China’s Oil Production Outside China To Rival Kuwait and Mexico’s

While it is no secret that China’s state-owned oil giants, CNPC, Sinopec and CNOOC, have been on a buying spree of overseas assets over the past three or four years, not much consideration has been given outside the industry to what that means in production terms. Now the International Energy Agency (IES) has done just that. And it is eye opening.

The IEA estimates that by 2015 China will be producing 3 million barrels of oil a day outside its borders, twice what it produces today. Quite what that means is well illustrated by some comparisons. Three million barrels per day is roughly what the United Arab Emirates, Mexico and Kuwait each now produce. They are currently the world’s eighth, ninth and tenth largest producers. It would be comfortably more than Brazil, Nigeria and Venezuela’s output. They are the eleventh, twelfth and thirteenth largest producers. It would also be three quarters of the way to what China already produces; China is the world’s fifth biggest oil producing nation.

This ranking hasn’t come cheap. The M&A consultancy Dealogic (via the Financial Times) says that China’s state oil companies have spent $92 billion since the start of 2009 on oil and gas assets in countries from Angola to the U.S.  There is little to suggest that number won’t pass the $100 billion mark sometime later this year as they continue to buy oil and gas in the ground, be it under water or shale, and the expertise to get it out.

China Seeks Compensation For War-Damaged Libyan Projects

The hopes of Chinese civil engineering firms that they would be able to return to abandoned construction projects in Libya appear to have been dashed for now. Commerce minister Chen Deming says it is too dangerous to return, and that China is seeking compensation from the new government in Tripoli, particularly for housing projects worth more than $10 billion that were completed or close to completion but suffered heavy artillery damage during the fighting.

Before the civil war that overthrew the Gaddafi regime started in February, 2011, some 75 Chinese companies, including 13 large state owned enterprises, were working on $19 billion worth of projects, mainly in oil services, railways, housing construction and telecoms. Evacuating more than 35,000 Chinese nationals from these in March last year was a source of some pride in Beijing. (A similar, though more-low profile and pre-emptive evacuation of Chinese workers in Syria is now underway, with 100 or so being left in the country to secure Chinese engineering projects as far as they can, and so minimize the sort of damage suffered in Libya.)

Chen’s comments about Libya followed the visit of an inspection team from his ministry that arrived in Tripoli earlier this month to assess the extent of the damage, and the prospects for Chinese engineering companies to return. China has, though, resumed its oil imports from Libya, which were interrupted by the civil war. It is expected to ship 140,000 barrels a day from Libya this year.

Shifting Sands Of China’s Relationship With U.S.

Reuters’ report that China’s three big state-owned energy companies, CNPC, Sinopec and CNOOC, have had their arms twisted by the U.S. to suspend new investments in Iran causes this Bystander to raise an eyebrow. CNPC has reportedly delayed work on a 4.7 billion dollar deal; Sinopec has postponed a 2.0 billion dollar oil development, and CNOOC has halted a gas venture according to the news agency after U.S. officials threatened sanctions against the SOEs’ U.S. investments. This they apparently did by bypassing official diplomatic channels and going directly to the companies.

Now, Washington has not had much success in getting Beijing to go along with its efforts to thwart Iran’s nuclear programme. Beijing opposes proposed UN sanctions, which would jeopardize the oil supplies it buys from Tehran, it’s third biggest supplier. Plus there is the general reluctance on Beijing’s part of being seen to be doing anything at Washington’s behest, and a general tendency to stick with old friends, especially those hostile to the U.S., (a policy that is causing some second thoughts, or at least some readjustment, in the light of events in places like Pakistan, Libya and Syria, all of which also have implications for the leadership’s legitimacy at home).

Even if there may be some shifting of the geo-political sands occurring, there is no way that any or all of CNPC, Sinopec and CNOOC would take it upon themselves to undermine official policy without at least tacit approval from Beijing. Which then makes the question, why would Beijing do this now. Is it just letting some of those swirling geo-political sands settle until prospects become clearer, or is using supposedly business decisions as a smokescreen, if we may mix and match our metaphors, for some back-channel cooperation with Washington that it sees to be in its short- or long-term advantage but which it can’t bring into the open? Or is it, as Reuters implies, just part of Beijing’s desire, seen since late last year, to ease tensions with the U.S.as it heads into it’s own leadership transition?

