China's Energy Appetite

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See all Bulls Reasons Bulls Perspectives China's still has strong growth prospect 100% agree China's still has strong growth prospect This one is tough to argue against, there is no question in my mind that China will continue to grow and prosper which will bode wwell for firms who sell China oil/ energy resources. Some have made the argument that Chinese GDP will slump after the 2008 Olympics. ... read more View or Edit Reason 1 votes 100% agree See all Bears Reasons Bears Perspectives Is China's politics and economics compatible? 0% agree Is China's politics and economics compatible? The question that remains to be seen in my mind is can China continue to grow and prosper with an economic system which uses open markets but a political system which is non-democratic.... View or Edit Reason 0 votes 0% agree Send the authors a comment or suggestion can you put a graph of imported and exported coal in China on this page [Dismiss] [Done] There is an additional facet to this complex issue. Simply stated the Communist government of Ch... more [Dismiss] [Done] See All Suggestions

Top Contributors cassindy chao Np1 Related Articles Rising Worldwide Demand for Energy ‘One China’: Taiwan Conflict Exxon Mobil (XOM) Schlumberger N.V. (SLB) Yanzhou Coal Mining Company (YZC)

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China's massive appetite for fuel drives it to create giant energy-generation projects like the Three Gorges Dam, but it's still not enough.

[edit] Companies Affected by a Rising Demand for Energy in China

[edit] Key Chinese Players

PetroChina Co., China Petroleum & Chemical Corp. (or Sinopec), and CNOOC Ltd. are China's three largest oil producers. All have a share of domestic projects. PetroChina is one of the largest oil companies in the world besides ExxonMobil, Royal Dutch Shell and Gazprom. It boasted Asia's highest profitability in 2006.

• China has an overall crude oil production target of 200 million tons, or some 4.02 million barrels a day of crude oil by 2015, according to Zhang Guobao, a vice minister of the National Development and Reform Commission (NDRC). The 2006 output of 184 million tons means much more development must occur to meet this target.

• CNOOC shares ownership of China's biggest joint-venture investment, the $4.3 billion Daiyu Bay petrochemical plant that it shares with Shell. By holding the rights to practically all of China’s offshore oil, CNOOC can benefit from joint-ventures where others take risks and absorb costs in return for a share of the rewards. As a result, it has a relatively high EBITDA margin compared to other oil and gas producers.

Halliburton and Schlumberger are foreign companies that offer advanced extraction technologies that can be used in difficult geological structures in China.

According to PetroChina's China's onshore heavy oil reserves are around 19.8 billion tons, of which 2.06 billion tons are proven, although it expects that the proven reserves will likely rise to 7.95 billion tons. These represent 20% of China's total oil reserves. Over 80% of heavy oil resources in China are below 800 meters underground, with some in Xinjiang's Tarim Basin as deep as 5,300 meters.

[edit] Natural Gas

Panva Gas and Xinao Gas are two players in natural gas include, both of which are quoted in Hong Kong. China's National Reform and Development Commission (NDRC) wants to raise natural gas production to 92 million tones, which would equate to a compound annual growth from 2005 to 2010 of 13.2 percent. Some argue that gas companies shares might even have more upside than oil companies because, due to environmental concerns, the NDRC wants to increase the overall energy share of cleaner burning gas to total energy consumption by 89 percent.

Woodside Petroleum, in October 2002, led a consortium of companies to import liquefied natural gas (LNG) into China in a deal valued at $25 billion (Australia's largest ever trade deal). CNOOC owns 25 percent of this venture, along with 12.5% each for Woodside Petroleum, BHP Billiton, BP, ChevronTexaco, Japan Australia LNG (MIMI), and Shell).

[edit] Hydroelectric power

Additionally, China is taking its appetite for hydropower abroad as well. China, Thailand, and Myanmar intend four more stations along the Salween in the future. To the extent such hydropower resources are expanded, China’s appetite for fuel abroad should decrease or stay flat.

[edit] Coal power

Yanzhou Coal, the largest listed Chinese coal mining firm, is actively investing to expand its capacity--new mines will add 13 million tons per year. China has the world's third largest coal reserves and is the world's leading coal producer. Despite plans to lower dependency on coal-fired power, absolute consumption is seen increasing due to power demand from China's sustained growth.

Anglo Coal, a unit of Anglo American PLC, announced in November 2006 a $4 billion coal mining joint-venture with China's geology bureau in Shaanxi Province. While Anglo has already invested $300 million in a feasibility study, the operations are not expected to begin until 2009.

