netrashetty
Netra Shetty
China New Borun (BORN) (NYSE:BORN) produces corn-based alcohol in China. The alcohol is used in the production of baijiu. baijiu is a grain-based alcoholic beverage, made of corn, wheat, or barley. The alcohol is clear with an alcoholic content of 18% to 68%. baijiu is consumed on any occasion in China. The company has two facilities in two provinces that produces a combined 260,000 tons of corn-based alcohol. Another facility to produce 120,000 tons of corned-based alcohol is under construction and should be live December 2010. Based on data from the Frost & Sullivan Report, following the completion of the new facility, the company will be the largest producer of corn-based alcohol by production capacity. [1]
China was the third largest producing nation of alcohol, behind USA and Brazil. The domestic demand for edible alcohol grew from 2.3 million tons in 2004 to 4.6 million tons in 2009, a CAGR of 14.9%. The increase can be attributed to the demand for baijiu between 2004-2007. According to Frost & Sullivan, the domestic demand for edible alcohol will grow at 16.6% CAGR from 2009 to 2012, reaching 7.3 million tons in 2012. [1]
The company's initial public offering of stock filed on the NASDAQ exchange on 27 April 2010. The initial price offer range is $12-$14, and the company plans to sell 5.5 million shares to raise $72 million. [1]
For calender year 2007 to 2009, the company's revenues increased from $71.4 million to $155.4 million, a CAGR of 47.5%. In the same time frame, the company grew its net income from $8.6 million to $24.4 million, a CAGR of 68.4%. [1]
Although it is the world's fourth largest economy, China is second in energy consumption only to the United States. China is capable of overtaking the U.S. as the world's largest energy consumer by 2010 according to the EIA.[1] China's massive energy needs stem from the numerous infrastructure,transportation, and industrial projects created by the government and private companies, and[2] according to the IEA, China's overall population has the potential of reaching 1.5 billion and require 8,600 terawatts of electricity in 2030.[3]
In order to meet the energy needs of an expanding population and numerous construction projects, China's primary source of energy has come from coal, which is a relatively inexpensive resource in China.[4] However, China's coal power accounts for 80% of greenhouse gas emissions produced in the country, and is one of the reasons why China is the world's largest producer of carbon dioxide.[5] The country is capable of reducing its reliance on coal power through investments in the development of "cleaner" sources of energy such as nuclear energy, hydroelectric energy, and natural gas, but these require substantial investments from the government and consume numerous natural resources to build. For example, the Three Gorges Dam, which is capable of producing the energy equivalent of 10 Hoover Dams, is the world's largest consumer of dirt, stone, concrete, and steel and cost an estimated $25 billion to build.[6] While Chinese energy companies continue to develop domestic energy supplies, many have invested in the development of foreign oil fields in order to secure future supplies.
Trends and Forces
Estimates of 2011 Energy Demand stress the importance of Coal
In January 2011, the National Energy Administration (NEA) announced its prediction that China's energy demand is likely to rise in 2011, but at slower pace than in 2010.[7] Although it expects economic growth to continue in 2011, energy supply and demand is expected to "balance" in 2011.[8] The NEA predicts that the growth rate of coal consumption will be vital to energy demand growth, but has the potential of being dragged down by the macro-economic policies.[9] In particular, the development of renewable energy and the energy saving targets set for the national 12th Five-year Plan starting from 2011.[10] Overall, NEA predicts electricity consumption has the potential of increase 9% over 2010 levels.[11]
According to Citigroup, China's new coal imports have the potential of rising 63% in 2011 due to surging domestic demand.[12] Driven by demand from steel and cement producers, overall demand has the potential of rising 7.3% in 2011 compared to 2010 levels.[13] On the other hand, supplies are only expected to increase by 4.8% in 2011 compared to 2010 levels.[14]
Rising net imports are likely to benefit international producers and shippers. A surge in coal imports has the potential of driving international coal prices highers while simultaneously increasing lift freight rates.[15] Within China, domestic prices are also likely to increase if domestic demand outpaces domestic production significantly.[16] Chinese coal producers such as China Shenhua Energy Company (HKG:1088) and Yanzhou Coal Mining Company (YZC) have the potential of benefiting from higher domestic prices as well as higher international prices.[17]
International and domestic energy companies vie for dominance in the Asian fuel oil market
With market dynamics changing, several firms are competing for control over the largest fuel oil market.[18] The market, trade volumes, and the number of big players have increased significantly as the Chinese economy continues to grow and use oil.[19] However, the presence of big players in the Signapore market such as Royal Dutch Shell, BP, PetroChina, and Sinopec have hindered any one firm from dominating the oil market.[20] BP, which led the Asian fuel oil trade from approximately 2000 to 2010, has reduced its position substantially. Large firms also employ Storage facilities in order to buy more oil when prices are cheap and sell when prices rise.[21] However, the large amount of big players in the fuel oil market has reduced the ability of firms to meet their price objectives and make storing oil profitable.[22] In fact, storing large amount of fuel for future sale exposes the owner to a possible drop in prices, leaving them with a large amount of fuel worth less than when they purchased it.[23] With less of a propensity to be dominated by one firm, the Asian fuel oil market have the potential of being more risky for larger firms than it has been in the past.[24]
China National Offshore Oil Corporation takes precautionary measures to avoid deepwater spill
In the wake of disastrous BP gulf oil spill, China National Offshore Oil Corporation (CNOOC) has ordered checks on its projects to avoid similar spills.[25] In June 2010, the country's largest offshore oil producer began updating the blowout preventer system of a rig in Shanghai in order to enhance the safety of its production facilities. Also in June 2010, CNOOC announced that it will double its oil leak prevention bases to 14.[26] From 2010 to 2015, CNOOC has the potential of devouting significant financial resources to upgrading its deep-water diving equipment.[27] As the BP disaster continues to spread, it is likely more Chinese oil companies will take measures to improve the safety of their offshore equipment.[28]
To boost reserves and production, Chinese companies plan for overseas acquisitions
In March 2010, PetroChina announced that it plans to spend at least $60 billion over 2010 to 2020 on overseas acquisitions. From 2005 to 2009, PetroChina spent between $2 billion and $3 billion annually on acquisitions.[29] As China's energy needs grow, spending by Chinese companies on mining and energy acquisitions has also risen, reaching a record $32 billion 2009.[30] For example, annual domestic oil production has the potential of reaching 200 million tons by 2020; however, demand is capable of increasing to nearly 600 million tons by 2020.[31]
Although the target segments or target geographic regions were not announced, PetroChina and Cnooc made significant acquisitions in the refinery, gas, and coal segments in 2009 and 2010.[32] In 2010, Cnooc agreed to take a majority stake in Argentina's second-largest oil producer for $3.1 billion.[33] PetroChina spent nearly $7 billion in 2009 and early 2010 to buy refineries and reserves in Australia, Canada, Singapore and Central Asia.[34] In March 2010, PetroChina and Royal Dutch Shell agreed to buy Australian gas producer Arrow Energy for $3.2 billion.[35] The Arrow acquisitions is designed to improve the development of PetroChina's coal-bed methane reserves that have the potential of containing as much as 38 trillion cubic meters.[36] PetroChina plans to increase its annual output capacity of the fuel to 4 billion cubic meters within five years, which represents 20% of China's projected coal-bed methane output by 2015.[37]
In an effort to reduce coal consumption by 2020, China intends to triple the use of gas to about 10 percent of energy consumption.[38] As much as half of PetroChina's oil and gas has the potential of coming from abroad by 2020.[39] A large portion of those imports have the potential of coming from Russian pipelines. China plans to import 68 billion cubic meters per year of natural gas from Russia through two pipelines.[40] As of March 2010, overseas production represents a 10% of overall energy production.[41] While the gas deals are intended to alleviate China's dependency on coal-derived energy, PetroChina intends to focus on oil and gas and has no definite plans to invest in solar or wind energy. [42]
In April 2010, China Petrochemical, the Beijing-based company known as Sinopec, agreed to pay ConocoPhillips $4.65 billion for its stake in Syncrude.[43] China Petrochemical Corp. paid more for the stake than analysts expected: ConocoPhillips received a 20% premium based on the stake's value implied last week by Canadian Oil Sands Trust’s market worth, debt, and cash.[44] This premium price reflects not only the increased level of acquisitions by Chinese energy companies, but also that they are willing to pay premium prices to acquire those assets.[45] Asian nations such as China, South Korea, Japan and India are seeking energy resources overseas in order to drive their economies, which has the potential of creating an "asset race" as the list of available resources for purchase becomes smaller.[46]