China, Russia Make Scant Progress In Resolving Energy Disputes

The agreement signed with Russia after the latest round of Sino-Russian energy cooperation talks just concluded in Moscow papers over some wide cracks. For one, there doesn’t seem to be much more to the agreement than that the two countries will continue to try to conclude their long running discussions over two long-term gas-supply deals. Xinhua’s report is all cheer and no content.

What the two sides have been talking about, seemingly since when the Siberian forests that became the oil and gas were still forests, is to expand an outline agreement under which from 2015 Russia’s gas monopoly Gazprom would supply 30 billion cubic meters a year–roughly one-third of China’s 2009 consumption and a quarter of Russia’s total exports–to more than double the volume, supplied via two direct pipelines from Siberia to western and central China. The formula for determining the price has been the main sticking point.

Been there, done that, got nowhere. Pricing is at the heart of the dispute over the Russian oil China has recently started getting via the Daqing spur to Russia’s East Siberia Pacific Ocean pipeline (ESPO). The deliveries are the result of $25 billion-worth of loans in 2009 from China National Petroleum Company (CNPC) and the China Development Bank to the energy company Rosneft and the state-owned pipeline monopoly Transneft that was to be repaid in oil, expected to be 15m tonnes a year (150,000 b/d) for 20 years starting this year.

The oil started flowing at the start of the year, but since then China has accused Russia of overcharging it for the deliveries, and demanded more oil as a make-up, while Russia said China was way underpaying given market conditions. The pricing formula has broken China’s way and Russia can sell to Japanese, South Korean and American customers far more profitably. It certainly has no intent to double up on its losses supplying China. Transneft has threatened to sue CNPC in court. Hard ball meets hard ball.

Meanwhile, the deliveries continue at their original levels. Last month CNPC and Rosneft broke ground for a joint-venture oil refinery in Tianjin that will be able to refine 260,000 barrels a day and is due to start operations in late 2013.

On the gas front, China’s increasing ability to source domestically and from Central Asia and some doubts about Gazprom’s capacity to deliver the extra gas has strengthened Beijing’s negotiating hand, while the higher prices Russia can get for its gas in Europe make Moscow in no hurry to resolve the issue, let alone buckle. Vice Premier Wang Qishan said after the Moscow that China “hopes the two sides could make further essential progress in gas talks as soon as possible and that the two sides exchanged views and plans on future energy cooperation, demonstrating mutual trust as well as candid and pragmatic spirit of cooperation between China and Russia”. Which pretty much says there was no progress.

 

 

Cheap Russian Oil Starts Flowing To Northern China

The first Russian oil has flowed through the Daqing spur of the 2,750 kilometers pipeline connecting East Siberia to the Pacific Ocean (ESPO). The picture above shows the 1,000 kilometers spur at Mohe, where it enters China. Up to now China’s deliveries of Russian oil have come via Russia’s Far Eastern port of Kozmino to which it travels by rail from the Skovorodino terminal of the main ESPO pipeline.

The pipeline has been built by the Russian state companies, Transneft and Rosneft, using a 20 year $25 billion loan repayable in oil on favorable terms. China will be paying one-fifth as much for Daqing-delivered oil as it does for the supplies that come via Kozmino.

Russia sees a growing export market for its energy in China, though progress on oil stands in marked contrast to natural gas, the fuel to which China is switching from coal to generate heat and power. Negotiations over supplies and building the infrastructure to deliver them are stalled over price, and to a lesser extent some geopolitical jockeying in Central Asia. However, there has been agreement that Russia will start to supply China with Eastern Siberian gas in 2015.

