Renowned for its vast oil reserves, Daqing, a city in the far northern province of Heilongjiang, is one of the richest cities in China. However, declining reserves and China’s broader shift towards cleaner energy sources have fostered doubts over whether the city’s past glory can be sustained for much longer. A recent trip to the city by The Economist Intelligence Unit confirms that in the near term, the outlook for Daqing remains positive: oil demand in the country remains huge, and domestic oil production is still a national strategic priority. Over the long run, however, Daqing’s efforts to diversify would do well to play better on the city’s strengths if they are to succeed.
The past three decades of strong economic growth have been accompanied by a sharp increase in energy consumption. In turn, cities blessed with energy resources, such as Daqing, have boomed. China’s most productive oilfield is in Daqing, and the city gained national prominence in the 1960s when Mao launched a social movement lauding the hard-working spirit of local oil workers, entitled “Learning from the Daqing Spirit”. The city is now one of China’s richest cities, with GDP per head of Rmb135,752 (US$22,514) in 2012. Annual output of crude oil in the city reached 40m tonnes in 2012, while national oil consumption that year reached 477m tonnes oil equivalent (toe).
Even so, the issue of economic sustainability has become a growing local concern. Annual oil production has fallen from 50m tonnes in the years up to 2003 to 40m tonnes since 2004. Oil companies are facing growing difficulties in extracting oil: 90% of the liquid extracted from the underground oilfield is currently water.
Rosy near-term prospects
We expect that growth over the near term will be supported by China’s growing energy demand and the city’s strategic position in China’s energy planning. The domestic market is large: China overtook the US as the world’s largest energy consumer in 2009, and demand is still growing as modern industry expands and living standards rise. We forecast that China’s oil consumption will grow at a rate of 4.9% a year over 2012‑20, or around 30m toe a year.
This will ensure immense opportunities for the oil industries in Daqing, as the consumption of other energy resources, such as nuclear and hydro, is still underdeveloped in China. Consumption of nuclear energy and hydropower stood respectively at just 0.8% and 2.3% of total energy consumption in 2012, compared with 18.6% for oil.
Meanwhile, new oil extraction and refining techniques developed by a state-owned oil company, CNPC, should continue to raise extraction and processing efficiency. Daqing’s oil output growth can be largely attributed to the application of new technologies developed by CNPC. The recovery factor is over 40%, around 10‑15 percentage points higher than similar oilfields in foreign countries. (The recovery factor is the ratio of recoverable oil to the total oil in place at the source.)
Moreover, Daqing plays a key role in processing China’s oil imports, sitting at the end of the Russia-China oil pipeline. In June 2013 Russia signed a US$270bn agreement to provide China with 46m tonnes of crude oil a year for the next 25 years. A substantial proportion of the Russian oil will be transported to Daqing, either for further processing or to be transferred to other parts of China. As China tries to diversify its oil imports in the name of energy security, Daqing’s position will strengthen.
Prepare for the day
Long-term risk abounds, however. The city’s output is falling as its reserves shrink. New oilfields such as Changqing, on the border of Shaanxi, Gansu and Ningxia, pose a growing challenge. Currently China’s second-largest field, Changqing possesses rich reserves of oil and natural gas (a much cleaner energy source), and is looking to replace Daqing gradually as the country’s main energy production centre. In 2012 the Changqing field produced more than 45m toe of oil and gas, the highest level in China.
At the same time, the nation’s energy preferences are shifting from oil to cleaner substitutes such as nuclear power and natural gas. China is committed to limiting its carbon dioxide emissions, which necessitates lower dependence on oil. The current national 12th five-year plan (2011‑15) attaches great importance to environmental protection in the national energy strategy, and sizable investments are being made to boost capacity in these sectors. Energy price liberalisation is expected, which will have an impact on oil demand.
The Daqing government has already started to plan for the inevitable exhaustion of its oil reserves. Local officials have given a preliminary estimate that this will take place in around 100 years. Value added from the oil and petrochemicals industries currently accounts for 72.2% of Daqing’s industrial value added. The city has set a target in its local five-year plan of having more than 60% of total industrial output come from non-oil related industries.
But even though the city is fuel-rich, it cannot necessarily leverage this to build up other heavy industries. In China, natural resources are state-owned assets. Daqing’s oilfield is run and managed by CNPC, which is supervised by the State-owned Assets Supervision and Administration Commission (SASAC) of the State Council, China’s cabinet. This means that the local government has little say over oil production and transaction decisions. The assurance of inflows from Russia should bolster the city’s position as a processing and transport centre, but most of the oil produced in Daqing is handed over directly to the central government for reallocation. The extent to which the imported oil can contribute to Daqing’s economic development depends on how much oil the city can keep for its own disposal.
Press the advantage
The local government has consequently indicated that it intends to develop the service sector. The plan for doing so includes a bit of everything-from services outsourcing to financial services. However, the success of any service sector depends on the availability of a sizable skilled labour force. Daqing lags behind in terms of education quality, with just eight tertiary education institutions, compared with 49 in the provincial capital, Harbin. Local officials interviewed by the EIU also lament that the long, cold winter reduces the willingness of workers (especially those in service sector) to move there.
The current plan lacks focus. Daqing is a fairly new city, with only 30 years of history, and does not have a tradition in services. Its comparative advantages over other cities in this regard are not clear. Consequently, instead of trying to develop a wide variety of service subsectors, Daqing would do well to capitalise on its current market niche. For example, the city is already building an international petroleum information centre, which is a multi-functional financial service platform that processes oil production and transaction information worldwide. It also provides related financial services. These sorts of services, which can capitalise on the city’s existing base of petroleum workers, will allow Daqing to continue in oil-related economic activities without depending on the substance itself.
China’s thirst for oil will support Daqing’s growth in the short run, buying the city precious time to prepare for its looming economic transition. Instead of hastily rushing into the development of non-oil related sectors, it might do better to boost the quality of its labour force, find its market niche and build on its strengths.
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