The Tenth Five-Year Plan of Oil & Gas Exploration

During the "Tenth Five-Year" (2001-05) period, China will undertake a strategic reorganization in the oil industry by means of market liberalizaition, internalization, cost-effecitveness, scientific and technological breakthrough and sustainable development.

Changes will be made in structures of oil reservation and exploration: Natural gas will have a greater percentage in oil output; More oil imports will enter the domestic market; Oil and gas will have a grater percentage in non-renewable energy consumption in China.

The reorganization is aimed at ensuring a smooth and sustainable oil supply in the long run at lowest cost and meeting the goal of a sustainable and sound economic growth. Therefore, the guiding principles should focus on domestic market, taping international market, beefing up exploration efforts while staying rational, being frugal and building oil reserves.

Objectives of the Tenth Five-Year Plan

1)To ascertain oil and gas reserves. Oil reserves will amount to more than 3.8 billion metric tons with 0.85 billion metric tons workable; Gas reserves will reach 1,200-1,400 billion cubic meters with 700-800 billion cubic meters recoverable; 100 billion cubic meters of coal gas need to be proved.

2)To increase oil and gas supplies. By 2005, the total oil production is expected to exceed 170 million metric tons, total natural gas (including coal gas) will top 50 billion cubic meters. Oil imports will amount to 15-25 million metric tons.

3)To build key infrastructures for oil & gas transportation and storage. In the five-year period, Oil and gas pipelines of 14,500km in total lenghth will be built. Storage facilities of eight million cubic meters of oil and underground gas storage facilities of 1.14 billon cubic meters will also be built.

4)To raise oil and gas share in non-renewable energy consumption. A 3 percentage increase will be achieved within 5 years.

5)To advance in technical development and innovation. The science and technology will contribute a share of 55 percent from the average 50 percent in the oil and gas exploration .

6)To achieve main economic and technical targets. The success rate of test well will be increased by two percentage over that of the "Ninth Five-Year" period, oil recovery rate by 1 percentage. One third of time will be reduced in a well cycle, and the cost of oil and gas production will be reduced by 15-20 percent.

Priorities in the Five-Year Plan

1)To achieve smooth and sustainable oil supplies through speedy exploration and rational extraction. Production at existing oil fields should be maintained, and new oil fields should increase reserves and output to keep a steady growth. The production at existing oilfields in the east can be maintained by strengthening exploration and increasing recovery ratio. Oil exploration in the west should be sped up in order to realize the strategic oil transition as soon as possible. Oceanic exploration should be reinforced to achieve fast growth. Evaluation exploration in the south oil zone should be pushed forward.

2) To make full use of West-East Gas Project and Offshore Gas Project to achieve rapid development of natural gas industry. During the "Tenth Five-Year" period, construction of pipelines, including one from Xinjiang to Shanghai, one from Xining to Lanzhou and one undersea line for East and South Offshore gas fields, should be sped up. At the same time great efforts will be made to build underground storage and import facilities for liquefying natural gas. By the end of the Tenth Five-Year period or later, we will have a natural gas production base with annual production of 10 billion cubic meters.

3) To expand overseas exploration to supplement domestic supplies. Efforts will be focused on three strategic zones, namely, the Middle Asia and Russia, the Middle East and North Africa, and South America during the "Tenth Five-Year" period. Priority should be put in Russia, Kazakhstan, Turkmenistan, Iran and Iraq, Sudan and Venezuela and Indonesia to raise the shares both in production and reserves to set up several stable production bases. The cross border oil pipeline Illechivisky-Manzhouli-Daqin will be built. Oil imports should be diversified. By 2005, oil imports will reach 15-25 million metric tons.

4) To speed up construction of national oil storage system to safeguard oil supply. During the "Tenth Five-Year" period, several oil storage bases will be built in the country according to the principle of unified planning, involvement of both government and enterprises with the former playing a leading role. By 2005, the storage capacity will reach 8 million cubic meters.

Main Policies and measures

1) To encourage oil companies to speed up investment in scientific and technological innovation. During the Tenth Five-Year period, China will concentrate our efforts on scientific and technological innovation in a bid to remove the bottleneck in the oil exploration both in theory and practice. Priorities will be key technologies related to sustainable oil industry development, including exploration technology for non-standard resources appraisal, new theory and measure for oil recovery, technologies for deep-water exploration, extraction and transportation.

2) To encourage domestic oil and gas exploration to build more reserves through active economic measures. Appropriate policies will be formulated to encourage more investments into exploration and to fully utilize resources in terms of manpower, technology and capital. Special exploration risk funds in oil geology will be set up at the expense of government, and resource compensation funds will be used to reinforce domestic exploration.

Competition will be introduced to break up the monopoly in ocean-land and geographic boundary divisions in order to get a clearer picture of the national reserves . Then, appropriate measures will be taken to improve the structures of exploration and storage to establish a national oil reserve system. At the same time, current regulations on international cooperation in oil exploration both onshore and offshore will be updated to expand win-win cooperation with foreign partners in oil and gas exploration.

3) To make great efforts to develop natural gas industry in order to optimize energy structure. Natural gas industry will enjoy top priority in energy investment allocation in order to strengthen exploration and increase output. Measures will be taken to encourage investment from more channels to explore and extract natural gas and to build pipelines and infrastructures.

Projects related to natural gas will be granted favorable policies in terms of loans. New regulations will be established with regards to pricing, tax, environmental protection research to nurture natural gas industry. At the same time, measures will be taken to speed up the coal gas development.