Where China Put Its Big Bucks In 2010: Down South America Way

South America dominates the list of the biggest overseas acquisitions by Chinese companies this year. The two biggest to date: Sinopec’s $7 billion purchase of 40% of the Brazil assets of the Spanish energy group, Repsol; and the $5.6 billion CNOOC is spending in two phases for 50% of Bridas Corp., the investment vehicle of the Argentine vertically integrated energy group, Bridas. Bridas Corp.’s primary asset is Pan-American Energy (PAE). The partners are buying out BP’s 60% stake in PAE as BP raises cash to put in a piggy bank for any obligations arising out of the Deepwater Horizon accident, turning what looked in March like an iffy investment by CNOOC into something much more promising by the end of November.

Sinopec has since also picked up the U.S. oil company Occidental’s production and development assets in Argentina for $2.5 billion, the fourth biggest overseas investment by a Chinese company this year. The third biggest was Sinochem’s $3.1 billion purchase of a 40% stake in Statoil’s Peregrino subsalt field off the Brazilian coast. Add in a couple of smaller deals in Venezuela and Chinese firms have secured this year stakes in six projects that will eventually be producing upwards of 570,000 barrels of oil a day.

China’s state oil companies have long had a toe-hold in the region, but this year represents a big step forward, including diversifying China’s energy dependence on Venezuela. These deals have not only secured future oil supplies, they are also piecing together a vertical supply chain that includes refining, trading and storage — and further downstream power generation and distribution. State Grid, the world’s largest power utility and another state-owned behemoth, spent nearly $1 billion to acquire seven power distributors in Brazil as part of a deal it has won to be operate the power distribution system in densely populated southeastern Brazil.

Taken together those seven acquisitions would make a list of the ten largest overseas acquisitions by Chinese companies in 2010. As well as securing energy supplies for China’s own fast growing economy, Chinese companies will be well positioned to profit from the domestic growth of the emerging economies of South America.

In comparison the other big overseas acquisitions of the year seem small beer. PetroChina spent $1.6 billion to acquire Arrow, an Australian coal seam and power distribution company, in a joint bid with Royal Dutch Shell valued at $3.2 billion overall. Chinalco spent $1.3 billion to buy 45% of Rio Tinto’s Simandou iron ore business in Guinea through its Chalco subsidiary. China Huaneng Group, the country’s largest electricity producer, paid $1.2 billion for GMR Infrastructure’s 50% stake in InterGen, a U.S.-based utility that runs power plants in Britain, the Netherlands, Mexico, Australia and the Philippines.

The biggest industrial foreign acquisition was Geely’s $1.8 billion acquisition of Volvo from Ford Motor, the largest piece of business done by a company not state owned. The next largest industrial acquisition was the purchase of Nexteer, a parts-maker bought from GM by Pacific Century Motors, a joint venture between Tempo Group and the investment arm of the Beijing municipal government, a deal valued at less than $500 million.

CNOOC Extends China’s South America Reach

BP’s $7 billion sale at the end of last month of its 60% stake Pan American Energy to its partner Bridas which owns the other 40%, means CNOOC ends up with 50% of the oil and gas company that operates mainly in Argentina — and China takes another large step in the acquisition of energy interests in the region.

Since March, when CNOOC, China’s third-largest oil company, bought into Bridas for $3.1 billion, Bridas has been a 50-50 joint venture between the state-owned company and the Argentine owners of Bridas Corp., the well-connected Bulgheroni family who run a vertically integrated energy group that is the second-largest oil and gas producer in the country and have business connections to Central Asia.

BP may have been a forced seller, given its need to fill a war chest for any  obligations arising from the Deepwater Horizon disaster in the Gulf of Mexico; CNOOC either got a fine price this time or overpaid for its stake last March.

In the short term, CNOOC’s investment, which represents China’s second largest overseas M&A deal of the year, may give it access to the local market but long term the focus will be on exports. The question is how that will fit with the Argentine government’s policy to favor the domestic market over exports.

Update: State Grid, the world’s largest power utility, is buying seven Brazilian power distributors in a $1 billion deal. It has also won a 30-year concession to operate the power distribution system in densely populated southeastern Brazil — further evidence that Chinese companies see good business in the growth prospects of South America’s largest economies.

