Earlier this year, Daqing Oilfield announced it will be cutting back production to preserve its dwindling reserves. It's bad news for the already struggling city of Da-qing and the rest of Northeast China's Heilongjiang Province, both of which depend heavily on the oil field for tax revenue and economic growth. The Global Times recently sent its reporter Liu Tian to Daqing to uncover the roots of the problems at China's second-largest oil field. This is the first part of a two-part story.

Pumping units work on May 22 at an oil extraction facility in Daqing, Northeast China's Heilongjiang Province. Photo: CFP

In Daqing, the home of China's second-largest oil field by production, the oil pumping stations throughout the city seem to run unceasingly, suggesting that Daqing remains a booming oil city in Northeast China's Heilongjiang Province.

Listening to the city's residents, taxi drivers, professors and oil executives, however, one hears a different story.

For decades, Daqing Oilfield, a subsidiary of China National Petroleum Corp (CNPC), has been the pillar of the economy in Daqing city.

The oil field accounts for about half of Daqing's annual GDP and around 80 percent of the city's total tax revenue, according to media reports.

The oil field also dominates Heilongjiang's economy.

It accounts for 90 percent of the province's energy industry, which in turn has accounted for 54 percent to 73 percent of the added value of industrial enterprises in the province over the past decade, the National Business Daily reported in May 2014.

To make matters worse, the province's economy has recently taken a hit.

In 2014, its economic growth slowed to 5.6 percent, the lowest growth rate of any province in China.

In the first quarter of 2015, Heilongjiang's GDP grew by 4.8 percent, ranking among the bottom five provinces in the country.

On many occasions, government officials and industry analysts have blamed the economic downturn on the depletion of the province's natural resources: oil, coal and lumber.

Daqing Oilfield - or the region's dependence on it - is at the heart of the problem.

As its production has slowed, the situation has had an outsized effect on the region's economy.

Residents' livelihoods are on the line. About 300,000 people depend on the oil field, including current employees, retirees and their family members, according to media reports.

This means that more than one-fifth of Daqing's nonagricultural workers will be affected by the diminished production.

Cutting back

From 1976 to 2002, Daqing Oilfield produced 50 million tons of crude oil a year. Then in 2003, annual production fell to 40 million tons.

In January, Daqing Oilfield lowered its output target for 2015 to 38.5 million tons. And that's only the beginning. The oil field plans to cut its production by 1.5 million tons a year, with the goal of reducing annual output to 32 million tons by 2020, the Xinhua News Agency reported in December 2014, citing a provincial-level economic work conference.

The purpose of the production cuts is to make Daqing's oil reserves last as long as possible, said Zhao Junping, a professor at Daqing-based Northeast Petroleum University.

"The production cut plan is a strategic and voluntary move that is conducive to the sustainable development of Daqing Oilfield," he told the Global Times on June 8.

Planned production cuts can help maintain Daqing's reserves until the local oil industry can come up with a new economic model that doesn't rely so heavily on production, said Sun Xin, deputy director of the general manager's office at Daqing Oilfield Venture Group Co Ltd.

Taking its toll

The production cuts will hurt the economy and strain government revenue in Daqing and the rest of the province. Daqing will lose more than 20 billion yuan ($3.2 billion) in GDP if the oil field's production falls by 1.5 million tons a year, local media reported in January, citing an unnamed city governmental official.

Heilongjiang will accordingly see its GDP drop by about 20 billion yuan and its government revenue fall by 6 billion yuan, Xinhua reported in late 2014.

The production cuts will be a major blow to Daqing's small and medium-sized enterprises (SMEs) and the significant segment of its population that relies on the oil field to make a living. About 70 percent of Daqing's equipment manufacturers get 90 percent of their orders from the oil field, the National Business Daily reported.

Some companies are already feeling the pinch.

"It will be quite difficult for our company to break even this year because our orders from Daqing Oilfield have fallen off due to the production cut," Sun, the deputy director, told the Global Times on June 8.

Sun's employer is a subsidiary of Daqing Oilfield, from which it gets the overwhelming majority of its orders.

Dependency costs

Dwindling oil reserves aren't the source of all of Daqing's problems. They might not even be the city's biggest problem, said Zhao, the professor.

"Another deeper cause - which is mentioned less but is probably more important - is the outdated system deeply rooted in Daqing Oilfield as a long-standing State-owned enterprise," he said.

The strict controls that CNPC has placed on Daqing Oilfield in terms of personnel management, finances and other aspects have restricted its development, Zhao said. It lacks the vitality that an oil field would have in a market economy.

The situation has burdened the company that runs the oil field with responsibilities usually left to the government. Local residents said that there are two sets of public service systems in Daqing: one run by the local government, and one run by the oil field.

Both the government and the oil field have their hands in education, healthcare, hospitals, water, heating, electricity and public transportation. The services controlled by Daqing Oilfield primarily serve the oil field's employees.

For example, if one calls 114 - the universal telephone hot line for information - to find the phone number for a Daqing Oilfield-related company, the operator will explain that the caller must dial another number to get the information.

Zhao criticized this kind of dual system, primarily for the harm it does to the Daqing Oilfield.

"Daqing Oilfield is distracted from its main business," he said. "Moreover, operating this huge system has burdened the oil field's personnel and finances."

The nearly 50 second-level affiliates of Daqing Oilfield (with other hundreds of smaller enterprises at lower levels) do most of their business within the Daqing Oilfield system. They don't sell very much to enterprises outside the system, let alone those outside the province, or abroad, Sun said.

The situation has resulted in a system in which the oil field's affiliates can't become bigger and stronger, Zhao said. Lacking any competition, they can simply mooch off Daqing Oilfield.

Daqing city is also vulnerable. Its industrial enterprises depend on the oil industry for nearly 80 percent of their business, a city official said in an interview in May.

"Daqing has built too many oil-related industries over the past few decades," Zhao said. "These industries, their employees and eventually the city itself will be caught in a hopeless situation once the oil industry goes into recession."