Additional developmental projects have come from sovereign wealth funds, which can provide financing to companies and trusts that cannot afford to fund their own operations.[47] In May 2010, China Investment Corp., a state-owned sovereign wealth fund, agreed to invest approximately $1.23 billion in developing 237,000 acres owned by Penn West Trust in northern Alberta.[48] The two entities will form a joint venture in which Penn West will have a 55% stake and China Investment Corp. will have a 45% stake. Penn West had held the acreage for a while, but has been unable to fund its own development. China Investment Corp.has the potential of providing additional financing as the the acreage is developed.[49] This joint venture is the first major oil sands deal coming from a sovereign wealth fund, not an oil company.[50] In the same month, a group of Chinese banks preliminarily agreed to build three refineries in Nigeria at a cost of $23 billion.[51] Nigeria cannot afford to build refineries to produce enough for its population, and the new refineries are likely to be used for domestic Nigeria consumption. As a result, the goal of the banks is not to secure oil supplies, but to profit from Nigerian oil consumption.[52]
Royal Dutch Shell (RDS'A), BP (BP), Hess and CONOCOPHILLIPS (COP) among several partnerships formed with Chinese energy companies in order to develop their shale gas prospects over 2009 to 2010.[53] Chinese companies like PetroChina and Sinopec have targeted oil majors with expertise in shale oil and gas exploration and production.[54]
Challenges of supply and demand stem partially from oil pricing model, policy issues
In China, the National Development and Reform Commission of China (NDRC) has the ability to control wholesale price ceilings for crude oil and petroleum products. While NDRC's fixed prices often remove oil-price volatility, the prices have the potential of negatively impacting producers if the set prices do not reflect the market accurately. The most recent price announcement, which was in November 2009, pushed the price ceiling to a record high.[55] While that price ceiling has remained fixed, the market for oil in china has changed dramatically.[56] Low demand during winter and high inventory levels forced the local suppliers like Sinopec and PetroChina into price wars and have led them to cut gasoline and diesel prices significantly. Since the announcement in November 2009, when benchmark prices were $74/barrel, benchmark prices have risen to $80/barrel and fallen to $72/barrel.[57] This sparked rumors that the NDRC would announce a price reduction before the first of January. Companies such as Sinopec and PetroChina cut their prices in anticipation changes to the price ceiling. Those firms lost money when the NDRC kept prices the same. The pricing problems of early 2010 demonstrate the potential downsides of the NDRC pricing formula and the costs incurred by oil company as a result of those downsides. The recent pricing inaction has displayed the inherent deficiency of the NDRC pricing formula.[58] According to analysts at Seekingalpha.com, the formula disregards the short-term market supply/demand fundamentals. The NDRC has acknowledged these shortcomings and plans to update its formula. The exact details of the update, like its expected completion date, are unknown as Feburary 2010.[59]
2010 Energy Plan has the potential of benefiting cleaner energy source by raising the financial cost of polluting
Through a new energy plan outlined by the Chinese government, renewable energy providers in China have the potential of supplying 10% of China’s energy by 2010. The 2010 energy plan is designed to foster the development of clean energy sources like wind, solar, nuclear, and hydro.[60] The Chinese government is trying to diversify its economy away from coal, which accounts for 70% of the country’s energy and is the largest sources of greenhouse gas emissions. Energy sources from other hydrocarbons like oil and gas have the potential of increasing China’s reliance on imports and requiring the country to secure energy sources years in advance.[61] As a result, the plan focuses on developing domestic sources of renewable energy. The methods by which the government plans to boost its clean energy sources include new tariffs from wind energy, subsidies for solar cell producers, and raising power prices. A rise in the cost of power has the potential to increase efficiency and make more-expensive renewable power sources more appealing.[62] However, the Chinese government has not promised to raise power prices by the end of 2009, and has been traditionally slow to adjust energy prices.[63]
In November 2009, the Chinese government announced plans to improve its energy efficiency by 2020. China has pledge to cut carbon dioxide emissions per unit of gross domestic product by 40 to 45 per cent by 2020 compared with levels in 2005.[64] Although this may not reduce overall carbon emission, China's pledge signifies the country's commitment to increasing its use of renewable energy sources and improving the efficiency of its oil, gas, and coal operations.[65] Additionally, the pledge shows the China is willing to cooperate with international demand for more environmentally friendly forms of energy.[66]
In November 2009, President Obama and President Hu Jintao revealed an agreement that has the potential of increasing consumption of clean energy sources through bilateral cooperation.[67] The far-reaching agreement is designed to help the two largest consumers of coal power combine their technology and production capacity to curb pollutants.[68] The agreement includes intiatives for the construction research centers, the production of electrical cars and more energy-efficient manufacturing products, and the reduction of carbon emissions from burning coal.[69]
In March 2010, Royal Dutch Shell argued that rising energy needs and the demand for cleaning fuel have the potential of making China the largest gas market by 2020.[70] The biggest challenge facing the partnership between PetroChina and Royal Dutch Shell is where to find a reliable supply of natural gas. Relatively limited natural resources in China have the potential of making gas exports a lucrative business as well.[71] The expected level of natural gas demand in China has also led to several joint ventures between PetroChina and several oil majors. In August 2009, PetroChina and Exxon Mobil signed a $41 billion deal in which Exxon agreed to supply the Chinese energy company with liquid natural gas(LNG) for the next 20 years.[72] Exxon plans on supplying PetroChina will LNG extracted from its Gorgon project in Australia.In addition to Exxon's interest, Chevron and Royal Dutch shell also have stakes in the Gorgon LNG facility. The facility's proximity to China makes it a relatively cheaper option for gas exports.[73]
In August 2010, the Chinese Securities Journal reported that China plans to release a new $739 billion stimulus plan designed to keep new energy sources viable through 2020.[74] Although how the money will be allocated has not been released, the stimulus money has the potential of benefiting industries such as nuclear, wind, solar and biomass energy, as well as clean coal, smart grid, distributed energy and new energy sources for vehicles.[75] Stimulus packages have had success in growing Chinese energy companies; Chinese companies produce 50% of the worlds solar panels, and China has 3 of the top 10 global wind companies.[76] These two industries have the potential of benefiting significantly from this stimulus in terms of margin improvements, higher production volumes, and higher levels of r&d investment.[77]
China's energy needs are massive and produce many environmental and economic problems
Although China is the world’s largest producer and consumer of coal, the country’s reliance on coal as an inexpensive form of energy has produced several environmental and economic problems. According to a report published by MIT, China contains 13% of the world’s proven reserves, enough coal power to sustain its economic growth for a century. China's proven reserves are massive, but coal-derived power makes up 83% of China’s annual energy consumption.[78] The world average is 40%.[79] According to a report by Greenpeace, the World Wildlife Fund, and The Energy Foundation, China’s dependence on coal as a cheap source of energy has numerous environmental, social, and economic costs.[80] The report, entitled The True Cost of Coal, outlined the impact water pollution, air pollution, and mining accidents had on the Chinese economy.[81] 80% of China’s carbon dioxide emissions come from burning coal.[82] That pollution not only contaminates the water and air in China, but also is the leading cause of death in China; more than a million die each year from pollution-related illnesses.[83] The report estimated that the environmental and social costs associated with the country’s use of coal amounted to RMB1.7 trillion in 2007, approximately 7.1% of China’s GDP for that year.
In response to those studies, Beijing is reforming several of its coal facilities to improve safety, quality and efficiency. The Chinese government also plans to modernize its electric grid and coal transportation railways.[84] Of the country’s $585 billion stimulus package, $14.6 billion has been set aside for the implementation of ultrahigh voltage power networks.[85] However, the government plans to maintain investments of $43.86 billion in 2009 to increase power-generation capacity.[86]
Additionally, the operation and construction of the Three Gorges Dam illustrates the difficulties that arise from major construction projects in China. The Three Gorges Dam, which holds 10 world records, is the world’s biggest dam, power plant, and consumer of dirt, stone, concrete, and steel.[87] With maximum power capacity of 22,500 MW, the Three Gorges Dam is the anchor of the Chinese hydroelectric system, which included 12 hydropower mega-bases on the Yangtze River as of 2007.[88] The construction of the Three Gorges Dam displaced 1.13 million people, and polluted the drinking water in many areas of China.[89] Although major construction on the dam has ended, pollution from the dam continues to endanger drinking water.
