The Daqing Oilfield and Daqing city have a lot work to do to transform the region's oil industry to fend off the coming recession as production cuts to their toll on China's second largest oil field. The Global Times sent reporter Liu Tian to Daqing to find out what the city and oil industry can do to complete the transformation in time. This is the second part of a two-part story.

Employees work at an oil extraction facility on June 1 in Daqing, Northeast China's Heilongjiang Province. Photo: CFP

It is never an easy job for a city to make a big transformation once it has become dependant on a single industry. Daqing city, Northeast China's Heilongjiang Province, is no exception. After relying on oil production for more than half a century, the city has yet to make the preparations necessary to transform its economy.

However, the truth is that Daqing oil field's reserves are dwindling, said Sun Xin, deputy director of the general manager's office at Daqing Oilfield Venture Group Co Ltd, a subsidiary of Daqing Oilfield of China National Petroleum Corp (CNPC).

"It is almost impossible for Daqing Oilfield's production to rebound to its level prior to 2015," he told the Global Times on June 8.

Turning a giant

Possible plans for Daqing's transformation have rarely appeared in the media even though many reporters are eager to glean inside information from its management.

"We are now concentrating on developing the business, so we're unwilling to be distracted by publicity," said a Daqing Oilfield (Daqing) employee surnamed Wang, who is in charge of external publicity.

The frequent occurrence of corruption cases involving the petroleum industry in recent years has left senior executives inclined to keep a low profile, especially during a national crackdown on corruption, analysts said.

Daqing is moving ahead on a strategy to increase natural gas production to make up for the reduction in crude, highlighting the growing importance of natural gas for maintaining the oil field's sustainable development.

The oil field plans to increase natural gas production to 3.7 billion cubic meters in 2015, up from 3.5 billion cubic meters in 2014. It then wants to boost gas production to 4.5 billion cubic meters by 2017 and 10 billion cubic meters by 2020, according to the oil field's sustainable development plan from December 2014. Natural gas production at Da­qing has increased for four consecutive years, according to information posted on China National Petroleum Corp's (CNPC) website on May 12. The oil field produced 1.26 billion cubic meters of natural gas in the first four months this year, an increase of 92 million cubic meters from the same period in 2014.

"Daqing Oilfield should position natural gas production as a strategic business with high growth and value. It's a strong complement to falling oil production," said Zhao Junping, a professor at Northeast Petroleum University in Daqing. "Quite a lot of natural gas has been wasted in the past due to insufficient attention."

Daqing's natural gas is still in low comprehensive utilization currently, creating far less value than oil, "Natural gas utilization should be expanded to the industrial and civilian sectors as soon as possible," Zhao said.

As of the end of May, more than 560,000 families have benefited from civilian natural gas produced at Daqing, CNPC said on its website on June 3.

Many experts support the ideas of Fu Chengyu, the now retired chairman of China Petrochemical Corp (Sinopec), who was widely considered a reformer. At the beginning of the year, before he retired, he put forward the idea that Sinopec should shift to a new industrial structure that focused more on energy and materials and less on petroleum and chemical engineering.

Fu's suggestion would be a feasible way for Daqing to develop into deep processing, which would allow it produce new products with higher returns.

"The public expects Daqing to get into this business, but there is still a long way to go as it's not easy for a giant to turn round," Zhao said.

Finding focus

For Daqing's successful transformation, changes have to be made in both staff consciousness and company structure.

Specifically, Daqing needs to spin off non-core businesses and get out of providing public services. Currently, it is involved in education, healthcare, hospitals, water, heating and electricity. It should hand over these concerns to the local Daqing government to ease the strain on its personnel and finances.

In addition, the hundreds of subsidiaries at all levels need to stop acting like parasites on Daqing and open themselves to outside markets, according to Zhao. This is the only way these affiliated enterprises can avoid comprehensive atrophy due to the reduced oil production, Zhao said.

"Only the highly competitive minority of these enterprises is suited to step away from Daqing and expand into external markets," Sun said. "Mechanical equipment is one promising field that can make the transformation. The others, not so much."

Building Daqing into a competitive equipment manufacturing base is part of Daqing's sustainable development plan from December 2014.

"Policy support, not limited to personnel and capital, from the top level of Daqing is the prerequisite for its subsidiaries to make such a transformation," Sun said.

In addition, experts said that Da­qing should receive greater autonomy from its parent company CNPC so to become more efficient, and step out of the current "planned economic model."

"CNPC can still hold shares in Daqing without worrying about losing control, while still giving it more freedom," Zhao said.

Ending nepotism

As for transforming the staffs' consciousness, it won't be easy, Sun said. "It is not an easy thing because most people still want to work at the oil field because it offers a stable career and better benefits than other jobs in Daqing."

Over the last few decades, it has become common for the children of Daqing employees to get jobs at the oil field after they graduate from university. But this policy changed in April 2014, when Daqing set stricter hiring requirements for "second generation" applicants who attended second-tier universities with majors unrelated to oil and those who attended third-tier universities.

The oil field mandated that these applicants pass a strict screening test and train for one year at a commissioned training school before they can be hired.

This new policy has prevented many "second generation" applicants from working at Daqing. The situation triggered mass protests and petitions from the relatives of some employees. The topic has been hotly debated across the country since last year.

"Long-standing conservative ideas and the pursuit of a stable career have caused these second generation workers to regard Daqing as their first choice for a job," Zhao said. "So they are unwilling to seek opportunities elsewhere that might be better for them. It will take time to get them to change their minds."

Daqing maintained a stable annual output of 50 million tons of crude from 1976 to 2002. Afterward, annual output fell to 40 million tons. It stayed at that level until 2015. Daqing plans to further cut production over the next few years. Still, it remains China's second largest oil field by production. Neither the Shengli oil field, East China's Shandong Province nor Tarim oil field, Northwest China's Xinjiang Uyghur Autonomous Region produced more than 30 million tons of crude in 2014.

"The higher level of production gives Daqing oil field and Daqing city a precious buffer period to transform themselves," Zhao said. "But only keenly determined reforms can save them from recession."