian entities. Based on the Western model of operating as a fully integrated company active in E&P, refining and distribution/retailing, Lukoil has largely avoided the problems that have often hamstrung Russia’s energy sector and has operations in over 30 regions worldwide with revenues of over $114 billion. In 2013, Lukoil purchased Samara-Nafta, Hess Corp.’s Russian operations, for $2 billion. Due to its revenues and private sector status, Lukoil is possibly the federation’s largest taxpayer with liabilities of $30 billion annually.

With huge reserves straddling seven time zones and over 5,700 miles from west to east, it’s not surprising Russia is home to the world’s largest oil pipeline company. Headquartered in Moscow and fully state-owned, Transneft moves roughly 90% of all oil produced in Russia through 43,400 miles of pipeline.

As the entity responsible for transporting crude oil to refineries, truck and rail facilities, and ports for exporting to foreign markets, Transneft’s trunk pipelines are supplied by hundreds of feeder lines originating from each of the country’s primary production regions. Among Russia’s largest oil deposits are the North Caucus and Caspian Sea in the west, the Ural-Volga basin, Timan-Pecora and Western Siberia deposits in central Russia, and Eastern Siberia and northern Krasnoyarsk Krai fields in the east.

Russia Sets New Output Records for Oil & Gas

Dave Forest notes in a recent posting on Oilprice.com that with 2016 closed out, numbers from one nation in the energy space have been particularly eye-catching this week: Russia.

Over the last 15 years, Russia vaulted upward in oil and gas production, a fact that’s especially critical given this big producer is a “rogue” nation that lies outside the purview of OPEC. And 2016 was another big year for Russian oil output. With stats showing its production rose again this past year – to an average 10.96 MMbpd, up from 10.72 MMbpd in 2015.That came on the back of strong production in December, where Russian producers pumped 11.21 MMbpd – marking the highest output level in nearly 30 years.

That’s an important data point for energy markets, showing Russian supply is continuing to surge even as other big producers like Saudi Arabia are seeking production cuts. And it isn’t just oil where Russia is having a major impact on global markets. Recent stats show the nation also had a banner year for natural gas output.

Gazprom said it increased 2016 production levels to 419 Bcm or 14.8 Tcf, a mark that exceeded Gazprom’s own forecasts for the year by 2.7%. That rising production translated into higher exports, with Gazprom shipping 179 Bcm to Europe during 2016 – marking a record yearly total.

It’s not just pipeline gas that’s surging either. Russia’s burgeoning LNG exports also saw a 1.1% rise during 2016, to 14.69 Bcm, according to government reports. In fact, Russian LNG has been picking up speed even in the past few weeks, with December exports up 10.8%, to a total 1.47 Bcm. That puts Russia’s LNG shipments on pace for a 20% rise this year.