Category Archives: Energy

China’s CNPC Takes Advantage Of Total Retreat From Iran

WITH WASHINGTON AGAIN turning the financial screws on Iran, China stands to pick up a lot of the pieces that will get broken in the process.

The Iranian state news agency yesterday announced that China National Petroleum Corp. (CNPC) would take over Total’s 50.1% share of the $4.8 billion Phase 11 (of 24) development of the giant South Pars gas field, the world’s largest unitary gas reserve.

Terms, including financial ones, are unknown. Neither Total nor CNPC has made a public comment at this point. Confusingly, the Iranian oil ministry subsequently said that the terms of the contract remain formally unchanged, though that is not necessarily inconsistent with CNPC taking over.

Last year, in signing on, the French energy company became the first sizeable Western oil and gas company to invest in Iran following the lifting of sanctions on Tehran the previous year.

Now the Trump administration has pulled out of the nuclear agreement that enabled those sanctions to be lifted, fresh US sanctions have been imposed that force companies to choose between trading with Iran and trading with the United States.

For most Western companies, it is no choice at all. Total had already indicated that it would have to walk away from the South Pars project in the new circumstances.

CNPC, which has had a presence in Iran since 2004, already had a 30% stake in Phase 11. Iranian state-owned Petropars owns the rest.

The project is intended to supply gas to the domestic Iranian market from 2021 with excess to that requirement being exported, now assuredly eastwards rather than westwards. That gas could either be shipped or sent to China via the network of pipelines existant, under construction or planned across Central Asia and Pakistan.

China is already the largest market for Iran’s exports of crude oil and condensates, taking 24% of the total last year.

In addition, Chinese banks have extended $25 billion in credit lines for infrastructure investment, suggesting Chinese firms will easily be able to slip into the spaces vacated by Western multinationals and be in a position to negotiate favourable terms now they will be the only game in town for Tehran.

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United States Puts Trade War On Hold

THE US-CHINA trade war is on hold. Official. Or official, at least until the US president tweets that it is back on, or was never off or is over.

US Treasury Secretary Steve Mnuchin says the Trump administration will not, for now, impose tariffs on up to $150 billion in Chinese imports for alleged violations of US American intellectual property and unfair trade practices. The rationale, according to Mnuchin, who was speaking on one of the United States’ Sunday morning TV talk shows, is the progress made in last week’s trade talks towards a ‘framework’ for cutting the $375 billion merchandise trade surplus with the United States.

High-level US trade officials met their opposite numbers from Beijing in Washington last Thursday and Friday, which was followed by a communique that vowed that neither side would launch a trade war against the other.

China said it would buy more agricultural and energy products from the US as part of a substantial cut in its trade surplus with the United States, which will include still-to-be-discussed purchases of US manufactures and services.

Both of those, and particularly the latter, require structural reforms on Beijing’s part likely to come later rather than sooner.

Beijing said it would drop it anti-dumping investigation into US sorghum, but that at best will protect existing US exports now at risk, rather than create new business in itself. Also, while the US has plenty of energy, particularly liquefied natural gas, it could sell China it would have to build distribution infrastructure to deliver it. Privately, US trade officials say it could take three to five years to double US energy exports to China.

Sales of agricultural commodities could be ramped up within a crop season, however. China bought $19.6 billion-worth of US farm produce in 2017, making it US farmers’ second largest foreign market. The United States is hoping for a 40% increase this year. If that comes about, there will be only another $188 billion to go to the $200 billion cut in the trade surplus that the United States reportedly seeks.

Beijing also promised to address US concerns about intellectual property protections (although that is pushing against an open door given that Chinese firms have an increasing amount of intellectual property of their own to protect these days).

Whatever short-term concessions might be made to provide Trump with an arithmetical win on the trade deficit, Beijing will do nothing that compromises its Made in China 2025 industrial policy, which is the real war.

Meanwhile, our man in Washington sends word that President Donald Trump’s U-turn on sanctions against telecoms equipment maker ZTE got a rebuff from the US Congress last week.

The House Appropriations Committee snuck into an appropriations bill an amendment that forbids the Commerce Department from changing the sanctions on ZTE that it imposed last month for trading with Iran and North Korea.

