The current situation of the Daqing Oil Field and how to break through!

Thread Content

This post was last edited by yinkuilin6868 on 2016-6-6 08:11. 56 years ago, the oil workers in Daqing carried out an arduous \"oil campaign\"; within just three years they discovered a huge oil field covering an area of over 860 square kilometers. They also established an annual crude oil production capacity of 5 million tons, which accounted for half of the country’s total crude oil production at that time, thereby fundamentally changing the backward state of China’s oil industry. 56 years later, the oil workers in Daqing face another new \"battle\": this time, their \"enemy\" is not the extremely harsh natural conditions, nor the inadequate working conditions, or even the constant threat of oil well explosions – it is rather the combined pressure of the natural decline in oil field production, the reforms within state-owned enterprises, and the sharp drop in international oil prices. The Daqing Oil Field began a new round of production cuts last year; according to the plan, production is set to be reduced to 32 million tons by 2020, with an annual reduction of over 1.3 million tons. Amid low oil prices, Daqing, like other oil fields at home and abroad, has been hit hard by a sharp decline in revenues; last year alone, its oil field revenues dropped by over 100 billion. What is the actual current situation of the Daqing Oil Field? How significant is the impact of low oil prices on oil fields? How can Daqing overcome the chronic problems associated with cities dependent on resource depletion? A reporter from the Shanghai Securities News recently conducted an exclusive interview with Yan Hong, the chief accountant of the Daqing Petroleum Administration. Shanghai Securities News: The Daqing Oil Field once had a glorious history, and its development process is regarded as a \"miracle in the history of world oil exploration.\" However, after decades of development and construction, the oil field has inevitably encountered some practical contradictions and problems. What do you think are the main contradictions and problems in current oil fields? Could you give a detailed description of the environment over these past two years? Yan Hong: Since its development and construction began in 1960, the Daqing Oil Field has managed to maintain production levels of over 50 million tons for 27 consecutive years, making contributions to **economic development. However, as an old oil field, the Daqing Oil Field has been under development for 56 years. The biggest challenge it faces at present is the issue of resource succession, and its most significant problem is sustainable development. This contradiction and problem become particularly evident amid the continuous decline in international oil prices. It is first reflected in the insufficient replacement of resources: for instance, the reserve-production balance ratio in oil fields remains around 0.6, the proportion of newly discovered oil reserves that are of low-permeability or ultra-low-permeability types is high, the remaining extractable reserves are limited, and there is a shortage of backup resources. Secondly, there is the issue of increasing extraction difficulties: The main oil fields in Daqing have entered a \"double-high\" extraction phase characterized by extremely high water content and extremely high extraction levels; the remaining oil is highly dispersed, making extraction increasingly difficult. Due to factors such as the deterioration of oil and gas reserves, rising development costs, and increasing depreciation, the ratio of profitable production in oil fields has declined, while inefficient production capacity has increased; as a result, the return on investment in oil and gas-related operations has been falling year by year since the 12th Five-Year Plan period. On the other hand, the scope for business development is also a major issue. Although the Daqing Oilfield has made significant progress in expanding its operations outside its home region, it is still far from achieving a 50% share in its non-oil and gas-related businesses. Moreover, due to factors such as historical legacies, the oil field currently also undertakes various social services such as property management, public transportation, healthcare, and higher education, incurring substantial expenses for these purposes each year. Shanghai Securities News: After the sharp drop in international oil prices in the second half of 2014, Daqing Oilfield faced significant operational pressures; what measures were taken to address them? What are the predictions for business performance in the second half of this year? Yan Hong: International oil prices have dropped sharply over the past two years, posing severe challenges to the operation and production of oil fields. Affected by this, the peripheral fields suffered overall losses in the first quarter of this year; some of the key fields in the established areas also fell below break-even points. Moreover, as oil and gas investment scales shrink and the volume of work required for various operations decreases, it is quite challenging for the unlisted businesses related to engineering technology and project construction to turn losses into profits. Although we cannot control low oil prices, they force us to explore new opportunities, boost internal momentum, and optimize production organization in order to improve quality and efficiency. In addition, we have coordinated our unlisted business operations to leverage the advantages of integration and improve efficiency. We have made active efforts to turn around losses and boost profitability in key areas such as engineering technology, project construction, equipment manufacturing, oilfield chemicals, and production support. We have also accelerated the expansion into external markets; revenue from non-oil businesses increased by 760 million yuan last year compared to 2014, achieving growth against a challenging economic backdrop. Shanghai Securities News: **Last year, a major strategic decision was made to carry out supply-side reform, with a firm resolve to address the persistent problem of overcapacity. We can see that Daqing began to cut production last year; in fact, it is already at the forefront of the country in terms of capacity reduction. How does the Daqing Oilfield consider this? Yan Hong: During the \"Oil Campaign\" in 1960, China’s dependence on imported crude oil reached 60%, and now it has returned to that level, indicating that domestic oil production is still far from sufficient to meet consumption needs. Although the growth rate of oil consumption demand slowed down during