china and the global energy uncertainties

China and the

Global Energy Uncertainties

Victor Z. Gao

October 30th, 2014

InterContinental London Park Lane

Global Uncertainties in O&G

• Uncertainty of gas supply from Russia to

Europe in the Ukrainian crisis;

• Uncertainty as to whether the Western

sanctions against Russia would lead to a

new cold war;

• Uncertainty re ISIS’s impact on O&G supply in Africa, the Middle East and beyond;

• Uncertainty re how the US will deal with ISIS;

• Uncertainty in Libya;

• Uncertainty in Syria;

• Uncertainty in Israeli-Palestinian relations;

• Uncertainty in the US position towards Iran;

• Uncertainty about Ebola’s impact on O&G supply in West Africa and beyond;

• Uncertainty about if Ebola would expand into other parts of Africa and globally;

• Uncertainty in the East China Sea;

• Uncertainty in the South China Sea;

• Uncertainty in the US “Pivot to Asia”;

• Uncertainty in the shale gas (and shale oil)

prospect in the U.S. and other parts of the world;

• Uncertainty about the price of oil;

• Uncertainty about whether O&G will remain as a

commodity, or become a geopolitical weapon;

• Etc.

Uncertainty About Uncertainty

• Uncertainty about how some major O&G

producing countries in the Middle East will

react to the uncertainty in the US policy

towards Iran; ISIS; Syria; etc.;

• Etc.

One Big Certainty

• President Xi Jinping is fast becoming a paramount

leader in China, with vision, courage and wisdom;

• Xi Jinping = Xi BigBig;

• China will have coherent and unified leadership at

the top;

One Big Certainty

• China’s steady and increasing demand for

O&G, especially imported O&G, will be a

major certainty in the world.

The Known and the Unknown

• Regardless of many unknowns and

uncertainties in the global O&G market, the

most important known and certainty is

China’s continued demand for O&G, and

its continued dependence on O&G imports.

How Big Is China’s Economy?

Official GDP = US$9.31 trillion

PPP = US$ 13.37 trillion

(End of 2013)

China’s GDP as % of USA

• Using official exchange rate: 55.68%

• Using PPP: 79.96%

(End of 2013)

Greater China As % of USA

(Greater China = Mainland + HK + Macau + Taiwan)

• Using official exchange rate: 60.52%

• Using PPP: 88.07%

(End of 2013)

When Will China Surpass USA?

• Already!

– By Financial Times on October 8, 2014;

– “China’s GDP (based on PPP) will reach

US$17.6 Trillion in 2014, vs. US at US$17.4

Trillion”.


• Before the end of 2014

– (based on PPP).

– By the International Comparison Program of the

World Bank on April 30, 2014.


• By 2021.

– By the Economist’s website on August 22, 2014.

The Chinese Perspective

• The surpassing depends on which

benchmarks to use;

• The surpassing will not be a single event;

• The surpassing will be a process;


• The surpassing will be an accumulation of

surpassing in many categories and by many

different measurements, some of which have

already taken place;

• The surpassing is just a matter of time;


“China is getting increasingly closer to

the center of the world stage.”

By President Xi Jinping of China

Expectation of Surpassing

• As a matter of fact, the expectation of the

surpassing to take place, and sooner rather

than later, already forms an important part

of that surpassing itself.

How Much Bigger Than USA?

• At its maturity, China’s GDP may be:

• 1 China = 2 USA; or

• 1 China = USA + EU;

• On a per capita basis, however, China will

be approximately half of USA, or

• 2 China = 1 USA.

Mega Trends in China’s Energy

• Oil: Demand is increasing fast; need to add

200 to 300 million tons to oil consumption by

2020;

• Gas: Government has ordered gas

consumption to double in five years;


• Coal: Consumption needs to go down: down

to 65% in 2014;

• Nuclear: Will go up; 26 NPSs being built;

Close to 30 NPSs being planned; Nuclear

power increasing to 5% or 10% of total power?


• Hydro: How much more can it grow?