The inclusion of a seven-year ban on US companies selling components to ZTE has led the company to cease operations, and it was that ban that Trump, surprisingly, a week ago ordered the Commerce Department to rescind and replace with a less onerous alternative.

There is a long distance between an amendment being passed in committee and making it into law, a distance few such amendments survive. However, even getting past the first step, acceptance into a bill, shows how driven US-China trade relations are going to be on the US side by domestic politics, and especially in the run-up to November’s mid-term Congressional elections.

The Democrats — and it was one of their number, Dutch Ruppersberger, a Congressman representing a district in Baltimore, that proposed the amendment — are attacking Trump’s policies at every turn, scenting the opportunity to recapture control of at least one house of Congress from the Republicans in the mid-terms.

This partisan dimension further complicates the already complex trade relationship between the two countries. There may be no war-war for now, but there will be plenty of jaw-jaw.

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China Will Rebalance The World’s Energy

Wind turbines in Xinjiang, 2005. Photo credit: Chris Lim. Licenced under Creative Commons

ACROSS THE MORE heavily industrialised provinces, factories and plants are being ordered to shut down or limit production during the winter months. This is both to curtail excess industrial production and also to curb seasonal smog, a byproduct of China being the world’s largest consumer of coal, which provides 65% of its energy.

The newly published annual outlook from the International Energy Agency (IEA) brings a glimmer of a silver lining to that particular dark cloud. China, it says, will remain a ‘towering presence’ in coal markets, but it believes coal use peaked in 2013 and is set to decline by almost 15% over the period to 2040.

China burnt 2.75 billion tonnes of coal in 2013, more than the rest of the world put together.

It is no secret that Beijing sees pollution as a potential political problem and that it is keen for China to go green. Lian Weiliang, deputy head of the National Development and Reform Commission, said earlier this week that the country was ahead of pace in its goal to cut coal capacity by 500 million tonnes within three to five years of 2016, while the Ministry of Industry and Information Technology forecast that environmental protection equipment manufacturing would be a 1 trillion-yuan ($150 billion) industry by 2020.

The new era will be about energy policy where the focus is on electricity, natural gas and cleaner, high-efficiency and digital technologies, not an energy system dominated by coal and a legacy of serious environmental problems, giving rise to almost 2 million premature deaths each year from poor air quality.

The switch will also flow from rebalancing the economy from a development model based on heavy industry, infrastructure development and the export of manufactured goods to one driven by higher-value-added manufacturing, services and domestic consumption.

Signs of the new era are there to be seen. Energy demand growth slowed markedly from an average of 8% per year from 2000 to 2012 to less than 2% per year since 2012. Official plans call for it to slow further to an average of 1% per year to 2040.

Energy efficiency regulation is a large part of the explanation. Without new efficiency measures, the IEA reckons, end-use consumption in 2040 would be 40% higher.

Nonetheless, such is the compounding effect of economic growth that by 2040, per-capita energy consumption in China will exceed that of the European Union and electricity demand for cooling alone in China will exceed the total electricity demand of Japan today.

The IEA reckons that China will need to add the equivalent of today’s United States power system to its electricity infrastructure to meet the demand expected by 2040. Such will be the scale of China’s clean energy deployment, technology exports and outward investment that it will play a huge role in determining global energy trends and in particular provide the momentum behind the low-carbon transition.

“When China changes, everything changes”, as the IEA says.

The agency lays out the future thus:

One-third of the world’s new wind power and solar PV is installed in China … and China also accounts for more than 40% of global investment in electric vehicles. China provides a quarter of the projected rise in global gas demand and its projected imports of 280 billion cubic metres in 2040 are second only to those of the European Union, making China a lynchpin of global gas trade. China overtakes the United States as the largest oil consumer around 2030, and its net imports reach 13 million barrels per day in 2040. But stringent fuel-efficiency measures for cars and trucks, and a shift which sees one-in-four cars being electric by 2040, means that China is no longer the main driving force behind global oil use – demand growth is larger in India post-2025.

China will also continue to lead a gradual rise in nuclear output, overtaking the United States by 2030 to become the largest producer of nuclear-based electricity.

The shift to a more services-oriented economy and a cleaner energy mix will take a decade to have its effects on the skies above. The IEA projects carbon dioxide emissions will plateau at only slightly above current level by 2030 before starting to fall back.