4) To encourage domestic enterprises to take active parts in international market to source oil and gas from various origins. Domestic enterprises will be encouraged to conduct their business internationally. They are expected to play a more active role in joint exploration and extraction overseas and build up oil and gas production bases there. In this way, domestic technology, equipment, materials and labor are expected to enter overseas markets. Measures will also be taken to encourage more overseas oil and gas to enter domestic market.

5) To speed up establishment of a national oil reserves system under unified planning. A national oil reserves system should be established because it can ward off or cushion any possible negative effects incurred by supply disruptions, price upheavals and other unexpected events. and ensure a stable oil supply. Certain proportion of the oil supplies, controled by the government, will be marketed to cover operation and maintenance costs.

In the early stage of the project, a greater proportion of the oil will be allocated to the market to alleviate government financial load. Funds for reserve infrastructure will be mainly provided by the government, but more financial resources will be sought through policy loans, issuance of securities. At the same time, an enterprise reserve system will also be set up.

6) To reform financial system for oil investment, strengthen supervision and perfect policies and organizational structure. Government approval for each project will be phased out. Enterprises will be decision makers and risk takers; Banks are entitled to grant loans independently and the government will assume the role of a supervisor. The investors will be decision makers, beneficiaries, and also risk takers under the new investment management. International practices will be adopted, through legislation and administrative measures, to better major management system and regulate business operations. Laws and regulations on oil resource management and commercial activities will be enacted.

2: A brief introduction to the development of China's oil and gas industry

Oil and gas industry has developed into a fundamental industry in China's economy. So far, up to 688 oil and gas fields have been discovered in 25 provinces, cities, autonomous regions and offshore areas. China has set up six oil and gas zones, including 24 production bases, like Daqin, Shengli, Liaohe, Xinjiang, Sichuan, Changqin, Bohai and South China Sea.

China has become the fifth biggest oil producer in the world with an oil production of 160 million metric tons in 2000 from a paltry 121,000 metric tons in 1949. China ranks fifteenth in gas production with an output of 27.7 billion cubic meters in 2000. By the end of 1999, China has built 11,300km long-distance oil pipelines, 11,800km long-distance gas pipelines. Now an oil network connecting Northeast China, North China and East China, and a gas network connecting North China and Sichuan-Chongqing have been set up. A system including exploration, extraction, designing, operations, scientific and technological research and technical supporting services has been in place in the industry.

By the end of 1999, the discovered oil reserves amounted to 20.56 billion metric tons, with 5.93 billion recoverable. 42.4 percent of the total recoverable oil reserves are discovered with 8.07 billion metric tons to be discovered, enjoying a huge potential for exploration. The total natural gas resources amounted to 380 million cubic meters (kcm) with an estimated 105 kcm recoverable. Up till now, 23 kcm of natural gas has been discovered with 14.8 kcm recoverable. Only 14 percent of the recoverable resources has been found so far. Despite all these, China is still at preliminary stage in gas exploration. The country is rich in coal gas. It is roughly projected that China hs 3,000-3,500 billion cubic meters of gas reserves up to 2000 meters deep on land.

In 1998, China launched a strategic restructuring of its oil industry by integrating upstream with downstream operations, domestic trade with foreign trade and production with sales. PetroChina Company Limited(PetroChina), China Petroleum & Chemical (Sinopec) were established in the restructruing. PetroChinaranked 11th and Sinopec 20th among the world's top 50 oil companies in terms of 6 composite indices including oil and gas reserves, production, refinery and sales. Both enjoyed advantages both in scale and integration of upstream and downstream.

By the end of 1999, China's oil industry had accumulated fixed assets worth 186 billion yuan. Annual sales reached 187.6 billion yuan with profits amounting to 29 billion yuan, 30 percent of the total profits by State-owned or State-controlled enterprises. Oil industry has become a fundamental industry in the country's economy.

In 2000, China's prospecting and extraction investments amounted to 68 billion yuan, slightly higher than that in 1999. Oil prospecting and extraction projects had run into the fast track. 400 million metric tons of oil reserves were put to use.

The production capacity of crude oil jumped to 18.6 million metric tons, an increase of more than 1 million metric tons over the previous year. The production capacity of natural gas increased by almost 50 percent from 1999 to reach 3.3 billion cubic meters. The nationa'stotal oil and gas sales reached 301.2 billion yuan, an increase of 62.1 percent over the previous year. Total profits and tax amounted to 151 billion yuan, an increase of 174.7 percent. Total profits reached 110.3 billion yuan, an increase of 296.3 percent. Total assets arrived at 422 billion yuan, an increase of 15 percent. PetroChina, Sinopec and China National Offshore Oil Corporation (CNOOC) achieved a combined profit of 94.4 billion yuan, an increase of 237 percent over the previous year, representing almost 40 percent of the total profits of 239 billion yuan achieved by all State-owned or State-controlled enterprises across the country.

In 2002, total assets of the oil and natural gasindustry reached 473.529 billion yuan, increasing by 11.59 percent over the previous year. The industry's sales revenue reached 272.01 billion yuan, increasing by 0.51 percent over the previous year. The total profit reached 91.145 billion yuan, decreasing by 7.5 percent over the previous year. the industry had a workforce of 571,200 people, decreasing by 1.02 percent over the previous year.

In 2002, the output of crude oil reached 169 million tons, up 2.45 percent over the previous year, and its accumulative sales revenue reached 0.163 billion tons. The ratio of sales and output reached 99.6 percent.

In 2002, recoverable natural gas reserves increased by 237.5 billion cubic meters. The industrial output of natural gas reached about 32.622 billion cubic meters, up 7.76 percent over the previous year, while the sales volume reached 24.4 billion cubic meters.