the 13th Five-Year Plan period, it will continue to increase. Therefore, for the upstream sector, the main issue is how to improve development efficiency in order to enhance the overall operational capacity of the oil field. Daqing’s production cuts that began last year were a systematic process, representing a proactive adjustment; in line with our plans and goals, as well as the current resources and technological capabilities available, efficiency was also given priority during this adjustment process. When deciding which oil wells should be shut down and which new production capacities should be established, we have a strict evaluation system; only those projects that meet the required standards can proceed, while those that do not are rejected. Overall, decisions are made based on efficiency, with production levels and structures being adjusted accordingly. As for the production targets, the preliminary estimate is to maintain the oil and gas production equivalent at over 35 million tons by 2020, but this figure has not yet been finalized and further validation is required. At the same time, we must also strive to enhance the competitiveness of our unlisted businesses, thereby achieving steady improvements in economic performance under comparable oil prices. Shanghai Securities News: Currently, oil fields are all operating under tight budgets – how are the employees in Daqing getting through the tough winter? What changes have there been in the work and life of employees at all levels over these two years? During the capacity reduction process, what is the situation regarding the placement and re-employment of employees? What experiences does Daqing have in addressing issues such as excess staff that other oilfield companies can learn from? Yan Hong: Since oil prices have fallen and economic downward pressure has increased, some difficulties have indeed arisen. Nevertheless, the Daqing Oilfield continues to seek ways to improve the working conditions for its employees, reducing their workload through equipment automation. At the same time, the working and living conditions as well as the quality of meals for employees have also improved; for example, apartment-style management for drilling teams has been implemented in drilling companies, along with specialized centralized cleaning services for drillers’ uniforms. In addition, we are also strengthening internal management, establishing mechanisms and systems, placing greater emphasis on the concept of efficiency, and optimizing human resources – all of these efforts are aimed at maintaining stability and harmonious development within the team. Daqing has remained stable in this regard, with no significant fluctuations. In terms of optimizing human resources, over the past few years Daqing Oilfield has focused on meeting the needs related to oilfield production capacity expansion. It has strived to control the total number of employees, continuously tapped into internal potential, and adopted methods such as labor deployment across different units and optimized allocation within each unit to reassign surplus staff from back-office positions to front-line roles. This approach not only alleviates the pressure caused by surplus employees in back-office areas but also meets the demands of front-line production, thereby effectively utilizing existing workforce resources and reducing the need for new hires. Shanghai Securities News: To achieve sustainable development of the Daqing Oil Field, adopting a strategy of using gas to supplement oil is a practical option. What efforts has Daqing made to this end? How are the results? Yan Hong: We have placed the natural gas business at the core of oilfield development. Last year, the Daqing Oilfield produced 3.53 billion cubic meters of natural gas, reaching a record high. The proven gas reserve ratio in the Daqing Northeast exploration area is only 11.7%, making it a key area for exploration and development in recent times. We need to accelerate the development of gas field production capacity, with plans to build new facilities capable of producing around 800 million cubic meters per year; the gas output from these wells is expected to increase by about 170 million cubic meters compared to 2015. In the future, the natural gas business of Daqing Oilfield will need to continue to develop at a rapid pace. In two exploration areas such as the northeast of Daqing, efforts should be intensified to develop resources and the market, and progress should be accelerated in the construction of upstream and downstream facilities for natural gas, so as to leverage its advantages as a clean energy source. Shanghai Securities News: What measures has the Daqing Oilfield taken in terms of transformation and upgrading over the past few years? Faced with the increasing difficulties in extracting oil from old fields and the decreasing remaining reserves, how can oil companies improve their development technologies and reduce development costs? How can a balance be achieved between ensuring stable production and supply, and reducing costs while improving efficiency? Yan Hong: In this regard, we focus on making precise adjustments and tapping potential thoroughly, so as to ensure that oilfield development is \"of high quality, profitable, and sustainable.\" In terms of water-driven development, the focus is on optimizing the production structure by reducing the proportion of high-cost production and increasing the volume of low-cost, high-efficiency production ； In terms of third-generation oil recovery, efforts are focused on improving efficiency through polymer flooding, while steadily expanding the scale of application of combined flooding methods. Currently, the output from third-stage oil recovery has remained above 10 million tons for 14 consecutive years. By optimizing investment plans, oil fields can improve operational efficiency and reduce development costs, thereby achieving better quality and higher efficiency while still meeting oil and gas production targets. For example, in water flooding development, comprehensive adjustment efforts are intensively carried out, focusing on enhancing precise water injection control and strengthening well intervention measures to unlock potential, thereby continuously improving development outcomes. The focus of polymer flooding development is to optimize and adjust the polymer injection areas in order to improve the efficiency of polymer flooding. Overall, we will adjust the scale of capacity expansion based on oil price fluctuations and the results of cost-benefit analyses, and firmly avoid pursuing projects that fail to meet the required cost-benefit standards.