China's massive appetite for fuel drives it to create giant energy-generation projects like the Three Gorges Dam, but it's still not enough.
Structure of Coal Consumption in China 2007[90]
Gas shortages have the potential of plaguing China and producers during Fall/Winter 2010
By November 2010, gas supply in China was already falling short of peak demand, requiring suppliers to prioritize residential consumers.[91] While the government and producers have taken measures to alleviate demand pressures, more pipelines and additional underground storage may not be enough to meet potential demand.[92] For example, PetroChina is lifting output from major fields and plans to prioritize supply to Beijing. Peak winter demand in Beijing rose to 60 million cubic meters per day in 2009 from 4 million cubic meters per day at other times of the year. for 2010, demand is expected to rise 15% year-over-year.[93] To meet this demand, PetroChina plans to utilize its relatively-new Shaanxi-Beijing pipeline. Despite this, domestic production has the potential of falling short of domestic demand during the winter of 2010.[94] For China, a domestic supply shortage may force the government or its producers to import more natural gas from abroad and deal with power outages throughout the country.[95]
China's automotive industry is driving force behind gasoline consumption
Despite its reliance on foreign imports, the Chinese oil industry continues to grow in order to provide energy to a developing economy and a growing automobile industry. According to China Daily, it is probable that oil demand will grow by an annual average of 4.5 percent from 2007 to 2010 and an annual average of 3.3 percent from 2010 to 2020.[96] The relatively large increases in oil demand are a result of the rising consumption of refined oil products by automotive drivers in China. Gasoline, kerosene, and diesel are expected to outpace total oil demand over the next 13 years as Chinese automakers produce more cars. In particular, growth in gasoline demand is most affected by China’s expanding automotive industry.[97] While gasoline demand increased 5.7% in 2007, vehicles sales expanded at double-digit rates.[98] As the automotive industry grows, gasoline has the potential to becoming a larger fraction of the total oil demanded by China. In 2006, refined oil demand accounted for 47.1% of total demand, but that percentage is capable of rising to 59.5% by 2020.[99]
Chinese Banks and Oil Companies Secure Future Oil Supplies from Brazil and Russia
In March 2009, the Chinese government agreed to finance oil-field developments with Brazilian and Russian oil companies in exchange for guaranteed supplies of crude oil.[100] China will loan the Brazilian oil company Petrobras (PBR) $10 billion for the development of its pre-salt fields. In return, Brazil will supply China with 100,000 to 160,000 barrels of crude oil per day.[101] Petrobras (PBR) has reached similar agreements with Unipec, a subsidiary of China Petroleum and Chemical Corporation. Petrobras (PBR) will sell between 60,000 and 100,000 barrels of crude per day to Unipec in exchange for $10 billion in loans from Unipec and the China Development Bank.[102] In March 2009, the China Development Bank signed a $15 billion financing deal with Russia’s government-controlled oil company Rosneftand a $10 billion deal with Transneft in exchange for future oil supplies.[103] In exchange for the loans to Russian oil companies, China will receive oil supplies and a new pipeline spur to China.[104] For China, the deals secure 15 million tons of oil (300,000 bpd) every year for the next 20 years.[105] China has also agreed to loan Venezuela $12 billion in order to develop oil projects that have the potential to increase Venezuelan exports to China from 330,000 bpd to 1 million bpd by 2015.[106]
China’s financing contracts with Petrobras (PBR) and Rosneft are part of the country’s strategy of securing future energy contracts in order to meet the country’s rising demand for energy. From its contracts with Brazil, Chinese oil companies will be able to purchase up to 320,000 barrels of crude oil a day.[107] However, abroad operations expose Chinese companies to political risk and instability.
Natural gas, renewable energy sources, and nuclear energy require government spending on infrastructure to become stable sources of energy
In addition to being the world leader in coal consumption, China emits more greenhouse gases than any other country in the world. While coal-derived power accounts for 80% of the greenhouse gases China emits, the government’s economic stimulus package has the potential to improve the capacity of China’s renewable energy sector and reduce the country's carbon emissions.[108] According to the National Development and Reform Commission, the subsidies are part of China’s plan to increase China’s usage of renewable energy to 10% by 2010 from 7.5% in 2005 and to increase solar-power capacity from 70,000 kilowatts to 300,000 kilowatts by 2010.[109] According to David Chu, who heads the U.S's Department of Energy, China is spending $9 billion per month on renewable energy sources.[110] In his opinion, this consistent spending has contributed substantially to developing China's high-tech renewable technology, which has surpassed that of the United States.[111]
For China, nuclear power and natural gas offer alternative power sources to coal. China uses nuclear plants to supply power to areas in which coal is expensive to transport.[112] Nuclear power plants are primarily located in coastal and rural areas located far away from coalfields. As a result, the Chinese government has plans to increase the amount of power the country generates from nuclear plants, which was 8.6 Gwe as of April 2009.[113] The National Development and Reform Commission wants to increase China’s nuclear power capacity 10-fold to 160 Gwe by 2030.[114] However, the country’s nuclear plans require a substantial increase in the efficiency of its current power plants as well as improved nuclear technology.[115] Additionally, the Chinese government’s plans necessitate the government working with various local governments, which can be inefficient and corrupt.[116]
The Chinese government considers natural gas both an environmentally safer fuel than coal and a stable source of energy.[117] For that reason, China’s Ministry of Science and Technology predicts that natural gas consumption in China has the potential of growing at a rate of 15 percent annually from 2009 to 2030 and reaching 200 billion cubic meters by 2020.[118] However, rapid increases in natural gas consumption have the potential to cause supply gaps and force China to rely on natural gas imports. In order to prevent a supply shortage, the government has plans to replace outdated infrastructure and build additional pipelines and liquefied natural gas (LNG) facilities.[119] Between 2002 and 2020, these government investments have the potential of reaching $32.1 billion.[120]
Originally set to 40 GWe of energy by 2020, China's expected nuclear capacity has the potential of reaching 70 to 80 GWe by 2020.[121] Nuclear energy's growth in China has occurred mainly around the coastal areas where the economies are developing rapidly.[122] In these areas, nuclear plants provide an alternative energy source close to their centers of demand. While coal is the primary energy source in China, transporting coal from the north or northwest to several provinces in China is expensive and difficult.[123] By providing a more stable and environmentally friendly energy source, nuclear energy has received a significant increase in investment.[124] As of September 2010, the China National Nuclear Corporation (CNNC) alone plans to invest CNY 800 billion ($120 billion) into several nuclear energy projects by 2020. By 2015, total investment by CNNC has the potential of reaching CNY 500 billion ($75 billion). China has 13 nuclear power reactors as of December 2010, but 25 additional reactors are under construction and have the potential of becoming operation soon.[125]
China's renewable energy market has the potential of reaching $1 trillion
China's Renewable Energy Targets, by Type[126]
In September 2009, a collection of Western companies reported that China's renewable energy market has the potential of generating annual revenue between $500 billion to $1 trillion.[127] The China Greentech Report 2009 outlined 300 clean energy services that are capable of opening in China if the Country's renewable energy market continues to grow. In 2009, the Chinese government predicted that the country has the potential of using clean sources of energy to provide 20% of its annual energy consumption and has provided subsidies and contracts to solar, wind and hydroelectricity companies.[128] But, because wind, solar, and water are not as financially viable sources of energy relative to oil and coal, manufacturers of clean technologically have required government support and subsidies.[129] The report acknowledges that the support of government and corporate policy makers has the potential of being vital to the future success of renewable energy sources in China.[130]
A large source of growth for Chinese solar and wind companies has come from exports. China's exports of green goods rose 400% from 2004 to 2009.[131] Also, China has the potential of producing more than half of the world's wind turbines and solar panels by the end of the year.[132] In part, the international growth of Chinese solar companies can be attributed to loans and tax incentives from state-owned banks. Loans are given to Chinese solar companies by the China Development Bank in order to develop the industry into an internationally competitive sector.[133] Chinese companies have had access to plenty of cheap capital for expansions. Loans made to Trina Solar (TSL), Suntech Power Holdings (STP) , and Yingli, and JA Solar Holdings, (JASO) have totaled $16 billion for 2010.[134]
Companies Affected by China's Energy Needs
China's Energy breakdown in 1978 and 2006. In 2006, renewable sources of energy accounted for less than 1% of China's energy consumption
Key Chinese Players
China National Petroleum Corporation: China National Petroleum Corporation is a state-owned integrated oil and gas company with proved oil reserves of 3.7 billion barrels.[135] In 2007, CNPC produced 172 million tons of crude oil and 114.4 billion cubic meters of natural gas.[136] The company also processes crude oil into refined petro-products that can be used as fuel.[137] In 2007, CNPC produced 121. 73 million metric tons of crude oil domestically and refined 76.81 million metric tons of crude oil.[138] CNPC transports its crude oil, natural gas, and refined products through the company’s 39,316 kilometers of pipeline, railroads, and third-party pipeline systems. CNPC also operates as an engineering and construction company, an oilfield services provider, and a petroleum equipment manufacturer.[139] CNPC is the parent company of PetroChina Company (PTR).