A Pipeline Called Pakistan

To Beijing, Pakistan looks a lot like a corridor from the high plateau of China’s western reaches to the blue water ports of the Arabian Sea and thus access to shipping routes to the Middle East, Africa and Europe. The distance is relatively short, less than 1,500 kilometers as the crow flies, but at the northern end the terrain is difficult, the weather harsh, borders unsettled and security uncertain. Road and rail links are patchy, particularly north of Pakistan’s capital Islamabad. Nor is there yet a motorway connecting the capital to the southern port city of Karachi, let alone to Gwadar on the Gulf of Oman close to the border with Iran and where China is developing a deep-water port and naval base. That is why additional Chinese investment in Pakistan’s N-35 highway, the Karakoram Highway, may prove to be the most significant of the deals announced during Prime Minister Wen Jiabao’s visit to the country.

The highway (left) links Hasan Abdal, on the Peshwar-Rawlpindi motorway in the northern Punjab some 40 kilometers west of Islamabad, to Kashgar in Xinjiang via the Khunjerab Pass. Started in 1959 and not completed until 1986, the road snakes for 1,300 kilometers (two-thirds of it in Pakistan) over some of the highest paved road in the world. It makes for a stunningly beautiful trip across the Karakoram mountains along one of the branches of the Old Silk Road, but it is less splendid as a commercial artery. It is mainly two lanes and impassable for parts of the year because of either winter snows or summer monsoon; the border crossing is closed for a third of the year.

The two countries agreed in 2006 to to triple its width and upgrade it so it can take heavy trucks in all weathers. The long-term plans call for the Karakoram Highway to be linked to Gwadar by rail; Chinese investment is funding a rail connection from the port to Rawalpindi. Separately, a feasibility study is underway for the rail link to go all the way through to Kashgar, following the Karakoram Highway from Havelian, a town on the N-35 at the northern edge of Pakistan’s existing rail network. At Kashgar, it would connect to the Chinese rail network at its most westerly point.

There are also plans to run a parallel oil pipeline from Gwadar into Xinjiang. Before then trucks carrying natural gas bound for western China may be rumbling up the roads of the Indus valley, the first part of their journey being on the $200 million coastal highway between Gwadar and Karachi that Beijing is paying to build. Gwadar will also be a terminal for the proposed natural gas pipeline from Turkmenistan, intended originally to give Central Asian states access to European markets without going through Russia, but now seemingly another of the web of links connecting Central Asia’s natural resources with western China.

There are geo-political reasons beyond the purely commercial for Beijing’s relationship with Islamabad, reflected in the other deals struck during Wen’s visit and in the delicate dance China is engaged in with India. It also gives Pakistan an alternative to its uneasy relationship with the U.S. and thus Beijing another front to its own complicated relationship with Washington. But if Pakistan is to be an energy pipeline for China, it also underlines Beijing’s obsession about separatistism in its western reaches.

China’s Green Leap Forward

China has a goal of meeting 15% of its energy consumption from non-fossil fuels by 2020, and the five-year plan that starts next year calls for a large expansion of hydropower for electricity generation. The World Bank, in a policy note on the Great Green Leap Forward, says China needs to do four things to hit its goal:

Develop hydropower faster. Hydropower rehabilitation and more rapid and environmentally and socially sound development could achieve the target at a lower cost because hydropower is already competitive with coal. Developing hydropower more quickly would allow for increasing the renewable energy target above the envisaged government target without increasing the incremental cost of the program.

Improve the performance of wind power rapidly. China’s experience has been less than optimal in planning wind farm, operational integration and coordination between developers and grid operators. This considerably reduced the performance of the wind program. If not addressed adequately, the high level of inefficiencies could increase the cost to the nation of the envisaged wind program, which could become prohibitive.

Promote trade. With trade, provinces could achieve their mandated targets. Renewable energy transactions would amount to about 360 terawatt-hours, 42 percent of the total of the envisaged government target. And more important, trade would reduce the discounted cost of the envisaged renewable energy target by about 56-72 percent.