• New & Renewable: We have to keep faith and

spare no efforts. But, alas, how much can they

really contribute to China’s staggering energy

demand?

The Great Variables

• Shale Gas: When and how can SG be

developed en masse?

– SG as a bonus and an insurance policy.

• Improving Energy Efficiency:

– How to improve? How much to improve?

Achilles’ Heel: Oil Import

• China’s Oil Consumption:

– 500 million tons in 2013;

– Oil import at 300 million tons;

– Total oil consumption to increase to above 700

million tons by 2020.


• Dependence On Oil Import:

–Has increased from 32% around 2000 to

above 58% in 2013;

–May go up to above 70% by 2020.


• Potential Dangers:

– Maritime security for oil shipping;

– Safety and security of cross-border O&G pipelines;

– Major fluctuations in imported O&G prices;

– Insufficient strategic reserves.

New Achilles’ Heel: Gas Import

• China’s gas consumption:

– 2001: 27.4 Billion cm;

– 2013: 167.6 Billion cm;

(An increase of 13.8% over 2012.)

– 2020: ≈ 350 Billion cm (too conservative).


• Natural gas accounted for 5.9% of China’s

energy production in 2013.

• Only 4% of China’s populations use natural

gas by the end of 2013.


• Dependence On Gas Import:

– China became net gas importer in 2006;

– Total gas import in 2013 @ 53 trillion cm;

– Gas import was at 31.6% of total gas

consumption in 2013.

New Role for Gas in China

• China has declared war on pollution.

• Gas has become one major new weapon

against pollution:

– to increase the use of gas;

– to decrease the use of coal.

Major O&G Infrastructure Projects

• China has built multiple, major O&G pipeline projects linking with many

Central Asia countries, all the way to Turkmenistan;

• Major O&G pipelines linking with Myanmar (direct access to the Indian

Ocean);

• Major O&G pipelines linking with Russia:

– The Eastern Pipelines;

– The Western Pipelines;

• China continues to build major and many LNG terminals along the Chinese

coast line.

Three Bonanzas for China

• America Achieving “Energy Independence”!

• Russia Going East (mainly to China)!

(accelerated as a result of the Ukrainian crisis.)

• Oil Price Declines!

The New Triangular Relations

• The Ukrainian crisis is re-shaping the

geopolitical relations in the world for many

years to come.

• It is re-shaping a new triangular relations

among America, China and Russia.

Implications for Global Energy

• Energy will become more strategic and

geopolitical;

• Russia will go east, mainly to China, and

will continue to do so in the future;


• China will provide a major stabilizing factor

in the global O&G market, providing large,

steady, long-term and increasing demand

for O&G;


• Politics and geopolitics aside, major O&G

producing countries (and major producing

companies) will do so to their own benefit to

lock up such increasing, long-term demand

from China.

China in the Coming Decade

• China will be the largest economy, with

20% of the global economy and global trade.

• China will be the largest importer of O&G,

and will continue to do mega M&A deals in

O&G in the world.


• China will settle major O&G imports in

Rmb.

• Rmb will become a major reserve currency.

• USA will either export O&G or not, and if it

does, it may export O&G to China.


• China will have greater democracy and

transparency, and better governance and

rule of law than today.

The Chinese Way of Success

• The Chinese way of success will enable

multiple stakeholders to win;

The Chinese Way of Success

• President Obama said that China has been a

free rider (on USA) for the last 30 years.

• China now calls on other countries to “free

ride” on the Chinese wagon of growth and

development.

Using Alibaba’s IPO As An Example

• The largest IPO in history;

• The largest e-commerce and e-finance

player in China;

• Largest shareholders: (1) Softbank; (2)

Yahoo!; (3) public shareholders;

Using Alibaba’s IPO As An Example

• China sees benefits in the following:

– Promoting e-commerce and e-finance in China;

– Creating more jobs in China;

– Encouraging innovation in China;

– Promoting China’s globalization.

• It is the same case in the O&G sector!

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