Sinopec ( China Petroleum and Chemical Corporation): Sinopec is a state-owned integrated energy and chemical company in the People’s Republic of China.[140] In 2007, the company’s exploration and production segment sold 38.85 million tons of crude oil and 6.3 billion cubic meters of natural gas.[141] Through its refining segment, the company processed 3.1 million barrels of crude per day. Sinopec also produces various chemical products.[142]
China National Offshore Oil Corporation: CNOOC is a producer of offshore crude oil and natural gas as well as an independent exploration and production company.[143] CNOOC has offshore production areas in Bohai Bay, western South China Sea, eastern South China Sea, East China Sea, and offshore of Indonesia.[144] The company owned net proved reserves of approximately 2.6 billion barrels of oil as of December 31, 2007. Daily production in 2007 was 469, 407 barrels of oil.[145]
China Shenhua Energy Co.: Shenhua is an integrated coal-based energy company that engages in the production, processing, transportation, and sale of coal and thermal coal products.[146] With respect to proved coal reserves, it is the second largest publicly traded coal company in the world.[147] Shenhua had recoverable coal reserves of 11.482 billion ton as of December 31, 2007.[148] It transports its coal products all-over China through a network of ports and dedicated rail lines.[149] As of December 31,2007, Shenhua controlled and operated 13 coal-fired power plants with total installed capacity of 15,091megawatts.[150]
China Natural Gas, Inc. (CHNG): China Natural Gas provides natural gas for industrial, commercial and residential use as well as Compressed Natural Gas for vehicular fuel in primarily in the Xi'an area.[151] The company distributes natural gas through a network of approximately 120 kilometers of high-pressure pipelines.[152] China Natural Gas also owns 35 CNG fuel stations in China as of December 31, 2008.[153]
Foreign Companies Affected by a Rising Demand for Energy in China
Oil and Gas exporters:' Due to growing oil demand, China’s oil and gas imports have grown drastically. China became a net importer of oil during the 1990s, and, in 2007, imported oil accounted for 47% of the country’s total oil consumption.[154] While China’s crude oil production increased 1.6% in 2007, imports rose by 12.4%.[155] Of those imports, approximately 50% come from countries in the Middle East, particularly Iran and Saudi Arabia.[156] China’s “oil” relationship with Gulf Coast countries has encouraged those countries to invest in China’s growing oil industry; in 2006, Gulf states invested $20 billion in China’s oil industry.[157] In 2006, trade between those states and China totaled $135 billion.[158] China also needs natural gas. In June 2009, Russia agreed to supply China with natural gas beginning in 2011 in a deal that has the potential of reaching $100 billion.[159]
China's annual crude oil imports( in million tons)
The economic crisis beginning in 2007 has also impacted the amount of oil that China imports. In 2008, China imported 14.71 million tons of oil, an increase of 107.4% year over year.[160]
Petrobras (PBR)(Brazil)
Rosneft (Russia)
Gazprom (GZPFY)
LUKOIL (LUKOY)
OPEC
PDVSA(Venezuela)
PetroChina Company (PTR)
Coal Exporters: While 13% of the world's coal reserves are located in China, the country has the potential of being a net coal importer of 10 to 20 million tons of coal in 2009 due to lagging production and transportation systems and higher domestic prices.[161] In March 2009, China imported 5.72 million tonnes of coal in March, up 37.4% year on year.[162] With domestic demand for coal-derived power outpacing domestic supply, lower international prices make coal imports more attractive for the Chinese government.[163] Rising coal imports has the potential of benefiting coal miners located in the pacific region, especially Australian coal companies.[164]
Peabody Energy (BTU)
BHP Billiton (BHP)
CONSOL Energy (CNX)
Natural Gas and LNG producers operating in Australia: From 2010 to 2020, PetroChina plans to increase its domestic gas production significantly in order meet domestic demand for natural-gas-derived power, which is expected to make up 10% of China's total energy consumption by 2020.[165] With each new domestic well costing approximately $300,000 to drill, PetroChina's expected gas output depends heavily on the company's ability to achieve adequate long-term financing. As a result, PetroChina has struck some key long-term supply deals with foreign gas producers. While Chinese companies are interested in building LNG terminals as part of the country's plan to use more environmentally-friendly fuels, Australia is an attractive source for Chinese companies given the country's proximity, political stability, and supply of natural gas resources.[166] For example, the Browse fields, from which Woodside Petroleum (ASX:WPL) extracts the gas eventually shipped to China, are estimated to contain 13 trillion cubic feet of sales gas and 355 million barrels of condensate.[167]
Exxon Mobil (XOM): Signed $41 Billion deal with PetroChina in August 2009 to supply the company with LNG until 2030[168]
Chevron: In a $4.7 billion joint venture with PetroChina, Chevron plans to develop natural gas fields in Western Australia.[169]
BP: Opted to process fuel from the Browse fields.[170]
Royal Dutch Shell (RDS'A): Opted to process fuel from the Browse fields.[171]
Woodside Petroleum (ASX:WPL): The company has supplied 3 million metric tons of fuel/year since 2006 to a terminal owned by China National Offshore Corp.[172]
Nuclear Companies and Uranium Suppliers: In 2007, China announced that it would spend $50 billion to build 32 nuclear plants by 2020. The nuclear construction project announced in 2007 is one of the reasons some analysts argue that China has the potential of building 300 nuclear plants between 2000 and 2050.[173] In 2007, China signed a multibillion dollar deal with Toshiba's Westinghouse Electric Co. and the Shaw Group to build four nuclear plants beginning in 2009.[174] In 2007, the Chinese Premier Wen Jiabao traveled to Australia and Niger in order to secure contracts for uranium.[175]
BHP Billiton
Energy Resources of Australia
Rio Tinto (RTP)
Paladin Resources
Cameco (CCJ)
Denison Mines (DNN)
Toshiba (TOSBF)
General Electric Company (GE)
Shaw Group (SGR)
Renewable Energy Companies: China's government spending and subsidies have the potential of benefiting producers of renewable energy. While 8% of China energy came from renewable sources in 2009, the government plans to increase that to 15% by 2020. In order to accomplish that, China has created legislation and financial incentives for electric companies to use clean sources of energy.[176] China passed a law in 2005 that gives fixed rate tariffs and carbon credits to renewable energy companies. In 2008, China's $585 billion stimulus package devoted $366 million to subsidize the construction of solar energy panels by Chinese solar companies and $600 million to wind and nuclear power companies.[177] Since 2005, China's wind capacity has doubled every year.[178]
Suntech Power Holdings (STP)
Canadian Solar (CSIQ)
JA Solar Holdings, (JASO)
Solarfun Power Holdings (SOLF)
First Solar (FSLR)
Clayton Williams Energy (CWEI)
BP (BP)
Camco Financial (CAFI)
Nordex
ReneSola (SOL)
Suntech Power Holdings (STP)
The Transportation Industry: China depends on rail, air, and marine transportation companies to transport its coal and oil across the country.[179] In 2008, China began devoting more of its railway capacity to transport coal in order to avoid electricity shortfalls.[180] Industry reports indicated that 343.85 million tonnes of power-coal were supplied in the first half of 2008, an increase of 15.6 percent year on year. China also relies on foreign companies to transport oil and coal supplies from overseas.[181]
Eastern Siberia Railway ( a subsidiary of Russian Railways (RZD))
China Ocean Shipping Group
Exxon Mobil (XOM)
China Railways
Chinese Eastern Railways
Guangshen Railway Company (GSH)
China Southern Airlines Company (ZNH)
Domestic producers of Oil: When global oil prices increased rapidly during the first half of 2008, domestic prices remained capped at a low level. To minimize losses, Chinese refineries cut or stopped production. Those production cuts led to smaller locally-produced supplies of refined oil products, and higher supplies levels of foreign-produced oil.[182]
Oilfield Services and Engineering Companies: The global oil-field services and engineering service market has grown in response to China's increasing oil and natural gas production. While the engineering and energy services market in China is dominated by domestic companies like PetroChina, Sinopec and CNOOC, the country's growing energy production has the potential of creating the need for foreign companies to play a larger role.
