This is an abridged version of an article published in the June 2013 issue of World Pipelines, available for subscribers to download now

Ominously for China, the world’s worst air pollution ever to hit a major city struck Beijing in the run-up to the March inauguration of its new government for the next 10 years. For several weeks in early 2013, the index measuring minute deadly airborne particles in several Chinese cities including its capital regularly exceeded 30 times the World Health Organisation (WHO) level deemed toxic to human health. This horror story was soon surpassed by images of at least 15 000 rotting dead pigs floating down the Huangpu River into the heart of Shanghai city.

President Xi Jinping and his Premier, Le Keqiang, will have their work cut out to continue raising not just China’s GDP, but also the living standards of its 1.4 billion citizens, most of whom now live in cities that increasingly suffer from air and water pollution caused by carbon emissions, toxic fumes and particles from widespread burning of coal and oil.

China’s previous leaders (since the early 1980s) probably had an easier brief as they only had to focus on growing a rock-bottom economy devastated by Maoist communism. Even as recent as 2003 when Hu Jintao became President, the world was still largely unaware or dismissive of China’s rise, allowing its government a free hand to secure resource-based deals and cement relationships with developing countries around the world. The environment was not yet a major issue and social discontent was still easily quelled.

Confronted by the toxic air and dead pigs, the Xi administration has been forced at its outset to deal with China’s growing firestorm of domestic social and environmental challenges. Externally, the new government faces an increasingly suspicious West, at the same time that China’s oil and gas supplies from producing regions are being threatened by political instability and military conflicts.

Xi will continue with his predecessor’s policy of using China’s US$ 3.3 trillion hoard of foreign exchange reserves to acquire energy and other natural resources abroad, but his approach will have to be more deliberate and probably focused on a handful of large projects.

The new government will need to perform well if it is to achieve its target to double China’s 2010 GDP of 39.8 trillion yuan to 80 trillion yuan by 2020 (US$ 1 = 6.22 yuan).

Investments are set to rise sharply

Under the previous Hu administration, Chinese state companies gained a reputation as formidable competitors willing to overpay for energy resources, as witnessed by the 60% premium that CNOOC paid last year to acquire Canada’s Nexen Inc. for approximately US$ 15 billion. The deal represented the single largest overseas takeover by a Chinese company, and formed 15% of the estimated US$ 100 billion that its main state oil companies invested in acquiring oil and gas producing assets around the world between 2009 and 2012.

These figures are likely to be surpassed in line with projections that China’s crude oil demand and imports will rise sharply over the next few years, according to government officials and industry analysts.

The Energy Research Institute, an affiliate of the top policy-making National Development and Reform Commission (NDRC), expects the country’s crude oil demand to rise by an average annual rate of 4.6% from 450 million t in 2011 to 540 million t in 2015. Imports are expected to meet 60% of China’s 500 million t of its crude oil demand in 2013, up from 57% last year, and just over 50% in 2009.

China’s natural gas consumption will rise by a faster rate of 15% per year from 130 billion m³/yr in 2011 to 230 billion m³/yr in 2015, according to the NDRC and International Energy Agency (IEA). As it battles air pollution and attempts to reduce dependence on coal, China will become the world’s third largest natural gas consumer after the US and Russia by 2017, said the IEA. At current demand and import growth rates, China is on course to displace the US as the world’s leading oil importer and addict, said the US Energy Information Administration (EIA). Last December, Chinese oil imports exceeded 6 million bpd while the US took in just 5.98 million bpd, according to official data from both countries. According to BP, China’s oil consumption doubled to 9.8 million bpd between 2001 and 2011 at the same time that US demand declined from around 19.6 million bpd to 18.8 million bpd.

To meet the country’s vastly expanded energy demand, then Vice-Minister for commerce Zhong Shan told an industry conference last year that China would have to expand and deepen relations with both international oil and companies and producing countries. Translation: China would be most willing to open up its wallet and pay generously for oil and gas assets.

As a result of its relentless drive to invest in oil and gas assets, China will double its overseas 2011 oil production to 3 million bpd by 2015, predicts the IEA. This would place China’s overseas production ahead of the world’s top 10 oil producers including Kuwait, Qatar, Venezuela and the UAE, said the IEA.

Central Asia and Russia

As it surveys the changing international landscape, the new leadership in China has identified Central Asia and Russia as best suited to meet China’s long-term energy demand, which will include closer co-operation on a range of upstream and downstream projects.

This view was inherited from the previous government as China encountered growing resistance or difficult conditions in recent years trying to expand its energy trade and investment ties with countries in North America, Middle East, Africa and Latin America. The focus on Russia and Central Asia was most authoritatively articulated last October by Zhang Guobao, the powerful advisor to China’s National Energy Administration (NEA), at a forum in Kazakhstan.

With the advantage of sharing common borders and being on the same land mass as China, the hydrocarbon-rich countries of Central Asia have been able to quickly build and start up overland pipelines exporting natural gas and oil to its energy-hungry neighbour.

Kazakhstan, Turkmenistan and Uzbekistan have experienced rapid economic growth over the last few years as a result of China’s willingness to underwrite billions of dollars in new pipeline and infrastructure investments. Their success has encouraged neighbours Azerbaijan, Kyrgyzstan and Tajikistan to also look to find ways to hitch their economies onto the Chinese bandwagon.

Turkmenistan, a major success story of expanding Sino-Central Asian ties, boosted piped gas exports to China by 55% to 13.6 billion m³ in the first eight months of 2012. The bulk of the estimated US$ 5.5 billion in export earnings went to Turkmenistan, which supplied most of the gas to China through the Central Asian pipeline.

Mr Zhang said Chinese and Central Asian authorities are planning to expand the pipeline network to increase gas exports from 30 billion m³/yr per year to 70 billion m³/yr.

