Asia House Energy Security in Asia - John Kemp presentation


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Presentation from Energy Security in Asia conference on 19 February 2013 by John Kemp, Thomson Reuters, on the Energy Landscape in China

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Asia House Energy Security in Asia - John Kemp presentation

  1. 1. UvlVd8China and the world oil market:From producer to consumer and back againJOHN KEMPREUTERS7 FEBRUARY 2013(John Kemp is a Reuters market analyst. The views expressed are his own)
  2. 2. China has crucial role on both sides of oil marketWorld’s 2nd largest oil consumer, 4th biggest producer1890s-1963 China relies on imported crude and refined products1960 Daqing field put into production Super-giant oil province 48 oil and gas fields, various sizes, mostly waxy crudes Output > 50 million tonnes per year (1 million b/d) from 1976 By 1980s field shows signs of aging Water cut hits ~90% Production stabilised at >40 million tonnes since 2002 Tertiary recovery contributes 10 million tonnes per yearChina is self-sufficient in oil from 1950s to 1970s Function of cold war isolation Self-sufficiency not the same as energy securityChina becomes an exporter in 1973 Thailand, Philippines, Japan (1973-2004)Exports peak at 30 million tonnes in 1985 (600,000 b/d)
  3. 3. China’s transformation into net oil importer is mostimportant contributor to higher prices since 2002Production stagnates in 1980s and 1990sConsumption increases with economic modernisationStarts importing small volumes from Oman in 1983 to deal withbottlenecksChina becomes net importer of refined products in 1993Net importer of crude from 1996By 2011, domestic production (4.3 million b/d) meets less than half ofconsumption (8.9 million b/d) and China is world’s 2nd largest importerChina poised to overtake U.S. as world’s largest importer before 2020
  4. 4. China’s growing reliance on expensive oil imports, mostly from unstablecountries in the Middle East and Africa, transported via long andvulnerable sea lanes through some of the world’s most hazardouschoke points in the Straits of Hormuz and Malacca, suffuses everyaspect of energy and foreign policyChina is vulnerable to any disruption of global oil supplies and energyblackmail. In the event of a military conflict, the umbilical cord whichconnects China with its major supplies in the Middle East would betargeted by any opponent. Even in peacetime, the rising cost of oilimports presents an increasing challenge to the country’s economiccompetitiveness and ability to raise living standards.
  5. 5. China and the world oil marketKey priorities for the next decadePriority 1: Energy efficiencyPriority 2: Develop domestic oil and gas resourcesPriority 3: Improve access to resources overseasPriority 4: Protect overseas supplies and transit routesPriority 5: Master technology for shale and deepwaterPriority 6: Build domestic refining, storage, and distribution infrastructure
  6. 6. Priority 1: Energy efficiencyManaging domestic demand is even more important than securingforeign supplies “Runaway growth in energy consumption poses a real threat to China’s energy security. The era of Chinese energy independence is gone, along with the ideology of self-reliance … China’s thirst for oil forces the country to aggressively pursue international sources of supply, driving up international oil prices” Zha Daojiong, Renmin University, Survival 2006China’s rapidly growing petroleum consumption was a key contributorto the quadrupling of oil prices between 2002 and 2008 “Focusing on energy efficiency is probably the single most effective way to prevent the nightmarish scenario of China crowding out the global energy market” Zha, 2006China and the world oil market
  7. 7. Rapid growth in China’s energy use contributed to 2002-2008 oil spike7.4% CAGR in refined product consumption 1991-2011, 2.3 mb/d to 9.7 mb/d PRIMARY ENERGY CONSUMPTION (quadrillion British thermal units) 120 100 80 60 40 20 0 1980 1985 1990 1995 2000 2005 China Energy Consumption U.S. Energy ConsumptionChina and the world oil market
  8. 8. Enormous scope for energy efficiency gainsEmerging markets are far less efficient than the advanced economies PRIMARY ENERGY CONSUMPTION PER US$2005 GDP (British thermal units at market exchange rates)50,00045,00040,00035,00030,00025,00020,00015,00010,000 5,000 0 CAN USA FR GER IT UK JAP RU CN IND BRChina and the world oil market
  9. 9. Faster improvements in energy efficiency are essentialChina has started to follow the United States and Europe, but more to do …Urgent need to eliminate subsidies and price controls PRIMARY ENERGY CONSUMPTION (Btus) per $1 GDP (U.S.$ 2005) 90,000 80,000 70,000 China United States 60,000 50,000 40,000 30,000 20,000 25,982 10,000 7,340 0 1980 1985 1990 1995 2000 2005China and the world oil market
  10. 10. Five-Year Plan Targets (2011-2015)China’s government has responded with ambitious targets in 12th FYP: “Building a resource-saving and environment-friendly society should be stressed to save energy, reduce greenhouse emissions and actively tackle climate change” “Energy consumption per unit of GDP will decrease 16%” by 2015 (binding target)China and the world oil market
  11. 11. Priority 2: Develop domestic oil and gas resourcesChina is already world’s 4th largest oil producer (~4.5 million b/d)Large onshore and offshore sedimentary basins are prospective forboth oil and gasSubstantial undiscovered resources in conventional fieldsFracking could enable production of previously unrecoverablepetroleum deposits from tight rock formations and shalesChina and the world oil market