Baker Hughes (BHI)
Schlumberger N.V. (SLB)
Halliburton Company (HAL)
China was the third largest producing nation of alcohol, behind USA and Brazil. The domestic demand for edible alcohol grew from 2.3 million tons in 2004 to 4.6 million tons in 2009, a CAGR of 14.9%. The increase can be attributed to the demand for baijiu between 2004-2007. According to Frost & Sullivan, the domestic demand for edible alcohol will grow at 16.6% CAGR from 2009 to 2012, reaching 7.3 million tons in 2012. [1]
The company's initial public offering of stock filed on the NASDAQ exchange on 27 April 2010. The initial price offer range is $12-$14, and the company plans to sell 5.5 million shares to raise $72 million. [1]
For calender year 2007 to 2009, the company's revenues increased from $71.4 million to $155.4 million, a CAGR of 47.5%. In the same time frame, the company grew its net income from $8.6 million to $24.4 million, a CAGR of 68.4%. [1]
Although it is the world's fourth largest economy, China is second in energy consumption only to the United States. China is capable of overtaking the U.S. as the world's largest energy consumer by 2010 according to the EIA.[1] China's massive energy needs stem from the numerous infrastructure,transportation, and industrial projects created by the government and private companies, and[2] according to the IEA, China's overall population has the potential of reaching 1.5 billion and require 8,600 terawatts of electricity in 2030.[3]
In order to meet the energy needs of an expanding population and numerous construction projects, China's primary source of energy has come from coal, which is a relatively inexpensive resource in China.[4] However, China's coal power accounts for 80% of greenhouse gas emissions produced in the country, and is one of the reasons why China is the world's largest producer of carbon dioxide.[5] The country is capable of reducing its reliance on coal power through investments in the development of "cleaner" sources of energy such as nuclear energy, hydroelectric energy, and natural gas, but these require substantial investments from the government and consume numerous natural resources to build. For example, the Three Gorges Dam, which is capable of producing the energy equivalent of 10 Hoover Dams, is the world's largest consumer of dirt, stone, concrete, and steel and cost an estimated $25 billion to build.[6] While Chinese energy companies continue to develop domestic energy supplies, many have invested in the development of foreign oil fields in order to secure future supplies.
Trends and Forces
Estimates of 2011 Energy Demand stress the importance of Coal
In January 2011, the National Energy Administration (NEA) announced its prediction that China's energy demand is likely to rise in 2011, but at slower pace than in 2010.[7] Although it expects economic growth to continue in 2011, energy supply and demand is expected to "balance" in 2011.[8] The NEA predicts that the growth rate of coal consumption will be vital to energy demand growth, but has the potential of being dragged down by the macro-economic policies.[9] In particular, the development of renewable energy and the energy saving targets set for the national 12th Five-year Plan starting from 2011.[10] Overall, NEA predicts electricity consumption has the potential of increase 9% over 2010 levels.[11]
According to Citigroup, China's new coal imports have the potential of rising 63% in 2011 due to surging domestic demand.[12] Driven by demand from steel and cement producers, overall demand has the potential of rising 7.3% in 2011 compared to 2010 levels.[13] On the other hand, supplies are only expected to increase by 4.8% in 2011 compared to 2010 levels.[14]
Rising net imports are likely to benefit international producers and shippers. A surge in coal imports has the potential of driving international coal prices highers while simultaneously increasing lift freight rates.[15] Within China, domestic prices are also likely to increase if domestic demand outpaces domestic production significantly.[16] Chinese coal producers such as China Shenhua Energy Company (HKG:1088) and Yanzhou Coal Mining Company (YZC) have the potential of benefiting from higher domestic prices as well as higher international prices.[17]
International and domestic energy companies vie for dominance in the Asian fuel oil market
With market dynamics changing, several firms are competing for control over the largest fuel oil market.[18] The market, trade volumes, and the number of big players have increased significantly as the Chinese economy continues to grow and use oil.[19] However, the presence of big players in the Signapore market such as Royal Dutch Shell, BP, PetroChina, and Sinopec have hindered any one firm from dominating the oil market.[20] BP, which led the Asian fuel oil trade from approximately 2000 to 2010, has reduced its position substantially. Large firms also employ Storage facilities in order to buy more oil when prices are cheap and sell when prices rise.[21] However, the large amount of big players in the fuel oil market has reduced the ability of firms to meet their price objectives and make storing oil profitable.[22] In fact, storing large amount of fuel for future sale exposes the owner to a possible drop in prices, leaving them with a large amount of fuel worth less than when they purchased it.[23] With less of a propensity to be dominated by one firm, the Asian fuel oil market have the potential of being more risky for larger firms than it has been in the past.[24]
China National Offshore Oil Corporation takes precautionary measures to avoid deepwater spill
In the wake of disastrous BP gulf oil spill, China National Offshore Oil Corporation (CNOOC) has ordered checks on its projects to avoid similar spills.[25] In June 2010, the country's largest offshore oil producer began updating the blowout preventer system of a rig in Shanghai in order to enhance the safety of its production facilities. Also in June 2010, CNOOC announced that it will double its oil leak prevention bases to 14.[26] From 2010 to 2015, CNOOC has the potential of devouting significant financial resources to upgrading its deep-water diving equipment.[27] As the BP disaster continues to spread, it is likely more Chinese oil companies will take measures to improve the safety of their offshore equipment.[28]
To boost reserves and production, Chinese companies plan for overseas acquisitions
In March 2010, PetroChina announced that it plans to spend at least $60 billion over 2010 to 2020 on overseas acquisitions. From 2005 to 2009, PetroChina spent between $2 billion and $3 billion annually on acquisitions.[29] As China's energy needs grow, spending by Chinese companies on mining and energy acquisitions has also risen, reaching a record $32 billion 2009.[30] For example, annual domestic oil production has the potential of reaching 200 million tons by 2020; however, demand is capable of increasing to nearly 600 million tons by 2020.[31]
Although the target segments or target geographic regions were not announced, PetroChina and Cnooc made significant acquisitions in the refinery, gas, and coal segments in 2009 and 2010.[32] In 2010, Cnooc agreed to take a majority stake in Argentina's second-largest oil producer for $3.1 billion.[33] PetroChina spent nearly $7 billion in 2009 and early 2010 to buy refineries and reserves in Australia, Canada, Singapore and Central Asia.[34] In March 2010, PetroChina and Royal Dutch Shell agreed to buy Australian gas producer Arrow Energy for $3.2 billion.[35] The Arrow acquisitions is designed to improve the development of PetroChina's coal-bed methane reserves that have the potential of containing as much as 38 trillion cubic meters.[36] PetroChina plans to increase its annual output capacity of the fuel to 4 billion cubic meters within five years, which represents 20% of China's projected coal-bed methane output by 2015.[37]
In an effort to reduce coal consumption by 2020, China intends to triple the use of gas to about 10 percent of energy consumption.[38] As much as half of PetroChina's oil and gas has the potential of coming from abroad by 2020.[39] A large portion of those imports have the potential of coming from Russian pipelines. China plans to import 68 billion cubic meters per year of natural gas from Russia through two pipelines.[40] As of March 2010, overseas production represents a 10% of overall energy production.[41] While the gas deals are intended to alleviate China's dependency on coal-derived energy, PetroChina intends to focus on oil and gas and has no definite plans to invest in solar or wind energy. [42]
In April 2010, China Petrochemical, the Beijing-based company known as Sinopec, agreed to pay ConocoPhillips $4.65 billion for its stake in Syncrude.[43] China Petrochemical Corp. paid more for the stake than analysts expected: ConocoPhillips received a 20% premium based on the stake's value implied last week by Canadian Oil Sands Trust’s market worth, debt, and cash.[44] This premium price reflects not only the increased level of acquisitions by Chinese energy companies, but also that they are willing to pay premium prices to acquire those assets.[45] Asian nations such as China, South Korea, Japan and India are seeking energy resources overseas in order to drive their economies, which has the potential of creating an "asset race" as the list of available resources for purchase becomes smaller.[46]
