By Hou Yongzhi & Sun Zhiyan, Department of Development Strategy and Regional Economy of DRC

Research Report No. 70, 2008

The oil and gas prices have stayed at a high level in recent years, which has made the strategic pattern of oil and gas in the world become complicated. While the consumer countries have intensified competition among themselves, the resource countries have tightened control over their resources. As a result, international rivalry for oil and gas has become white-hot. China, while experiencing swift industrialization and urbanization, will have an ever-growing demand for oil and gas resources. To cope with the challenges facing its future development, China badly needs to speed up the transformation of the mode of development for its oil and gas industry so that it can realize an unconventional, resource-saving and internationalized development.

I. Rely on Independent Innovation to Pursue Unconventional Development

China's oil and gas industry has assumed a considerable scale thanks to years of development. However, the relevant Chinese enterprises are neither large in scale and nor strong in competitiveness when compared with the international giants in this industry. These enterprises have seen part of its original competitiveness being weakened due to the change in the competition situation and have found themselves unable to cope with the increasingly fierce international competition.

From the perspective of energy demand, oil and gas have become China's second major energy, next only to coal consumption. And this demand has been rising year after year. In the past 40 years, oil demand has jumped more than 24 folds. The domestic supply shortage has also expanded rapidly in recent years. With its current development scale, the industry is already unable to meet the ever-rising domestic demand. In face of new market competition and in light of the demand of economic and social development, China must continue to expand the scale of this industry and force this industry to form new cutting edges and boost its core competitiveness so that the industry can catch up with and surpass the world advanced level in a not-too-distant future.

From the perspective of corporate development, most of the oil enterprises are beset with a host of serious problems: the continuous rise in the degree of exploration and development of the oil and gas basins has resulted in a continuous increase in the cost of production, a growingly shorter cycle of development of oil refinery and new oil and chemical products, and a rapid development of the high-tech, high-value-added and high-performance products.

In face of these challenges, China must promote the technological upgrading of the oil and gas industry. But due to the technological monopoly and strict blockade by the Western multinational oil companies, over 80% of the advanced oil and petrochemical technologies are in the hands of a few top oil companies in the world. If China is to realize a technological upgrading of its domestic oil and gas industry by importing technologies from other countries, it will inevitably encounter a serious of insurmountable obstacles. Against this background, a key step for China to expand the industrial scale and increase the core competitiveness is to rapidly enhance the capacity of its oil and gas industry through independent innovation.

In enhancing the capacity for independent innovation, breakthroughs must be made in the research of basic technologies and generic technologies. Only when breakthroughs are made in this field can the oil and gas industry enhance its capacity for integrating the complex packaged technologies and for digesting the imported technologies. As the research of basic technologies and generic technologies involves heavy investment, high risk, long cycle of return and high uncertainty and as the research and development in this field is highly externally-related, a breakthrough, once made, can accelerate the technological upgrading of one or several industries at the same time and can bring forth great economic and social efficiency. In general, the enterprises are not so enthusiastic about the research and development in this field and individual enterprises have no strength for such development. But the large state-owned oil enterprises enjoy strong industrial advantages and occupy important positions that cannot be replaced by other institutions in integrating complex technologies. For this reason, China should rely on PetroChina, Sinopec, CNOOC and other large state-owned enterprises to intensify support for basic research and development. In addition, China should rationally arrange the ownership of general technologies and generic technologies and promote technology sharing among the domestic enterprises in the same industry in order to enhance the overall competitiveness of China's oil and gas industry as a whole. At the same time, China should encourage the domestic enterprises to form alliances for "pre-competition research and development". By forming such alliances, institutions and platforms for long-term and stable joint development can be established and close cooperation between the enterprises in the same industry can be strengthened in the field of basic and applied researches so that they can share risks and benefits.

In addition, China should formulate more relevant policies, in light of the economic and technological characteristics of the oil and gas industry and the unique features of the international competition, to encourage its enterprises to carry out independent innovations. For example, the state should introduce corporate-oriented financial and tax policies, especially the stimulation policies, in the upstream area of prospecting and development technologies, and give priority support to the national oil enterprises to innovate technologies that can boost exploration, development and extraction rate, and in particular to develop the extraction technologies for the unconventional oil and gas fields. In the meantime, China should strengthen the management of government investments and increase the use efficiency of public funds. In encouraging enterprises to develop high-efficiency and clean energy products and technologies (mainly at the downstream of the oil and gas industry), China should not only introduce policies that offer financial and tax incentives to enterprises but also introduce more consumer-oriented stimulation policies in light of the strategic requirements of the country's energy policies so that rational consumption will guide the enterprises to innovate the technologies for clean and renewable energy products, enhance the use efficiency of oil products and provide other industries with even cleaner energies.

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