This is an abridged version of an article published in the June 2013 issue of 奥辞谤濒诲听笔颈辫别濒颈苍别蝉, available for subscribers to
Ominously for China, the world鈥檚 worst air pollution ever to hit a major city struck Beijing in the run-up to the March inauguration of its new government for the next 10 years. For several weeks in early 2013, the index measuring minute deadly airborne particles in several Chinese cities including its capital regularly exceeded 30聽times the 91天堂原創 Health Organisation (WHO) level deemed toxic to human health. This horror story was soon surpassed by images of at least 15 000 rotting dead pigs floating down the Huangpu River into the heart of Shanghai city.
President Xi Jinping and his Premier, Le Keqiang, will have their work cut out to continue raising not just China鈥檚 GDP, but also the living standards of its 1.4聽billion citizens, most of whom now live in cities that increasingly suffer from air and water pollution caused by carbon emissions, toxic fumes and particles from widespread burning of coal and oil.
China鈥檚 previous leaders (since the early 1980s) probably had an easier brief as they only had to focus on growing a rock-bottom economy devastated by Maoist communism. Even as recent as 2003 when Hu Jintao became President, the world was still largely unaware or dismissive of China鈥檚 rise, allowing its government a free hand to secure resource-based deals and cement relationships with developing countries around the world. The environment was not yet a major issue and social discontent was still easily quelled.
Confronted by the toxic air and dead pigs, the Xi administration has been forced at its outset to deal with China鈥檚 growing firestorm of domestic social and environmental challenges. Externally, the new government faces an increasingly suspicious West, at the same time that China鈥檚 oil and gas supplies from producing regions are being threatened by political instability and military conflicts.
Xi will continue with his predecessor鈥檚 policy of using China鈥檚 US$ 3.3 trillion hoard of foreign exchange reserves to acquire energy and other natural resources abroad, but his approach will have to be more deliberate and probably focused on a handful of large projects.
The new government will need to perform well if it is to achieve its target to double China鈥檚 2010 GDP of 39.8 trillion yuan to 80 trillion yuan by 2020 (US$ 1 = 6.22 yuan).
Investments are set to rise sharply
Under the previous Hu administration, Chinese state companies gained a reputation as formidable competitors willing to overpay for energy resources, as witnessed by the 60% premium that CNOOC paid last year to acquire Canada鈥檚 Nexen Inc. for approximately US$ 15聽billion. The deal represented the single largest overseas takeover by a Chinese company, and formed 15% of the estimated US$ 100聽billion that its main state oil companies invested in acquiring oil and gas producing assets around the world between 2009 and 2012.
These figures are likely to be surpassed in line with projections that China鈥檚 crude oil demand and imports will rise sharply over the next few years, according to government officials and industry analysts.
The Energy Research Institute, an affiliate of the top policy-making National Development and Reform Commission (NDRC), expects the country鈥檚 crude oil demand to rise by an average annual rate of 4.6% from 450聽million t in聽2011 to 540聽million t in聽2015. Imports are expected to meet 60% of China鈥檚 500聽million t of its crude oil demand in聽2013, up from 57% last year, and just over 50% in聽2009.
China鈥檚 natural gas consumption will rise by a faster rate of 15% per year from 130聽billion m3/yr in聽2011 to 230聽billion m3/yr in聽2015, according to the NDRC and International Energy Agency (IEA). As it battles air pollution and attempts to reduce dependence on coal, China will become the world鈥檚 third largest natural gas consumer after the US and Russia by 2017, said the IEA. At current demand and import growth rates, China is on course to displace the US as the world鈥檚 leading oil importer and addict, said the US Energy Information Administration (EIA). Last December, Chinese oil imports exceeded 6聽million聽bpd while the US took in just 5.98聽million聽bpd, according to official data from both countries. According to BP, China鈥檚 oil consumption doubled to 9.8聽million聽bpd between 2001 and 2011 at the same time that US demand declined from around 19.6聽million聽bpd to 18.8聽million聽bpd.