Additional developmental projects have come from sovereign wealth funds, which can provide financing to companies and trusts that cannot afford to fund their own operations.[47] In May 2010, China Investment Corp., a state-owned sovereign wealth fund, agreed to invest approximately $1.23 billion in developing 237,000 acres owned by Penn West Trust in northern Alberta.[48] The two entities will form a joint venture in which Penn West will have a 55% stake and China Investment Corp. will have a 45% stake. Penn West had held the acreage for a while, but has been unable to fund its own development. China Investment Corp.has the potential of providing additional financing as the the acreage is developed.[49] This joint venture is the first major oil sands deal coming from a sovereign wealth fund, not an oil company.[50] In the same month, a group of Chinese banks preliminarily agreed to build three refineries in Nigeria at a cost of $23 billion.[51] Nigeria cannot afford to build refineries to produce enough for its population, and the new refineries are likely to be used for domestic Nigeria consumption. As a result, the goal of the banks is not to secure oil supplies, but to profit from Nigerian oil consumption.[52]
Royal Dutch Shell (RDS'A), BP (BP), Hess and CONOCOPHILLIPS (COP) among several partnerships formed with Chinese energy companies in order to develop their shale gas prospects over 2009 to 2010.[53] Chinese companies like PetroChina and Sinopec have targeted oil majors with expertise in shale oil and gas exploration and production.[54]
Challenges of supply and demand stem partially from oil pricing model, policy issues
In China, the National Development and Reform Commission of China (NDRC) has the ability to control wholesale price ceilings for crude oil and petroleum products. While NDRC's fixed prices often remove oil-price volatility, the prices have the potential of negatively impacting producers if the set prices do not reflect the market accurately. The most recent price announcement, which was in November 2009, pushed the price ceiling to a record high.[55] While that price ceiling has remained fixed, the market for oil in china has changed dramatically.[56] Low demand during winter and high inventory levels forced the local suppliers like Sinopec and PetroChina into price wars and have led them to cut gasoline and diesel prices significantly. Since the announcement in November 2009, when benchmark prices were $74/barrel, benchmark prices have risen to $80/barrel and fallen to $72/barrel.[57] This sparked rumors that the NDRC would announce a price reduction before the first of January. Companies such as Sinopec and PetroChina cut their prices in anticipation changes to the price ceiling. Those firms lost money when the NDRC kept prices the same. The pricing problems of early 2010 demonstrate the potential downsides of the NDRC pricing formula and the costs incurred by oil company as a result of those downsides. The recent pricing inaction has displayed the inherent deficiency of the NDRC pricing formula.[58] According to analysts at Seekingalpha.com, the formula disregards the short-term market supply/demand fundamentals. The NDRC has acknowledged these shortcomings and plans to update its formula. The exact details of the update, like its expected completion date, are unknown as Feburary 2010.[59]
2010 Energy Plan has the potential of benefiting cleaner energy source by raising the financial cost of polluting
Through a new energy plan outlined by the Chinese government, renewable energy providers in China have the potential of supplying 10% of China’s energy by 2010. The 2010 energy plan is designed to foster the development of clean energy sources like wind, solar, nuclear, and hydro.[60] The Chinese government is trying to diversify its economy away from coal, which accounts for 70% of the country’s energy and is the largest sources of greenhouse gas emissions. Energy sources from other hydrocarbons like oil and gas have the potential of increasing China’s reliance on imports and requiring the country to secure energy sources years in advance.[61] As a result, the plan focuses on developing domestic sources of renewable energy. The methods by which the government plans to boost its clean energy sources include new tariffs from wind energy, subsidies for solar cell producers, and raising power prices. A rise in the cost of power has the potential to increase efficiency and make more-expensive renewable power sources more appealing.[62] However, the Chinese government has not promised to raise power prices by the end of 2009, and has been traditionally slow to adjust energy prices.[63]
In November 2009, the Chinese government announced plans to improve its energy efficiency by 2020. China has pledge to cut carbon dioxide emissions per unit of gross domestic product by 40 to 45 per cent by 2020 compared with levels in 2005.[64] Although this may not reduce overall carbon emission, China's pledge signifies the country's commitment to increasing its use of renewable energy sources and improving the efficiency of its oil, gas, and coal operations.[65] Additionally, the pledge shows the China is willing to cooperate with international demand for more environmentally friendly forms of energy.[66]
In November 2009, President Obama and President Hu Jintao revealed an agreement that has the potential of increasing consumption of clean energy sources through bilateral cooperation.[67] The far-reaching agreement is designed to help the two largest consumers of coal power combine their technology and production capacity to curb pollutants.[68] The agreement includes intiatives for the construction research centers, the production of electrical cars and more energy-efficient manufacturing products, and the reduction of carbon emissions from burning coal.[69]
In March 2010, Royal Dutch Shell argued that rising energy needs and the demand for cleaning fuel have the potential of making China the largest gas market by 2020.[70] The biggest challenge facing the partnership between PetroChina and Royal Dutch Shell is where to find a reliable supply of natural gas. Relatively limited natural resources in China have the potential of making gas exports a lucrative business as well.[71] The expected level of natural gas demand in China has also led to several joint ventures between PetroChina and several oil majors. In August 2009, PetroChina and Exxon Mobil signed a $41 billion deal in which Exxon agreed to supply the Chinese energy company with liquid natural gas(LNG) for the next 20 years.[72] Exxon plans on supplying PetroChina will LNG extracted from its Gorgon project in Australia.In addition to Exxon's interest, Chevron and Royal Dutch shell also have stakes in the Gorgon LNG facility. The facility's proximity to China makes it a relatively cheaper option for gas exports.[73]
In August 2010, the Chinese Securities Journal reported that China plans to release a new $739 billion stimulus plan designed to keep new energy sources viable through 2020.[74] Although how the money will be allocated has not been released, the stimulus money has the potential of benefiting industries such as nuclear, wind, solar and biomass energy, as well as clean coal, smart grid, distributed energy and new energy sources for vehicles.[75] Stimulus packages have had success in growing Chinese energy companies; Chinese companies produce 50% of the worlds solar panels, and China has 3 of the top 10 global wind companies.[76] These two industries have the potential of benefiting significantly from this stimulus in terms of margin improvements, higher production volumes, and higher levels of r&d investment.[77]
China's energy needs are massive and produce many environmental and economic problems
Although China is the world’s largest producer and consumer of coal, the country’s reliance on coal as an inexpensive form of energy has produced several environmental and economic problems. According to a report published by MIT, China contains 13% of the world’s proven reserves, enough coal power to sustain its economic growth for a century. China's proven reserves are massive, but coal-derived power makes up 83% of China’s annual energy consumption.[78] The world average is 40%.[79] According to a report by Greenpeace, the World Wildlife Fund, and The Energy Foundation, China’s dependence on coal as a cheap source of energy has numerous environmental, social, and economic costs.[80] The report, entitled The True Cost of Coal, outlined the impact water pollution, air pollution, and mining accidents had on the Chinese economy.[81] 80% of China’s carbon dioxide emissions come from burning coal.[82] That pollution not only contaminates the water and air in China, but also is the leading cause of death in China; more than a million die each year from pollution-related illnesses.[83] The report estimated that the environmental and social costs associated with the country’s use of coal amounted to RMB1.7 trillion in 2007, approximately 7.1% of China’s GDP for that year.
In response to those studies, Beijing is reforming several of its coal facilities to improve safety, quality and efficiency. The Chinese government also plans to modernize its electric grid and coal transportation railways.[84] Of the country’s $585 billion stimulus package, $14.6 billion has been set aside for the implementation of ultrahigh voltage power networks.[85] However, the government plans to maintain investments of $43.86 billion in 2009 to increase power-generation capacity.[86]
Additionally, the operation and construction of the Three Gorges Dam illustrates the difficulties that arise from major construction projects in China. The Three Gorges Dam, which holds 10 world records, is the world’s biggest dam, power plant, and consumer of dirt, stone, concrete, and steel.[87] With maximum power capacity of 22,500 MW, the Three Gorges Dam is the anchor of the Chinese hydroelectric system, which included 12 hydropower mega-bases on the Yangtze River as of 2007.[88] The construction of the Three Gorges Dam displaced 1.13 million people, and polluted the drinking water in many areas of China.[89] Although major construction on the dam has ended, pollution from the dam continues to endanger drinking water.
China's massive appetite for fuel drives it to create giant energy-generation projects like the Three Gorges Dam, but it's still not enough.