• Some investors prefer China’s coal companies because they do not require much management - a skill some still consider lacking in China. Other investors, however, recommend steering clear of coal investments because pollution is now becoming a political issue so the NDRC wants to cut the contribution of coal to the entire energy consumption mix by 4% from its current levels by 2010. Additionally, coal burners also will have to add expensive scrubbers to their plants. To the extent China solves coal pollution problems cost-effectively, this will hold down China’s appetite for fuel from abroad.

[edit] China’s Growing Appetite for Oil

China is now the second largest oil consumer in the world, behind the U.S. However the U.S. is 40% self-sufficient in oil production, which means that China is actually the world's largest net consumer. As China has rapidly industrialized, its need for energy has grown dramatically. China’s demand for fuel is projected to increase by 150 percent by 2020, a rate of 7.5% per year, seven times faster than the U.S. Below is a graph of China’s expected daily oil consumption (in thousands of barrels), as compared to the United States, between the year 2000 and 2050. As China seeks key oil assets and access, this could lead to potential conflicts with the United States and others. One notable example was China National Offshore Oil Corporation’s CNOOC protracted $18.5 billion bid for Unocal which ultimately failed with Washington balking at Chinese ownership of a key oil asset.

Figure 1

China’s growth in oil consumption is largely due to the tremendous growth in private automobile ownership in China. There are 172 million males in China in the 25-39 age, constituting 13 percent of the population. This age bracket is important because it will push motor vehicle sales higher in China. Foreign automakers like Ford and GM have made concentrated pushes into China, through multiple dealerships, establishing credit divisions, developing partnerships with local automakers, and conducting dealership management training. At US$20,000, roughly one million Chinese could contemplate owning a car. If cars are produced locally in China, perhaps for a price less than $4,000, this figure could rise to 50 million. By 2010, China is expected to have 90 times more cars than in 1990. Below is a graph of analysts’ estimate of China’s ownership per one thousand people, as compared to the United States, between the year 2000 and 2050.

Figure 2

Another contributor to the dramatic increase in automobile sales in China is the low price of gasoline in China, as compared to other oil-importing countries. China’s gasoline prices are currently reported to be a mere third of retail prices in Europe and Japan, where steep taxes discourage excess gasoline usage.

[edit] China’s Need for Imports

China’s own oil reserves are small relative to its consumption. At current production rates, China’s reserves may only last for less than two decades. After exporting oil in the 1970s and 1980s, China became a net oil importer in the 1990s and now depends on imports for more than 30% of its overall oil consumption. This need for imports is expected to double by 2010. A report by the International Energy Agency predicted that by 2030, Chinese oil imports will equal imports by the U.S. today.

To date, both International Energy Agency and OPEC estimates of China’s oil demands have mostly been dramatically understated compared to reality. Thus, China’s demand may grow even more quickly than predicted. The chart below highlights China’s reality compared to IEA and OPEC estimates.

Figure 3
Source: IEA and OPEC monthly oil market reports. Actual demand from CEIC statistical yearbook, except for 2006 which is from NDRC announcement

[edit] China’s Shopping Spree

As one of the largest suppliers of oil, the Middle East has become a key source for China. 58% of China's oil imports come from the Middle East today, and this is expected to increase to 70% by 2015. In order to diversify, China has begun to acquire interests in exploration and production in places like Kazakhstan, Russia, Venezuela, Sudan, West Africa, and Canada. For example, in 2007, the Atasu-Alashankou pipeline from Kazakhstan to China will transport 4 to 6 million tons of oil, still below its design capacity of 10 million tons.

Within the Middle East, China’s attempts to build relationships in the region may result in an increase in Chinese arms sales to the region, including to state sponsors of terrorism. This could negatively impact U.S.-China relations. A report by the U.S.-China Security Review Commission, a Congressionally created organization, warned that China's increasing need for imported energy has given it an incentive to become closer to countries like Iran and Sudan: “A key driver in China's relations with terrorist sponsoring governments is its dependence on foreign oil to fuel its economic development. This dependency is expected to increase over the coming decade.”

China is the number one oil and gas importer from Iran. The two countries have signed energy deals valued in excess of $120 billion, and the country is the source of 15% of China’s oil imports. Through regional alliances, China has potential direct overland access to Iran. And India is building an oil pipeline from Iran, through Pakistan (with Pakistan's co-operation). In October 2004, China signed an energy deal of previously unprecedented magnitude with Iran ever and promised to block any U.S. attempt to refer Iran’s nuclear program to the UN Security Council – at the same time the U.S. and EU were diplomatically seeking to halt Iran’s nuclear program.