Develop green electricity scheme(s). Green electricity has been well studied in China and piloted in Shanghai municipality. Deploying green electricity schemes at the national and regional levels should be considered among the options to pay for the incremental cost resulting from the development of renewable energy.

All in all, an off-to-a-good start report with some could-do-betters, particularly with wind power, where approaching a third of the power generated is off-grid, and much, much still to be done.

China To Hold Growing Sway Over World Energy Industry

The International Energy Agency’s latest World Energy Outlook (to 2035) says China’s demand for energy will rise by 75% between 2008 and 2035, accounting for 22% of the world’s energy consumption, up from 17% today. Put another way, China will account for 36% of the growth in the world’s energy demand (see snapshot of IEA graph below). The IEA’s projections are based on the assumption that governments will do no more than meet any commitments already given on energy conservation, greenhouse gas emission reductions and the phasing out of fossil-fuel subsidies. (That so-called New Policies Scenario is the most conservative of the three sets of assumptions about governments’ intentions the IEA makes.)

It is hard to overstate the growing importance of China in global energy markets. [The IEA’s] preliminary data suggest that China overtook the United States in 2009 to become the world’s largest energy user, Strikingly, Chinese energy use was only half that of the United States in 2000….Prospects for further growth remain strong, given that China’s per-capital consumption level remains low, at only one-third of the OECD average.

The IEA also says that China’s growing need to import fossil fuels will have an increasingly large impact on international markets. It will account for half the net growth in global crude oil demand over the period, largely because it will need more fuel for cars and lorries. It will also have a voracious appetite for natural gas, the more so if coal use is restrained on environmental grounds. Its needs are likely to make the oil and gas producing nations of Central Asia such as Kazakhstan, Uzbekistan, Turkmenistan and Azerbaijan which draw from the Caspian basin a significant new energy region. Similarly, Beijing’s push to develop new low-carbon energy technologies could help drive down the costs of those through economies of scale.

In China, energy demand triples between 2008 and 2035. Over the next 15 years, China is projected to add generating capacity equivalent to the current total installed capacity of the United States.

Electricity generation is likely to be at the forefront of the transition to low-carbon technologies. The greatest scope for increasing the use of renewable energy sources in absolute terms, the IEA says, lies in power generation. China is already a leader in wind power and solar photovoltaic (PV) production as well as having become a leading supplier of the equipment thanks to strong government investment support. The IEA says China will add 335 gigawatts of wind generation capacity, 105 gigawatts of nuclear and 85 gigawatts of solar PV by 2035 (and put 8.5 million electric vehicles on its roads).  That said, coal-fired generation will remain substantial in China, with 600 gigawatts of new capacity exceeding the growth of the renewables and exceeding the current capacity of the U.S., E.U. and Japan.

The IEA takes aim at subsidies for fossil fuels, which it calls the “single most effective measure to cut energy demand”. It wants them phased out to end the market distortions that make it more difficult for low-carbon technologies to get development investment. It says that such subsidies amounted to $312 billion worldwide in 2009, though that was down from $558 billion the previous year. China was the fifth largest subsidizer in 2009, behind Iran, Saudi Arabia, Russia and India, at just shy of $20 billion. About half of that went to electricity generated from fossil fuels and most of the rest equally to coal and oil. Beijing has been moving towards more market based pricing for energy, but as the figures show, there is still a ways to go.

The subsidies analysis was done at the behest to the G-20, whose leaders are meeting in Seoul shortly and where climate change and the successor to the expiring Kyoto protocol on climate change will be on the agenda. The IEA lays out how heavily the burden lies on China and the U.S. to cut back emissions if the ideal target of limiting the increase in global temperatures to 2°C is to be hit by 2035: 32% China, 18% the U.S. 50% rest of the world. Low-carbon technologies would need to account, the IEA reckons, for over three-quarters of global power generation by then and plug-in hybrids & electric vehicles for 39% of new sales. That day may not come, or at least not fully, but the era of cheap fossil fuels is over. China is already investing heavily in those areas and giving itself a first mover advantage that the rest of the world may find difficult to claw back.