Structure of Coal Consumption in China 2007[90]
Gas shortages have the potential of plaguing China and producers during Fall/Winter 2010
By November 2010, gas supply in China was already falling short of peak demand, requiring suppliers to prioritize residential consumers.[91] While the government and producers have taken measures to alleviate demand pressures, more pipelines and additional underground storage may not be enough to meet potential demand.[92] For example, PetroChina is lifting output from major fields and plans to prioritize supply to Beijing. Peak winter demand in Beijing rose to 60 million cubic meters per day in 2009 from 4 million cubic meters per day at other times of the year. for 2010, demand is expected to rise 15% year-over-year.[93] To meet this demand, PetroChina plans to utilize its relatively-new Shaanxi-Beijing pipeline. Despite this, domestic production has the potential of falling short of domestic demand during the winter of 2010.[94] For China, a domestic supply shortage may force the government or its producers to import more natural gas from abroad and deal with power outages throughout the country.[95]
China's automotive industry is driving force behind gasoline consumption
Despite its reliance on foreign imports, the Chinese oil industry continues to grow in order to provide energy to a developing economy and a growing automobile industry. According to China Daily, it is probable that oil demand will grow by an annual average of 4.5 percent from 2007 to 2010 and an annual average of 3.3 percent from 2010 to 2020.[96] The relatively large increases in oil demand are a result of the rising consumption of refined oil products by automotive drivers in China. Gasoline, kerosene, and diesel are expected to outpace total oil demand over the next 13 years as Chinese automakers produce more cars. In particular, growth in gasoline demand is most affected by China’s expanding automotive industry.[97] While gasoline demand increased 5.7% in 2007, vehicles sales expanded at double-digit rates.[98] As the automotive industry grows, gasoline has the potential to becoming a larger fraction of the total oil demanded by China. In 2006, refined oil demand accounted for 47.1% of total demand, but that percentage is capable of rising to 59.5% by 2020.[99]
Chinese Banks and Oil Companies Secure Future Oil Supplies from Brazil and Russia
In March 2009, the Chinese government agreed to finance oil-field developments with Brazilian and Russian oil companies in exchange for guaranteed supplies of crude oil.[100] China will loan the Brazilian oil company Petrobras (PBR) $10 billion for the development of its pre-salt fields. In return, Brazil will supply China with 100,000 to 160,000 barrels of crude oil per day.[101] Petrobras (PBR) has reached similar agreements with Unipec, a subsidiary of China Petroleum and Chemical Corporation. Petrobras (PBR) will sell between 60,000 and 100,000 barrels of crude per day to Unipec in exchange for $10 billion in loans from Unipec and the China Development Bank.[102] In March 2009, the China Development Bank signed a $15 billion financing deal with Russia’s government-controlled oil company Rosneftand a $10 billion deal with Transneft in exchange for future oil supplies.[103] In exchange for the loans to Russian oil companies, China will receive oil supplies and a new pipeline spur to China.[104] For China, the deals secure 15 million tons of oil (300,000 bpd) every year for the next 20 years.[105] China has also agreed to loan Venezuela $12 billion in order to develop oil projects that have the potential to increase Venezuelan exports to China from 330,000 bpd to 1 million bpd by 2015.[106]
China’s financing contracts with Petrobras (PBR) and Rosneft are part of the country’s strategy of securing future energy contracts in order to meet the country’s rising demand for energy. From its contracts with Brazil, Chinese oil companies will be able to purchase up to 320,000 barrels of crude oil a day.[107] However, abroad operations expose Chinese companies to political risk and instability.
Natural gas, renewable energy sources, and nuclear energy require government spending on infrastructure to become stable sources of energy
In addition to being the world leader in coal consumption, China emits more greenhouse gases than any other country in the world. While coal-derived power accounts for 80% of the greenhouse gases China emits, the government’s economic stimulus package has the potential to improve the capacity of China’s renewable energy sector and reduce the country's carbon emissions.[108] According to the National Development and Reform Commission, the subsidies are part of China’s plan to increase China’s usage of renewable energy to 10% by 2010 from 7.5% in 2005 and to increase solar-power capacity from 70,000 kilowatts to 300,000 kilowatts by 2010.[109] According to David Chu, who heads the U.S's Department of Energy, China is spending $9 billion per month on renewable energy sources.[110] In his opinion, this consistent spending has contributed substantially to developing China's high-tech renewable technology, which has surpassed that of the United States.[111]
For China, nuclear power and natural gas offer alternative power sources to coal. China uses nuclear plants to supply power to areas in which coal is expensive to transport.[112] Nuclear power plants are primarily located in coastal and rural areas located far away from coalfields. As a result, the Chinese government has plans to increase the amount of power the country generates from nuclear plants, which was 8.6 Gwe as of April 2009.[113] The National Development and Reform Commission wants to increase China’s nuclear power capacity 10-fold to 160 Gwe by 2030.[114] However, the country’s nuclear plans require a substantial increase in the efficiency of its current power plants as well as improved nuclear technology.[115] Additionally, the Chinese government’s plans necessitate the government working with various local governments, which can be inefficient and corrupt.[116]
The Chinese government considers natural gas both an environmentally safer fuel than coal and a stable source of energy.[117] For that reason, China’s Ministry of Science and Technology predicts that natural gas consumption in China has the potential of growing at a rate of 15 percent annually from 2009 to 2030 and reaching 200 billion cubic meters by 2020.[118] However, rapid increases in natural gas consumption have the potential to cause supply gaps and force China to rely on natural gas imports. In order to prevent a supply shortage, the government has plans to replace outdated infrastructure and build additional pipelines and liquefied natural gas (LNG) facilities.[119] Between 2002 and 2020, these government investments have the potential of reaching $32.1 billion.[120]
Originally set to 40 GWe of energy by 2020, China's expected nuclear capacity has the potential of reaching 70 to 80 GWe by 2020.[121] Nuclear energy's growth in China has occurred mainly around the coastal areas where the economies are developing rapidly.[122] In these areas, nuclear plants provide an alternative energy source close to their centers of demand. While coal is the primary energy source in China, transporting coal from the north or northwest to several provinces in China is expensive and difficult.[123] By providing a more stable and environmentally friendly energy source, nuclear energy has received a significant increase in investment.[124] As of September 2010, the China National Nuclear Corporation (CNNC) alone plans to invest CNY 800 billion ($120 billion) into several nuclear energy projects by 2020. By 2015, total investment by CNNC has the potential of reaching CNY 500 billion ($75 billion). China has 13 nuclear power reactors as of December 2010, but 25 additional reactors are under construction and have the potential of becoming operation soon.[125]
China's renewable energy market has the potential of reaching $1 trillion
China's Renewable Energy Targets, by Type[126]
In September 2009, a collection of Western companies reported that China's renewable energy market has the potential of generating annual revenue between $500 billion to $1 trillion.[127] The China Greentech Report 2009 outlined 300 clean energy services that are capable of opening in China if the Country's renewable energy market continues to grow. In 2009, the Chinese government predicted that the country has the potential of using clean sources of energy to provide 20% of its annual energy consumption and has provided subsidies and contracts to solar, wind and hydroelectricity companies.[128] But, because wind, solar, and water are not as financially viable sources of energy relative to oil and coal, manufacturers of clean technologically have required government support and subsidies.[129] The report acknowledges that the support of government and corporate policy makers has the potential of being vital to the future success of renewable energy sources in China.[130]
A large source of growth for Chinese solar and wind companies has come from exports. China's exports of green goods rose 400% from 2004 to 2009.[131] Also, China has the potential of producing more than half of the world's wind turbines and solar panels by the end of the year.[132] In part, the international growth of Chinese solar companies can be attributed to loans and tax incentives from state-owned banks. Loans are given to Chinese solar companies by the China Development Bank in order to develop the industry into an internationally competitive sector.[133] Chinese companies have had access to plenty of cheap capital for expansions. Loans made to Trina Solar (TSL), Suntech Power Holdings (STP) , and Yingli, and JA Solar Holdings, (JASO) have totaled $16 billion for 2010.[134]
Companies Affected by China's Energy Needs
China's Energy breakdown in 1978 and 2006. In 2006, renewable sources of energy accounted for less than 1% of China's energy consumption
Key Chinese Players
China National Petroleum Corporation: China National Petroleum Corporation is a state-owned integrated oil and gas company with proved oil reserves of 3.7 billion barrels.[135] In 2007, CNPC produced 172 million tons of crude oil and 114.4 billion cubic meters of natural gas.[136] The company also processes crude oil into refined petro-products that can be used as fuel.[137] In 2007, CNPC produced 121. 73 million metric tons of crude oil domestically and refined 76.81 million metric tons of crude oil.[138] CNPC transports its crude oil, natural gas, and refined products through the company’s 39,316 kilometers of pipeline, railroads, and third-party pipeline systems. CNPC also operates as an engineering and construction company, an oilfield services provider, and a petroleum equipment manufacturer.[139] CNPC is the parent company of PetroChina Company (PTR).
