[lbo-talk] Global energy suppliers risky bet on China

Marv Gandall marvgand2 at gmail.com
Tue Nov 28 16:25:02 PST 2017

Conventional and shale oil and gas producers, pipeline operators, and supertanker fleets have been banking heavily on growing Chinese demand, but this Financial Times piece says they shouldn’t.

Massive Chinese investment in electric vehicles and renewables as well as its own shale and coal reserves are likely to reduce the country’s dependence on foreign suppliers - exacerbating central bankers’ fears of stranded fossil fuels assets and the collapse of major global energy and financial firms.

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Made in China – the world energy market of the future Nick Butler Financial Times November 26, 2017

What happens next in the global energy market depends to a disturbing degree on China. Disturbing not because the Chinese have done anything wrong – they haven’t. The country’s energy policy has been rational and largely predictable. But the situation is changing. The problem is that Beijing has become such a substantial force in the market that their actions or otherwise can send waves, often intentionally, through every part of the system. At the same time the predictability of the outcomes has eroded. The uncertainties over their future energy strategy, which I described in last week’s post, make them a very disruptive force in a market already struggling to keep up with multiple changes.

Remember the facts. Over the past three decades, China has brought more than 500mpeople out of subsistence poverty. Those people are now consumers of commercial energy supplies. The number of cars has risen by 19 per cent a year over the past decade. From being largely economically self reliant, Beijing is now a major importer and exporter of all categories of goods and services. Fifty-seven per cent of Chinese citizens now live in cities. Energy demand is now almost four times higher than it was 40 years ago and accounts for a quarter of all global consumption.

That rise has largely been fuelled by coal and, more recently, imported oil. But as the Chinese economy matures and rebalances, the energy mix will change. The problem is that we cannot yet know how or when that change will come.

Consider three different, entirely plausible, possibilities.

First that China develops shale gas, and possibly tight oil, successfully. The resources are certainly in place – some 1,115 trillion cubic feet, according to the US Energy Information Administration, with large areas still to be explored. It has become fashionable to talk down the prospects for economically viable development but it is perfectly possible that within the next few years indigenous supplies of gas from shale rocks could displace the need for further imports and even make the country self-sufficient.

At the moment, China imports a third of its gas use mostly in the form of LNG. Almost all the long-term forecasts for the industry and the plans of the world’s gas producers from Russia to Australia assume that imports will grow. The International Energy Agency, for instance, in its new long-term outlook anticipates a four-fold increase in imports by 2040. China, on those numbers, would be one of the largest gas importers in the world. Imagine the impact, therefore, if those imports were sharply restricted or even eliminated.

Can’t happen? Anyone who thinks that should consider what has happened in the US over the past decade. A country that was supposed to be a large-scale importer now, because of the unexpected development of shale resources, exports gas on a growing scale.

Then let’s take a second possibility. Suppose China becomes nervous of being dependent on imported oil – transported from Angola, the Persian Gulf, Venezuela and so on through the vulnerable Straits of Malacca. Suppose there is a renewed desire to reinforce the traditional Chinese desire for self-sufficiency, making imports of more than 12 million barrels oil a day (mbd) – the IEA’s projection for 2030 – unacceptable. In such circumstances, oil imports could be limited to specific uses where substitutes are not available and the demand for personal mobility would be satisfied by mandating the use of electric vehicles.

The remaining oil requirement – say six or seven mbd – could then be bought on a long-term deal from a small number of compliant suppliers such as Saudi Arabia and Iran. For the world market, the consequences would be lower total demand and a significantly smaller volume of open trade with the strong prospect of greater price volatility.

The third possibility is that the shift to an economy based on services and personal consumption turns out to be too politically challenging. In the end, the power of the Communist Party depends on maintaining stability across the whole country. The risks of regional fragmentation are real. Closing thousands of mines and industrial operations could become impossible. The Communist Party would not wish to be seen as the party of unemployment. As a result coal consumption would remain high, as would emissions.

Would that not make the problems of urban air quality worse? Not necessarily. In the main cities where the problems are most serious, plants could well be closed because alternative employment is available. But across the country, coal mines could stay open with power supplied to the cities through the country’s ever-expanding high-powered electricity grid.

In each case, what happens in China, for perfectly rational Chinese reasons, will shape the outcomes for the world as a whole. The same is true in different ways for renewables, where China is transforming the global market through technical advances and low production costs; for electric vehicles; and for nuclear where Beijing is set to out-compete the established players with its new generation of smaller reactors.

In every sense, the balance of power is shifting. The energy market of the future will be made in China.


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