China Study Warns Of Impending Oil Production Peak & World Oil Market Squeeze, + Peak Recoverable Coal ~2020

October 6th, 2017 by James Ayre

China is rapidly approaching peak fossil fuel extraction according to a new state-funded study led by the China University of Petroleum in Beijing.

The study findings include the assertion that China will experience a peak in its total oil production (conventional + unconventional) by as early as 2018. As a result, world oil markets and geopolitics are likely to be greatly affected as China seeks to meet the widening demand shortfall through trade.

Accompanying this reality, China will also be reaching peak commercially recoverable coal around 2020, according to the study. The study notes, though, that even though coal currently accounts for around 66% of China’s total energy consumption, a shift away from the resource has been underway in recent years, and that if this shift is accelerated, then demand may fall fast enough that peak coal may not occur there. For more on that, see:

China Halts Construction On 150 Gigawatts Of New Coal Power Plants

China’s Coal Consumption Declines Despite Increasing Energy Consumption

China Suspends 104 Under-Construction & Planned Coal Power Projects

With regard to natural gas, the study notes that, while China’s technically recoverable reserves are fairly high (peak by ~2040), water supply constraints are likely to limit extraction rates to a significant extent. The country’s shale oil and gas areas are already “highly exposed” to water stress issues, which are expected to increase over the coming decades.

Nafeez Ahmed published a really excellent article discussing the new study over at Insurge Intelligence that I recommend reading in its entirety if you have the time. For those who don’t have the time, though, I’m going to highlight some interesting parts here.

I’ll start by noting that the researchers warn that if “new abundant energy resources” aren’t lined up, the situation will “challenge the sustainable development of Chinese society.”

As noted in the piece by Ahmed: “There are various scenarios that follow from here — China could: shift to reducing its massive demand for energy, a tall order in itself given population growth projections and rising consumption; accelerate a renewable energy transition; or militarise the South China Sea for more deepwater oil and gas.

“Right now, China appears to be incoherently pursuing all three strategies, with varying rates of success. But one thing is clear — China’s decisions on how it addresses its coming post-peak future will impact regional and global political and energy security for the foreseeable future.”

With regard to renewables, the study authors argue that the country’s current goal of 20% renewables by 2030 isn’t sufficient if the fossil fuel supply gap is to be bridged (based on projected demand). They also argue that plans to transition entirely to electric vehicles will have to be sped up.

Very interestingly, though, the study authors also discuss the option of exploring “much less energy-intensive means” of supporting the country’s population, and transitioning away from current, high consumption rates of many resources.

While renewables no doubt have a place in China’s transition away from fossil fuels, the reality is that if overall energy demand and resource consumption was to be reduced, such a transition would be far easier. How does a country wean itself off of the modern consumer lifestyle, though?

On that note, these parts from Ahmed’s piece are very interesting: “I asked Professor Wang whether this indicated that Chinese policymakers were beginning to take seriously the risk of peak oil. ‘Many experts, including those from the government, have already known about our papers and the peak oil issues,’ said Wang, explaining that their research group were the first to have introduced the concept of peak oil to China. ‘The Chinese government has taken measures for years to deal with the problem that China’s domestic oil and gas production can’t meet its demand’.”]

“But he added that while some official agencies supported the basic research, senior Chinese policymakers did not necessarily understand the problem. Although a significant number of Chinese energy experts agree that ‘peak oil in China is real and may come soon, they don’t think peak oil in the world is real,’ said Wang: ‘Therefore, if China can import enough oil with reasonable cost, the impacts on the economy is not considered the key issue by the government. What they care about is the import cost, the world oil price. If the price is too high, this will affect the Chinese economy significantly.’

“… All these risks would be compounded if global oil markets experience a supply squeeze of some kind. According to Wang, a peak in total global oil production is likely to arrive sooner rather than later: ‘Our group thinks the global oil peak may arrive much early than most people think. So if it happens, the import quantities and import cost will be the big issues that China must consider’.

“Last year, INSURGE exclusively published in full a confidential HSBC report concluding that 81% of the world’s total liquids production is in decline, and that this could lead to an oil supply squeeze in 2018.

“That view has been partly corroborated by Ed Morse, head of global commodities at Citigroup, who recently said that OPEC producers are for the most part already at maximum capacity, largely due to a lack of investment in exploration and development. The HSBC report, however, went further than this, concluding that while economic factors are a major issue, most OPEC producers are now facing geophysical constraints which they are unlikely to be able to surpass.”

Some of the most interesting parts of the new study relate to an Energy Return on Investment (EROI) assessment of China’s fossil fuel industries. The results aren’t pretty. As on the global level, the EROI rates for China’s oil, coal, and natural gas extraction have been falling fairly rapidly in recent years.

In China, this declining trend has been mainly due to “the depletion of shallow-buried coal resources and to the move away from conventional oil and gas resources,” according to the study.

The EROI of China’s coal extraction industry is now expected to fall to under 25 over the next few years — which is pretty low, and down from an average of 35 during the 1990s.

Similarly, China’s “oil and gas had reached a high of around 14 in the late 1990s, declining to 9.9 by 2012. It too is predicted to plateau slowly downwards in coming decades,” as summarized by Ahmed.

Notably, the EROI for China’s largest oil field — the Daqing oil field — was just 6.4 in 2012, and is presumably even lower now.

So, what will China’s solution to these looming energy shortage problems be? Will the country accelerate its transition to renewable energy? Will it ramp up its efforts to control the resource-rich South China Sea?

Ahmed notes: “This could see China adopt a much more aggressive approach to untapped oil and gas resources in the South China Sea, where Vietnam, Indonesia, Malasyia and the Philippines, alongside China, have contested claims to different offshore oil and gas fields.

“Meanwhile, ExxonMobil, whose former CEO Rex Tillerson is now Secretary of State under President Donald Trump, has systematically forged oil deals with all these countries. This implicates the firm — and potentially the US government — in a strategy of encroachment to access South China Sea’s fossil fuel resources.”

Which sets China and the US up for potential conflicts in the region.

Personally, I would guess that China is likely to continue pursuing a strategy of “all of the above” — doubling down on renewables and vehicle electrification, while also looking to secure access to the remaining resources of East Asia.

The new study was published in the September 19th edition of Springer’s peer-reviewed Petroleum Science journal. Financial support was provided by all three of China’s major oil firms: the China National Petroleum Corporation (CNPC), China Petroleum Corporation (Sinopec), and China National Offshore Oil Corporation (CNOOC).











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