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China Looks To Make A Razor-Sharp Deal For Saudi Aramco

Chinese Vice Premier Zhang Gaoli (L) meets with Saudi King Salman bin Abdulaziz Al Saud in Jeddah, Saudi Arabia, Aug. 24, 2017. Photo credit: Xinhua/Wang Ye

THIS BYSTANDER RECALLS a classic television advertisement from the 1970s in which US businessman Victor Kiam said he so loved using a Remington electric razor that he bought the company. China’s state-owned oil companies so love buying Saudi oil they are reportedly thinking of doing the same.

The Reuters news agency recently reported that the kingdom is evaluating the sale of 5% of its state oil company, Saudi Aramco, to a Chinese consortium comprising PetroChina and Sinopec, state-owned banks and China’s sovereign wealth fund. This would be as an alternative, or possibly a precursor to an initial public offering (IPO) of the Aramco’s shares on one or more stock markets, a listing that would likely be the biggest share sale ever and expected to raise $100 billion. The Chinese consortium would presumably have to come close to matching that number.

Ever since the Saudi government said it was looking to sell a small stake in Aramco in 2018 to kick start the funding of its economic diversification programme, Vision 2030, the world’s leading stock exchanges have been bidding for what would be both a large and a prestige bit of business. Some suitors have been ready to turn a blind eye to infringements of their own rules in their desire to get the listing.

A direct sale of a stake to China, the biggest buyer of Saudi oil, would make any eventual listing more likely to happen in Shanghai or Hong Kong than New York or London, which would be a considerable feather in the caps of either exchange.

Such a deal would also strengthen two-way Saudi-China trade and investment ties. In August, the Saudi energy minister said he expected to conclude a deal next year with PetroChina for the Saudis to invest in a new 260,000-barrels-a-day oil refinery in Yunnan that started operations in July. That investment was reported in April to be a 30% stake valued at $2 billion.

A similar arrangement could be struck with China National Offshore Oil Corp, (CNOOC), which is building a 200,000-barrels-a-day refinery in Guangdong province.

Vice Premier Zhang Gaoli (seen above on the left) visited Saudi Arabia in August, meeting Saudi King Salman (on the right) and Crown Prince Mohammed bin Salman in the Red Sea resort of Jeddah. This followed an exchange of official visits in 2016, with the king in March returning a visit by President Xi Jinping in January in which the two countries agreed to upgrade the bilateral ties to a comprehensive strategic partnership.

China is already Saudi Arabia’s largest export market, at $23.6 billion (2016 figures), all but a slither of it crude and refined oil and petrochemical products, and accounting for 15% of Saudi export volumes. China is also the kingdom’s leading source of imports, at $18.7 billion, accounting for 14% of total import volumes. Machinery accounts for 36% of Chinese imports, followed by metals (13%) and textiles (12%).

However, since late 2015, when China changed its rules on where independent refiners could buy crude, Russian suppliers have been vying with the Saudis to be China’s leading source of crude. That generates competition that will be welcome in Beijing for the effect it will have on prices, but another reason that Saudi might be prepared to cut investment deals to secure its exports.

 

Update: Aramco’s chief executive, Amin Nasser, told the US business news TV channel CNBC in an interview broadcast on October 23 that an IPO was on track for the second half of 2018. Nasser also denied a Financial Times report that Aramco was talking to ‘the Chinese or others’ about delaying the share sale. He was not pressed, however, on whether a separate deal with investor groups could co-exist with a public share sale.

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Too Innovative To Be True

Traffic-straddling busTHE GIANT TRAFFIC-STRADDLING bus that caught this Bystander’s somewhat skeptical eye last year (see above) has gone the way of many an idea that was too innovative for its own good. Nowhere.

Technical and financial shortcomings seem to have done for it, according to press reports. Latest reports say the test track is being dismantled.

Last year, shortly after the (very) short test run of a prototype Transit Elevated Bus (TEB) in Qinhuangdao, the Beijing News reported that the main investment promotor for it was Huaying Kailai, an asset management company blacklisted in 2015 for conducting illegal finance activities. The Global Times said the firm, part of the Huaying Land Group, also ran a peer-to-peer financing scheme that promised high returns but risked running out of cash.

