China Taps the Brakes on Oil Production

Chinese leaders are facing growing public pressure to curb emissions.

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A woman adjusts her mask as she walks past the residential apartment buildings shrouded by haze in Beijing, China Sunday, Oct. 6, 2013. Fog and pollution descended on northern China on Sunday, leading to flight cancellations and road closures at a time when millions of Chinese were headed home as a weeklong national holiday neared its end.

When we last looked at China's oil infrastructure growth and refinery development, we noted sizeable investments and loans China was making to build refineries and further oil exploration with Egypt, Nigeria, Saudi Arabia and Venezuela. Since then, we can now add Brazil and Uganda to the list.

Last October, a private Brazilian refinery signed an agreement with Chinese-owned Sinopec Petroleum de Brasil for storage tank terminals and new pipelines; prior to that, Sinopec acquired a 40 percent stake in the Spanish oil group Repsol's Brazilian subsidiary.

Additionally, China's state-owned Cnooc Ltd. is working now with U.K.-based Tullow Oil PLC and France's Total SA to develop Uganda's oil fields in the Lake Albertine Rift Basin. The Wall St. Journal reported that Uganda agreed with the companies on construction of a 60,000 barrels per day refinery and crude export pipeline, and the three companies are expected to invest more than $12 billion to develop Uganda's oil fields, which could contain as much as 3.5 billion barrels of crude.

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China's global oil expansion looks like an aggressive plan to gain influence and amass economic clout with oil producers. But at home, they're tapping the brakes. That's because environmental regulators have taken a most unusual step. They are blocking China's two largest oil producers –Sinopec and PetroChina – from expanding their refinery capacity after they failed to meet targets for reducing pollution.

Such penalties are highly unusual, critics say, because regulators often ignore violations of state-owned companies. But in the case of these two oil giants, AP reports that Chinese leaders are facing growing public pressure to curb the industrial emissions that have made China's major cities some of the world's most polluted and fouled both water supplies and farmland.

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That was the dirty little secret the world learned from the Beijing Summer Olympics. And in China, it looks like someone might have to take the fall. AP reported in August that the government announced that a CNPC vice president, two PetroChina vice presidents and a PetroChina geologist were under investigation on suspicion of "serious discipline violations."

While no details were given, undisclosed "discipline violations" is often used to describe embezzlement, bribery or some similar type of corruption. Does the punishment fit the crime? We may never know. But there's a message that travels clearly across all cultural barriers: China recognizes that its greatest natural resources are not to be compromised.

Gregg Laskoski is a senior petroleum analyst with GasBuddy.com.

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  • Corrected on : Updated on 10/9/13: A previous version of this post reported that the new Ugandan facility would produce 30,000 barrels of oil per day; the figure has subsequently been revised up to 60,000 barrels per day.