  12. 12. Conventional and continuous-type (shale) resourcesChina has potential to be a much bigger oil and gas producerConventional resources: USGS estimates (2011) China has substantialundiscovered oil/gas resources in six enormous onshore sedimentary basins(Songliao, Bohaiwan, Ordos, Sichuan, Junggar and Tarim): ~15 billion bbl of oil (mostly Tarim, Bohaiwan, Junggar and Ordos) ~ 87.6 tcf of natgas (mostly Sichuan, Ordos and Songliao) ~1.4 billion bbl of NGLs (Tarim and Sichuan)Unconventional resources: EIA estimates (2011) China has 1,275 tcf intechnically recoverable shale gas (20% of world total) in two onshore basins(Tarim and Sichuan) More shale gas resources likely in other basins Where there is gas, there are likely to be crude and liquidsOffshore: Both conventional and continuous accumulations likely to be foundin the string of basins along China’s continental shelf Bohai Bay, South Yellow Sea, East China Sea, Pearl River Mouth, South China SeaChina and the world oil market
  13. 13. China is thought to have the world’s largest technically recoverableshale gas reservesChina and the world oil market
  14. 14. China’s onshore sedimentary basins are prospective for oil and gasAnd where there is gas, there are likely to be oil and condensatesChina and the world oil market
  15. 15. Five-Year Plan Targets (2011-2015)Stabilise oil output and increase natural gas productionCreate five large-scale oil and gas production areas (Tarim-Junggar, Songliao, Ordos, Bohai Bay and Sichuan basins)Develop offshore and deepwater oil and gas fieldsRaise shale gas production to 6 billion cubic metres by 2015Double natural gas consumption to 260 bcm by 2015China and the world oil market
  16. 16. Priority 3: Improve access to overseas resourcesOverseas equity oil production rose 10-fold between 2000 and 2011 to1.7 million b/dDirect asset acquisitions Oil sands Shale (CNOOC acquires assets from Chesapeake)Partnerships with IOCs in Iraq Rumaila (CNPC 37%) Halfaya (CNPC 37.5%) Missan (CNOOC 63.75%)$90 billion in loans to oil and gas producing countries in exchange forofftake agreements or upstream assetsPipeline investments Kazakhstan (200 kb/d to 400 kb/d in 2013) Russia (300 kbd beginning 2011) Myanmar (440 kb/d after 2014)China and the world oil market
  17. 17. Priority 4: Protect overseas supplies and transit routesChina relies on the Middle East for most of its oil suppliesCrude supplies travel via long and vulnerable sea lanes through two ofthe world’s most hazardous choke points (Hormuz and Malacca)Diversify oil sources and supply routes Central Asia Africa Latin America LNGDiplomatic and military protection for supplies and transit routes Expansion of economic and diplomatic presence in Middle East Closer relations with Central Asia, Venezuela, Sudan Construction of ocean-going navy incl aircraft carriers Force projection into the Indian OceanChina’s own SPRChina and the world oil market
  18. 18. China has sought to diversify petroleum sources and transit routesPipeline across Myanmar will route oil away from Malacca Strait China’ s natural gas pipelines, terminals Russia Turkmenistan PIPELINES Turkmenistan-China pipeline W est-East Gas Pipeline I Beijing W est-East Gas Pipeline II Shanxi to Beijing pipeline Sichuan to East pipeline Zhongwu line Myanmar -China pipeline Shanghai LNG TERMINALS Under construction Approved Proposed Fujian Operational Myanmar Guangdong Sources: BOCI Research, Thomson Reuters. Reuters graphic/Christine Chan 24/04/12China and the world oil market
  19. 19. Cooperation or competition and confrontation with US, EU, Japan?China’s reliance on energy imports forces it to expand its economicand diplomatic presence wherever there are spare supplies, bringing itinto contact with the Western powersInternational reaction not always positive CNOOC’s bid for Unocal blocked by Bush administration Fears of a new Great Game in Central Asia Concerns about China’s role in Sudan, Iran, Venezuela Concerns about China’s claims in the East and South China Seas China articulates increasingly independent diplomatic position in Middle East (Libya, Syria, Iran)Partnering with IOCs to reduce visibility, allay fears about scramble forscarce resourcesChina and the world oil market
  20. 20. Priority 5: Master shale and deepwater technologyChina’s development of shale gas lagging far behind FYP plan targetof 6 bcm per year by 2015~ 20 exploratory wells drilled and fracked in Sichuan basin in 2010-12New licensing round attempts to accelerate progressNeed for more involvement by oilfield services companies (SLB, HAL)Same problems are slowing development of offshore sectorIEA recommends breaking monopoly of Big 3 and price reformChina and the world oil market
  21. 21. Priority 6: Build domestic refining, storage , distribution infrastructurefor oil and gasPlans for 5-8 million b/d of extra refining capacity by 2020Processing capacity for sour crudes to increase to 5.4 million b/dSPR is being filled with Phase III target of 500 million bbl (67 days ofnet imports) by 2016Refiners, importers and distributors will be required to hold minimumlevel of reservesChina still needs substantial expansion of gas transmission andworking storage capacityChina and the world oil market
  22. 22. Concluding remarksChina’s booming oil demand has been one of the two biggestinfluences on the market over the last decade (the other is fracking)China’s booming demand explains much of the price rise since 2002Growing reliance on imports represents a source of economic andmilitary vulnerabilityEfforts to develop overseas resources and protect transit routes are asource of tension with the United StatesChina has substantial untapped oil and gas resources of its ownFracking and deepwater could eventually transform the country’senergy security and global prices, but only if the country can overcomeobstacles to mastering and deploying the technology on a large-scaleChina and the world oil market