A power plant at Daqing Oilfield in Daqing, Northeast China's Heilongjiang Province on May 5 Photo: CFP

Daqing Oilfield, which was established in 1960 in Northeast China's Heilongjiang Province, saw an unexpected decrease in production in the first quarter.

"Daqing is facing many obstacles to its industrial development in the future," an unnamed government official was quoted as saying by a National Business Daily report published on May 13. "Structural adjustments and changes in the business model will occur soon."

The drop in production comes as China continues to struggle with overcapacity in the crude oil drilling and processing industry, which was mostly caused by the country's 4 trillion yuan ($641 billion) stimulus package launched to fend off the effects of the 2008 global financial crisis.

The Daqing Oilfield, one of China's biggest, produced 9.95 million tons of crude oil in the first quarter of 2014, according to an article published on April 10 by Shenzhen-based China Market Report Center on its website.

In addition to overcapacity, State-owned enterprises (SOEs) such as the Daqing Oilfield are going though a painful restructuring process, which is intended to make the once tightly controlled companies more market-oriented.

Falling behind

Oil and natural gas production accounted for 78 percent of Daqing's industrial economy from January to March, according to the National Business Daily report. Production by the city's large-scale industrial firms - encompassing all SOEs with annual revenues of more than 20 million yuan - shrank by 1.6 percent in the first quarter, with their fiscal income also experiencing a slight drop, the newspaper reported.

According to the National Bureau of Statistics (NBS), overall production at China's national large-scale industrial firms grew by 8.7 percent year-on-year in the first quarter, the slowest growth since the second quarter of 2009 and down by 0.8 percentage points from a year earlier.

However, this was still far higher than the rate in Heilongjiang. Production by the province's large-scale industrial firms increased by just 0.5 percent year-on-year in the first quarter, the NBS said.

Heilongjiang is among several provinces that are "highly dependent on natural resources," and that have experienced a sharp slowdown in growth of production, the NBS said in a statement issued on May 13.

"Heilongjiang, and Daqing in particular, are highly reliant on crude oil drilling and processing to support their economic development. So when the amount of nonrenewable crude oil drops, the growth of companies and regional economies depending on such a resource will slow down," Lin Boqiang, a professor with the China Center for Energy Economics Research at Xiamen University, told the Global Times on Thursday.

From 2002 to 2012, the lowest production growth of Heilongjiang's energy industry was 6.3 percent, the National Business Daily reported. Yet the province only recorded an increase of 0.1 percent in 2013, and a decline of 2.2 percent in the first quarter this year, the newspaper said.

In a teleconference headed by Heilongjiang Governor Lu Hao on April 25 for local industrial enterprises, officials said that local enterprises are facing huge pressures and things are set to get harder as industrial growth slows.

Dogged by overcapacity

Overcapacity in the petrochemical industry is the major factor driving the slowdown, according to the officials at the teleconference.

The central government has placed increasingly tight controls on these sectors to curb overcapacity, which has affected Heilongjiang's industrial development, the National Business Daily cited a government source as saying.

Daqing Oilfield, which accounts for 50 percent of Heilongjiang's industrial production, has produced high volumes of crude oil for more than 25 years, so its economic contribution will wane as its crude oil reserves diminish, officials at the teleconference said.

Another problem is that many industrial enterprises, including Daqing Oilfield, are less competitive these days, officials attending the teleconference said.

One major reason for this, experts say, is that State-owned industrial enterprises still have an old-fashioned and inefficient business model.

This model often involves hiring the children of current workers and paying salaries based on the length of employees' time at the firm instead of their performance.

The outdated system has hampered the growth of many SOEs, Liang Jun, director of the SOA Supervision and Administration Center at the Guangdong Academy of Social Sciences, told the Global Times on Thursday.

Thousands of Daqing Oilfield workers protested against the decision by parent company PetroChina to drop its guarantee of hiring all the workers' children, the South China Morning Post reported on April 30.

Children of Daqing Oilfield workers, regardless of their educational level, had been promised a job at the oilfield after entering the workforce, financial news portal cb.com.cn reported on Wednesday. But now, only children that graduate with a petroleum-related major from a top-tier universities will be hired by the oilfield directly after school, the news portal said.

Workers' children who graduate with other majors from less prominent colleges will have to undergo training for one year and pass tests in order to be hired, cb.com.cn said.

"Daqing Oilfield's old hiring model hurt the company since the children were not motivated to receive education in the petroleum industry or to work hard at the oilfield," Liang said. "The current model will boost the oilfield's competitiveness."

Fixing the problems

China has been gradually pushing ahead with reform of its SOEs, but the process has been slow and will remain painful, Liang noted.

"The interests of tens of thousands of people will be affected and many conflicts need to be resolved," he said.

Another key part of the reform is diversifying the large SOEs' businesses, said Lin from Xiamen University.

"Daqing Oilfield, for example, should have used the profits it made when business was good to invest in markets that were not related to petroleum," he said. "The enterprise would then have avoided a cash shortage and other problems."

The National Business Daily report said Daqing plans to invest in industries such as automobiles and new materials, while retaining its advantages in petrochemicals, equipment manufacturing and the food industry.

"It would be wrong for SOE executives and government officials to consider only current profits by, in Daqing Oilfield's case, continuously drilling for crude oil," Lin said. "It is never too late to invest in industries that will generate higher returns in the future."