Claims of cooperation agreements between the bus’s maker, TEB Technology Development, and municipal governments appear to have been as spurious as purported orders from three countries in Latin America.

Update: Police have arrested 32 people in connection with the failure of the TEB, including the CEO of TEB and founder of Huaying Kailai Asset Management, Bai Zhiming, and 31 Huaying Kailai employees.

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China Gets Its UK Nuclear Prize, Probably

THE UNITED KINGDOM’S decision to go-ahead with three nuclear power plants, the first at Hinkley Point, has had a somewhat surprisingly gruff welcome from state media.

Shortly after taking office in July, UK Prime Minister Theresa May ordered a second look at the projects, which were approved by the previous administration. This was to include cost and environmental concerns but also a security review of China’s involvement, which includes part-financing new reactors at Hinkley Point and Sizewell, both to be built and operated by France’s EDF, but also leading the construction and operation of a reactor at Bradwell to indigenous Chinese designs.

“However, in spite of the approval, China-phobia sentiments continue to hover and could possibly introduce more troubles as construction of the project gets underway, a Xinhua commentary thundered. “It is reported that while announcing the go-ahead, Theresa May has also promised ‘significant new safeguards’ to make sure that investment from China does not threaten national security. Of course, the British leader’s misgivings make little sense.”

The new safeguards give the British government a veto over sales of full or partial ownership of the reactors both while they are being built and then operated, and institutes national security reviews for future critical infrastructure projects, a practice that is common in most large economies, including China.

There had been dire warnings from the Chinese side when May announced her review that abandoning the projects would end the ‘golden era’ of Sino-British relations championed by her predecessor David Cameron and his finance minister, George Osborne.

“Let us hope that London quits its China-phobia and works with Beijing to ensure the project’s smooth development, Xinhua’s commentary continued.

Its testiness underlines the uncertainties that still surround the projects. China is desperate that Bradwell goes ahead to give it a key early sale to a developed nation of its still untried Hualong One reactor. Beijing hopes that will lead the way to a global export market for what a senior official at China General Nuclear Power estimates will be some 200 nuclear power plants.

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The Global Greening Of China

CHINA HAS THREE imperatives when it comes to climate change: to use the issue to cement its growing position as a world power; to deal with its domestic pollution problems so that they don’t become a political issue that could challenge the Party’s primacy; and to establish industrial leadership in ‘green’ technologies including renewable fuels.

The symbolism of Presidents Xi Jinping and Barack Obama jointly ratifying the Paris climate change agreement (Cop 21) will not be lost domestically or internationally. Xi will take the opportunity of the G20 meeting in Hangzhou to reinforce that message that China is at the centre of world affairs and that, as state media put it, developed and emerging countries are “in the same boat, with China charting the course ahead this time”.

The move by the world’s two biggest polluters is clearly a significant step for the climate change deal, which needs 55 nations accounting for at least 55% of the world’s emissions for it to come into effect. China and the United States raise the percentage at a stroke to more than 40% from 1%. It just now needs the EU and a couple of other countries to follow suit to get the deal over the line.

Beijing’s Paris accord commitment is to cut its carbon emissions per unit of GDP by 60-65% from 2005 levels by 2030 and to increase non-fossil fuel sources in primary energy consumption to about 20%. While those targets don’t necessarily mean a cut in absolute emissions levels, it will slow their growth meaningfully. China committed at Paris that they would peak in ‘around 2030’.

The large steps China has taken in energy efficiency and the rebalancing of the economy away from industrialisation and towards more services will aid it in hitting those goals. Becoming more of a low-carbon economy will also help achieve its domestic goals of lessening pollution, a perpetual point of popular perturbation and protest. Environmental NGOs are kept on a short leash for fear they are a seed of political organisation.

At the same time, China has developed into the world’s largest market for hydropower, nuclear, wind and solar energy and increasingly aims to make those indigenous industries, serving both the ambitions of developing low-carbon urbanisation and bringing economic development to some of the poorest but also windiest and sunniest provinces. As relatively new industries, there is also more opportunity for China’s new found desire to be innovative to flourish, as well as for its manufacturers to find new export markets for wind turbines, solar panels and even nuclear reactors.

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