Sinopec ( China Petroleum and Chemical Corporation): Sinopec is a state-owned integrated energy and chemical company in the People’s Republic of China.[140] In 2007, the company’s exploration and production segment sold 38.85 million tons of crude oil and 6.3 billion cubic meters of natural gas.[141] Through its refining segment, the company processed 3.1 million barrels of crude per day. Sinopec also produces various chemical products.[142]
China National Offshore Oil Corporation: CNOOC is a producer of offshore crude oil and natural gas as well as an independent exploration and production company.[143] CNOOC has offshore production areas in Bohai Bay, western South China Sea, eastern South China Sea, East China Sea, and offshore of Indonesia.[144] The company owned net proved reserves of approximately 2.6 billion barrels of oil as of December 31, 2007. Daily production in 2007 was 469, 407 barrels of oil.[145]
China Shenhua Energy Co.: Shenhua is an integrated coal-based energy company that engages in the production, processing, transportation, and sale of coal and thermal coal products.[146] With respect to proved coal reserves, it is the second largest publicly traded coal company in the world.[147] Shenhua had recoverable coal reserves of 11.482 billion ton as of December 31, 2007.[148] It transports its coal products all-over China through a network of ports and dedicated rail lines.[149] As of December 31,2007, Shenhua controlled and operated 13 coal-fired power plants with total installed capacity of 15,091megawatts.[150]
China Natural Gas, Inc. (CHNG): China Natural Gas provides natural gas for industrial, commercial and residential use as well as Compressed Natural Gas for vehicular fuel in primarily in the Xi'an area.[151] The company distributes natural gas through a network of approximately 120 kilometers of high-pressure pipelines.[152] China Natural Gas also owns 35 CNG fuel stations in China as of December 31, 2008.[153]
Foreign Companies Affected by a Rising Demand for Energy in China
Oil and Gas exporters:' Due to growing oil demand, China’s oil and gas imports have grown drastically. China became a net importer of oil during the 1990s, and, in 2007, imported oil accounted for 47% of the country’s total oil consumption.[154] While China’s crude oil production increased 1.6% in 2007, imports rose by 12.4%.[155] Of those imports, approximately 50% come from countries in the Middle East, particularly Iran and Saudi Arabia.[156] China’s “oil” relationship with Gulf Coast countries has encouraged those countries to invest in China’s growing oil industry; in 2006, Gulf states invested $20 billion in China’s oil industry.[157] In 2006, trade between those states and China totaled $135 billion.[158] China also needs natural gas. In June 2009, Russia agreed to supply China with natural gas beginning in 2011 in a deal that has the potential of reaching $100 billion.[159]
China's annual crude oil imports( in million tons)
The economic crisis beginning in 2007 has also impacted the amount of oil that China imports. In 2008, China imported 14.71 million tons of oil, an increase of 107.4% year over year.[160]
Petrobras (PBR)(Brazil)
Rosneft (Russia)
Gazprom (GZPFY)
LUKOIL (LUKOY)
OPEC
PDVSA(Venezuela)
PetroChina Company (PTR)
Coal Exporters: While 13% of the world's coal reserves are located in China, the country has the potential of being a net coal importer of 10 to 20 million tons of coal in 2009 due to lagging production and transportation systems and higher domestic prices.[161] In March 2009, China imported 5.72 million tonnes of coal in March, up 37.4% year on year.[162] With domestic demand for coal-derived power outpacing domestic supply, lower international prices make coal imports more attractive for the Chinese government.[163] Rising coal imports has the potential of benefiting coal miners located in the pacific region, especially Australian coal companies.[164]
Peabody Energy (BTU)
BHP Billiton (BHP)
CONSOL Energy (CNX)
Natural Gas and LNG producers operating in Australia: From 2010 to 2020, PetroChina plans to increase its domestic gas production significantly in order meet domestic demand for natural-gas-derived power, which is expected to make up 10% of China's total energy consumption by 2020.[165] With each new domestic well costing approximately $300,000 to drill, PetroChina's expected gas output depends heavily on the company's ability to achieve adequate long-term financing. As a result, PetroChina has struck some key long-term supply deals with foreign gas producers. While Chinese companies are interested in building LNG terminals as part of the country's plan to use more environmentally-friendly fuels, Australia is an attractive source for Chinese companies given the country's proximity, political stability, and supply of natural gas resources.[166] For example, the Browse fields, from which Woodside Petroleum (ASX:WPL) extracts the gas eventually shipped to China, are estimated to contain 13 trillion cubic feet of sales gas and 355 million barrels of condensate.[167]
Exxon Mobil (XOM): Signed $41 Billion deal with PetroChina in August 2009 to supply the company with LNG until 2030[168]
Chevron: In a $4.7 billion joint venture with PetroChina, Chevron plans to develop natural gas fields in Western Australia.[169]
BP: Opted to process fuel from the Browse fields.[170]
Royal Dutch Shell (RDS'A): Opted to process fuel from the Browse fields.[171]
Woodside Petroleum (ASX:WPL): The company has supplied 3 million metric tons of fuel/year since 2006 to a terminal owned by China National Offshore Corp.[172]
Nuclear Companies and Uranium Suppliers: In 2007, China announced that it would spend $50 billion to build 32 nuclear plants by 2020. The nuclear construction project announced in 2007 is one of the reasons some analysts argue that China has the potential of building 300 nuclear plants between 2000 and 2050.[173] In 2007, China signed a multibillion dollar deal with Toshiba's Westinghouse Electric Co. and the Shaw Group to build four nuclear plants beginning in 2009.[174] In 2007, the Chinese Premier Wen Jiabao traveled to Australia and Niger in order to secure contracts for uranium.[175]
BHP Billiton
Energy Resources of Australia
Rio Tinto (RTP)
Paladin Resources
Cameco (CCJ)
Denison Mines (DNN)
Toshiba (TOSBF)
General Electric Company (GE)
Shaw Group (SGR)
Renewable Energy Companies: China's government spending and subsidies have the potential of benefiting producers of renewable energy. While 8% of China energy came from renewable sources in 2009, the government plans to increase that to 15% by 2020. In order to accomplish that, China has created legislation and financial incentives for electric companies to use clean sources of energy.[176] China passed a law in 2005 that gives fixed rate tariffs and carbon credits to renewable energy companies. In 2008, China's $585 billion stimulus package devoted $366 million to subsidize the construction of solar energy panels by Chinese solar companies and $600 million to wind and nuclear power companies.[177] Since 2005, China's wind capacity has doubled every year.[178]
Suntech Power Holdings (STP)
Canadian Solar (CSIQ)
JA Solar Holdings, (JASO)
Solarfun Power Holdings (SOLF)
First Solar (FSLR)
Clayton Williams Energy (CWEI)
BP (BP)
Camco Financial (CAFI)
Nordex
ReneSola (SOL)
Suntech Power Holdings (STP)
The Transportation Industry: China depends on rail, air, and marine transportation companies to transport its coal and oil across the country.[179] In 2008, China began devoting more of its railway capacity to transport coal in order to avoid electricity shortfalls.[180] Industry reports indicated that 343.85 million tonnes of power-coal were supplied in the first half of 2008, an increase of 15.6 percent year on year. China also relies on foreign companies to transport oil and coal supplies from overseas.[181]
Eastern Siberia Railway ( a subsidiary of Russian Railways (RZD))
China Ocean Shipping Group
Exxon Mobil (XOM)
China Railways
Chinese Eastern Railways
Guangshen Railway Company (GSH)
China Southern Airlines Company (ZNH)
Domestic producers of Oil: When global oil prices increased rapidly during the first half of 2008, domestic prices remained capped at a low level. To minimize losses, Chinese refineries cut or stopped production. Those production cuts led to smaller locally-produced supplies of refined oil products, and higher supplies levels of foreign-produced oil.[182]
Oilfield Services and Engineering Companies: The global oil-field services and engineering service market has grown in response to China's increasing oil and natural gas production. While the engineering and energy services market in China is dominated by domestic companies like PetroChina, Sinopec and CNOOC, the country's growing energy production has the potential of creating the need for foreign companies to play a larger role.
Baker Hughes (BHI)
Schlumberger N.V. (SLB)
Halliburton Company (HAL)