Turkmenistan is well positioned to further take advantage of the Chinese market with the development of its giant South Iolotan (Galkynysh) field which will be key to Central Asia’s emergence as a major natural gas supplier. The region has the potential to export more than 120 billion m³ by 2020, said consultant Wood Mackenzie.

“China will require additional imports over and above Central Asia’s current contract of around 45 billion m³ by 2015. We forecast that China will have around 50 billion m³ of gas demand in 2020 that needs to be satisfied by additional imports and Central Asian gas could play a key role is meeting this demand,” said the company’s Senior Gas Supply Analyst Stephen O’Rourke.

For the next phase of growth, China is looking to expand co-operation with Central Asia beyond oil and gas to the import of hydropower, coal and uranium.

At an Eurasia forum in Xinjiang’s Urumqi city, another NEA official said China and Central Asian states should form a regional energy club to supplement the Shanghai Co-operation Organisation (SCO) in strengthening energy and economic ties among members.

Acting increasingly as an alternative block to the West, SCO was founded in Shanghai in 2001 to strengthen political and security ties among its members, China, Kazakhstan, Kyrgyzstan, Russia, Tajikistan and Uzbekistan.

Russia and China

In March, China and Russia wrapped up a number of energy agreements, worth more than US$ 600 billion, to mark a successful first overseas trip for newly-installed President Xi Jinping to Moscow to meet his counterpart Vladimir Putin.

In one of the world’s biggest long-term oil supply contracts on record, Russia’s state-owned Rosneft agreed to more than triple its exports to one million bpd to Asia’s largest economy over the next 25 years. At an average price of US$ 110/bbl, the 625 000 bpd of additional supply is worth US$ 25 billion a year, and US$ 625 billion over the 25 year term.

The agreement, which makes China the biggest buyer of Russian crude oil, was facilitated by the recent completion of the second phase of the East Siberia Pacific Ocean (ESPO) pipeline, lifting its capacity to 1 million bpd. ESPO’s owner and operator, Transneft, completed the first phase in 2009 to deliver 300 000 bpd of crude oil from Siberia to Asian markets.

As part of the latest deal, Chinese financial institutions are expected to grant huge loans and credit lines to the two Russian companies. In 2009, China granted Rosneft US$ 15 billion and Transneft US$ 10 billion in credit and loans for their respective roles in launching the supply of ESPO crude.

Rosneft CEO Igor Sechin also revealed that it and Sinopec are at an advanced stage of talks to develop the Sakhalin-3 project that will support the construction of a second LNG export terminal on the island. The project will tap into four fields estimated to hold more than 5 billion bbls of crude oil and 1.3 trillion m³ of natural gas.

Separately, in February, Sechin had visited China, South Korea and Japan to drum up investment interest in his company’s Arctic assets. Rosneft, which is hoping to venture into the LNG export business, said its Arctic interest alone holds 21 trillion m³ of natural gas.

For fear of being left out of the limelight during President Xi’s trip to Moscow, Russian gas monopoly Gazprom signed a preliminary agreement with China National Petroleum Corp. (CNPC) to lay the foundation for a 30 year gas supply contract from 2018. Unlike Rosneft, Gazprom has failed to nail down a deal with its Chinese counterparts despite years of negotiations. Amid growing international competition for Asian customers, however, Gazprom is expected to yield to Chinese demand for lower prices for an annual supply of up to 68 billion m³ of natural gas.

Russia’s En+ Group and China’s Shenhua Group signed a US$ 2 billion deal to jointly develop coal reserves in Russia’s Far East. Sino-Russian trade, which grew to US$ 88 billion last year from US$ 8 billion in 2000, is expected to top US$ 100 billion by 2015.

Amid the warming Sino-Russian ties, Europe has cause for concern as Moscow is fulfilling a major threat to reduce oil and supplies to its long time Western customers in favour of China, Japan and South Korea. The Russian government expects to expand ESPO’s capacity to 1.6 million bpd by 2025 to further increase sales to Asia at the expense of traditional major customers such as Germany and the Netherlands.

CNPC reports

China’s largest energy company said it missed its target to produce 120 million t of oil and gas from its overseas operations by more than 13% or around 16 million t. China National Petroleum Corp (CNPC) blamed political unrest and military conflicts in the Middle East, Africa and Latin America for capping the growth of its overseas production by just 1.4% to 52.4 million t.

The company had better fortune with its downstream sector, boosting its international oil and gas trade by 18.5% to exceed 300 million t for the first time. With oil prices holding up last year, the value of CNPC’s total oil trade surged 19.7% to US$ 230 billion.

The company reported strong growth from its operations in Iraq, South America and Canada. Production from its equity holding in Rumaila, Iraq’s biggest oilfield, rose more than 25% to over 25 million t last year, making it the highest of CNPC’s producing overseas projects.

Taking a broader view, CNPC said it estimates China’s domestic crude oil output grew to a record high of 207 million t last year from 203 million t in 2011, and could climb further on rising supply from offshore fields. But the country remains short and is increasingly dependent on imports, according to the China Petroleum Enterprise Association. Last year, China’s domestic oil demand rose 3.7% or more than three times the rate of production increase, to reach 470 million t and is on course to break the 500 million t barrier in 2013. In 2011, the country’s oil consumption rose 3.3% to 453 million t.

CNPC’s Research Institute of Economics & Technology subsidiary is even more bullish with its prediction for Chinese oil demand to surge 4.8% to 514 million t this year.

Written by Ng Weng Hoong.

This is an abridged version of an article published in the June 2013 issue of World Pipelines, available for subscribers to download now

Read the article online at: https://www.hydrocarbonengineering.com/special-reports/24062013/the_oil_and_gas_pipeline_and_energy_challenges_in_china/