To meet the country鈥檚 vastly expanded energy demand, then Vice-Minister for commerce Zhong Shan told an industry conference last year that China would have to expand and deepen relations with both international oil and companies and producing countries. Translation: China would be most willing to open up its wallet and pay generously for oil and gas assets.
As a result of its relentless drive to invest in oil and gas assets, China will double its overseas 2011 oil production to 3聽million聽bpd by 2015, predicts the IEA. This would place China鈥檚 overseas production ahead of the world鈥檚 top 10 oil producers including Kuwait, Qatar, Venezuela and the UAE, said the IEA.
Central聽Asia and Russia
As it surveys the changing international landscape, the new leadership in China has identified Central聽Asia and Russia as best suited to meet China鈥檚 long-term energy demand, which will include closer co-operation on a range of upstream and downstream projects.
This view was inherited from the previous government as China encountered growing resistance or difficult conditions in recent years trying to expand its energy trade and investment ties with countries in North America, Middle East, Africa and Latin America. The focus on Russia and Central聽Asia was most authoritatively articulated last October by Zhang Guobao, the powerful advisor to China鈥檚 National Energy Administration (NEA), at a forum in Kazakhstan.
With the advantage of sharing common borders and being on the same land mass as China, the hydrocarbon-rich countries of Central聽Asia have been able to quickly build and start up overland pipelines exporting natural gas and oil to its energy-hungry neighbour.
Kazakhstan, Turkmenistan and Uzbekistan have experienced rapid economic growth over the last few years as a result of China鈥檚 willingness to underwrite聽billions of dollars in new pipeline and infrastructure investments. Their success has encouraged neighbours Azerbaijan, Kyrgyzstan and Tajikistan to also look to find ways to hitch their economies onto the Chinese bandwagon.
Turkmenistan, a major success story of expanding Sino-Central聽Asian ties, boosted piped gas exports to China by 55% to 13.6聽billion m3 in the first eight months of 2012. The bulk of the estimated US$ 5.5聽billion in export earnings went to Turkmenistan, which supplied most of the gas to China through the Central聽Asian pipeline.
Mr Zhang said Chinese and Central聽Asian authorities are planning to expand the pipeline network to increase gas exports from 30聽billion m3/yr per year to 70聽billion m3/yr.
Turkmenistan is well positioned to further take advantage of the Chinese market with the development of its giant South Iolotan (Galkynysh) field which will be key to Central聽Asia鈥檚 emergence as a major natural gas supplier. The region has the potential to export more than 120聽billion m3 by 2020, said consultant Wood Mackenzie.
鈥淐hina will require additional imports over and above Central聽Asia鈥檚 current contract of around 45聽billion m3 by 2015. We forecast that China will have around 50聽billion m3 of gas demand in聽2020 that needs to be satisfied by additional imports and Central聽Asian gas could play a key role is meeting this demand,鈥� said the company鈥檚 Senior Gas Supply Analyst Stephen O鈥橰ourke.
For the next phase of growth, China is looking to expand co-operation with Central聽Asia beyond oil and gas to the import of hydropower, coal and uranium.
At an Eurasia forum in Xinjiang鈥檚 Urumqi city, another NEA official said China and Central聽Asian states should form a regional energy club to supplement the Shanghai Co-operation Organisation (SCO) in strengthening energy and economic ties among members.
Acting increasingly as an alternative block to the West, SCO was founded in Shanghai in聽2001 to strengthen political and security ties among its members, China, Kazakhstan, Kyrgyzstan, Russia, Tajikistan and Uzbekistan.
Russia and China
In March, China and Russia wrapped up a number of energy agreements, worth more than US$ 600聽billion, to mark a successful first overseas trip for newly-installed President Xi Jinping to Moscow to meet his counterpart Vladimir Putin.
In one of the world鈥檚 biggest long-term oil supply contracts on record, Russia鈥檚 state-owned Rosneft agreed to more than triple its exports to one聽million聽bpd to Asia鈥檚 largest economy over the next 25 years. At an average price of US$ 110/bbl, the 625聽000聽bpd of additional supply is worth US$ 25聽billion a year, and US$ 625聽billion over the 25 year term.