China also maintains a close relationship with Saudi Arabia. In the mid-1980s, China sold Saudi Arabia intermediate range ballistic missiles. Since then, high-level visits of Chinese leaders to Saudi Arabia resulted in a 1999 visit to Saudi Arabia by Chinese President Jiang Zemin, who announced a “strategic oil partnership” between the two countries.

[edit] China’s “Monroe Doctrine”

In the South China Sea, China is involved in territorial disputes with Malaysia, the Philippines, Taiwan, Vietnam and Brunei over access to energy in the Spratly and Paracel Islands. In the East China Sea, a rivalry is developing between China and Japan over access to energy resources. While China has already begun exploring for gas reserves on its side of Sea, the Japanese claim that some of the reserves being tapped by China are on Japan’s side of the demarcation line. Meanwhile China considers the drilling by Japanese exploration firms in the disputed territories to be a provocation.

In Africa, Chinese oil companies are accused of turning a blind eye to local corruption and human rights abuses. For example, along with the Chinese have investment of more than $8 billion in joint exploration contracts in Sudan and the construction of a 900-mile pipeline to the Red Sea, there is credible evidence that China has provided arms to the Sudanese government to support it in the country's 20-year civil war. The Sudan is believed to be the source of seven percent of China’s oil imports.

After dozens of U.S. universities and ten states have decided to sell investments in companies doing business in Sudan, including PetroChina, mutual fund giant Fidelity Investments agreed to follow suit in May 2007, cutting its holdings by its U.S.-based funds by 91% – about $600 million. Prior to its decision, Fidelity had been targeted by activists seeking to curb investment in companies doing business in the African nation accused by the U.S. government of complicity in genocide. The “Save Darfur Coalition” urged Berkshire Hathaway Inc--which is PetroChina's largest overseas investor and is led by renowned investor Warren Buffett--to withdraw its financial interests in PetroChina, however on May 5, 2007 Berkshire Hathaway shareholders rejected the proposal to sell the company’s reportedly 2.3 billion shares of PetroChina. Berkshire said that selling its 1.1% stake would not have a beneficial effect on Sudanese policy, because it is PetroChina’s parent company, China National Petroleum, not PetroChina itself that is active in Sudan. Berkshire acquired its PetroChina position in 2003 for about HK$1.70 per share. By February 2007, those shares traded up to HK$9.47 per share, resulting in a net profit for Berkshire of over $2.3 billion

China’s African adventures have not been without cost, however. On April 24, 2007, rebels stormed a Chinese-run oil field in eastern Ethiopia, killing 74 people, destroying the exploration facility, and kidnapping seven Chinese workers. While Ethiopia does not currently produce oil, China's Zhongyuan Petroleum Exploration Bureau had signed an exploration deal there.

China’s has also entered the United States’ backyard, signing oil and gas deals in Argentina, Brazil, Peru, Ecuador, and Venezuela. For example, China National Petroleum Corp has invested in several blocks in Venezuela, including the Orinoco River basin, home to some of the planet's largest deposits of heavy crudes and bitumen. Chinese state-owned oil companies have also begun seeking ambitious oil deals in Canada, the largest single oil supplier to the U.S. China Petrochemical Corp. or Sinopec Group has a 40% interest in the Northern Lights project with Calgary-based Synenco Energy Inc. (SYN.T). Synenco has said its best estimate of the resources in the Northern Lights project lands is 1.67 billion barrels of bitumen, of which 1.3 billion barrels is recoverable.

Lastly, China has reached a commercially-based détente with its sometime ally, sometime rival, Russia. A recently completed pipeline south from Siberia could serve either Japan or China. And at present it connects to China.

[edit] Exploration on China’s Own Turf

In May 2007, China announced that it newly found oilfield in Bohai Bay has a reserve of one billion tons, or about 7.35 billion barrels. This represents the largest oil discovery in China in over four decades. The oilfield is situated in North China, in Hebei Province, as well as offshore. The field covers an area of 1,300-1,500 square kilometers and is expected to produce light crude.

In 2006, China produced 183.68 million tons of crude oil, up 1.7 percent from 2005, and imported 138.84 million tons. Its overall oil consumption (crude plus oil products) amounted to 346.55 million tons, an increase of 9.3 percent from the prior year. For 2007, industry experts predict that China's crude oil imports will reach 160 million tons.