Victor Gao talks to Oil & Money about the uncertainties within China and the global energy markets

2. China and the
Global Energy Uncertainties
Victor Z. Gao
October 30th, 2014
InterContinental London Park Lane

3. 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;

4. • 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;

5. • 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”;

6. • 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.

7. 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.

8. 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;

9. One Big Certainty
• China’s steady and increasing demand for
O&G, especially imported O&G, will be a
major certainty in the world.

10. 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.

11. How Big Is China’s Economy?
Official GDP = US$9.31 trillion
PPP = US$ 13.37 trillion
(End of 2013)

12. China’s GDP as % of USA
• Using official exchange rate: 55.68%
• Using PPP: 79.96%
(End of 2013)

13. Greater China As % of USA
(Greater China = Mainland + HK + Macau + Taiwan)
• Using official exchange rate: 60.52%
• Using PPP: 88.07%
(End of 2013)

14. 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”.

15. When Will China Surpass USA?
• Before the end of 2014
– (based on PPP).
– By the International Comparison Program of the
World Bank on April 30, 2014.

16. When Will China Surpass USA?
• By 2021.
– By the Economist’s website on August 22, 2014.

17. 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;

18. The Chinese Perspective
• 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;

19. The Chinese Perspective
“China is getting increasingly closer to
the center of the world stage.”
By President Xi Jinping of China

20. 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.

21. 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.

22. 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;

23. Mega Trends in China’s Energy
• 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?

24. Mega Trends in China’s Energy
• 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?

25. 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?

26. 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.

27. Achilles’ Heel: Oil Import
• Dependence On Oil Import:
–Has increased from 32% around 2000 to
above 58% in 2013;
–May go up to above 70% by 2020.

28. Achilles’ Heel: Oil Import
• 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.

29. 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).

30. New Achilles’ Heel: Gas Import
• 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.

31. New Achilles’ Heel: Gas Import
• 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.

32. 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.

33. 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.

34. 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!

35. 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.

36. 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;

37. Implications for Global Energy
• China will provide a major stabilizing factor
in the global O&G market, providing large,
steady, long-term and increasing demand
for O&G;

38. Implications for Global Energy
• 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.

39. 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.

40. China in the Coming Decade
• 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.

41. China in the Coming Decade
• China will have greater democracy and
transparency, and better governance and
rule of law than today.

42. The Chinese Way of Success
• The Chinese way of success will enable
multiple stakeholders to win;

43. 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.

44. 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;

45. 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!