The agreement, which makes China the biggest buyer of Russian crude oil, was facilitated by the recent completion of the second phase of the East Siberia Pacific Ocean (ESPO) pipeline, lifting its capacity to 1聽million聽bpd. ESPO鈥檚 owner and operator, Transneft, completed the first phase in聽2009 to deliver 300 000聽bpd of crude oil from Siberia to Asian markets.
As part of the latest deal, Chinese financial institutions are expected to grant huge loans and credit lines to the two Russian companies. In 2009, China granted Rosneft US$ 15聽billion and Transneft US$ 10聽billion in credit and loans for their respective roles in launching the supply of ESPO crude.
Rosneft CEO Igor Sechin also revealed that it and Sinopec are at an advanced stage of talks to develop the Sakhalin-3 project that will support the construction of a second LNG export terminal on the island. The project will tap into four fields estimated to hold more than 5聽billion bbls of crude oil and 1.3 trillion m3 of natural gas.
Separately, in February, Sechin had visited China, South Korea and Japan to drum up investment interest in his company鈥檚 Arctic assets. Rosneft, which is hoping to venture into the LNG export business, said its Arctic interest alone holds 21 trillion m3 of natural gas.
For fear of being left out of the limelight during President Xi鈥檚 trip to Moscow, Russian gas monopoly Gazprom signed a preliminary agreement with China National Petroleum Corp. (CNPC) to lay the foundation for a 30 year gas supply contract from 2018. Unlike Rosneft, Gazprom has failed to nail down a deal with its Chinese counterparts despite years of negotiations. Amid growing international competition for Asian customers, however, Gazprom is expected to yield to Chinese demand for lower prices for an annual supply of up to 68聽billion m3 of natural gas.
Russia鈥檚 En+ Group and China鈥檚 Shenhua Group signed a US$ 2聽billion deal to jointly develop coal reserves in Russia鈥檚 Far East. Sino-Russian trade, which grew to US$ 88聽billion last year from US$ 8聽billion in聽2000, is expected to top US$ 100聽billion by 2015.
Amid the warming Sino-Russian ties, Europe has cause for concern as Moscow is fulfilling a major threat to reduce oil and supplies to its long time Western customers in favour of China, Japan and South Korea. The Russian government expects to expand ESPO鈥檚 capacity to 1.6聽million聽bpd by 2025 to further increase sales to Asia at the expense of traditional major customers such as Germany and the Netherlands.
CNPC reports
China鈥檚 largest energy company said it missed its target to produce 120聽million t of oil and gas from its overseas operations by more than 13% or around 16聽million t. China National Petroleum Corp (CNPC) blamed political unrest and military conflicts in the Middle East, Africa and Latin America for capping the growth of its overseas production by just 1.4% to 52.4聽million t.
The company had better fortune with its downstream sector, boosting its international oil and gas trade by 18.5% to exceed 300聽million t for the first time. With oil prices holding up last year, the value of CNPC鈥檚 total oil trade surged 19.7% to US$ 230聽billion.
The company reported strong growth from its operations in Iraq, South America and Canada. Production from its equity holding in Rumaila, Iraq鈥檚 biggest oilfield, rose more than 25% to over 25聽million t last year, making it the highest of CNPC鈥檚 producing overseas projects.
Taking a broader view, CNPC said it estimates China鈥檚 domestic crude oil output grew to a record high of 207聽million t last year from 203聽million t in聽2011, and could climb further on rising supply from offshore fields. But the country remains short and is increasingly dependent on imports, according to the China Petroleum Enterprise Association. Last year, China鈥檚 domestic oil demand rose 3.7% or more than three times the rate of production increase, to reach 470聽million t and is on course to break the 500聽million t barrier in聽2013. In 2011, the country鈥檚 oil consumption rose 3.3% to 453聽million t.
CNPC鈥檚 Research Institute of Economics & Technology subsidiary is even more bullish with its prediction for Chinese oil demand to surge 4.8% to 514聽million t this year.
Written by Ng Weng Hoong.
This is an abridged version of an article published in the June 2013 issue of 奥辞谤濒诲听笔颈辫别濒颈苍别蝉, available for subscribers to