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China, Chinese Oil Companies and Geopolitics

Presentation for Foreign Service Officer Energy Industry Training Session Petroleum Equipment Suppliers Association July 28, 2010

Steven W. Lewis, Ph.D. Fellow in Asian Studies James A. Baker III Institute for Public Policy Associate Director, Chao Center for Asian Studies Rice University

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Chinese Oil Companies and China's Energy Policy Formation

1. 2.

3.

China's Rapid Economic Growth and Increasing Demand for Energy The Other Side of Energy Security: Local Energy Policy and Demand Management in China The Challenge of Decentralization and Privatization of Energy to Comprehensive Energy Policy Formation

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Demand Projections for Select Asian Countries and USA

Total Final C onsumption Units: m toe

3000

2500

A v e ra g e A n n u a l D e m a n d G ro wt h ( 2 0 0 1- 2 0 2 5 ) US : 1.88% (GDP : 3.0%, P OP : 0.6%) C h in a : 4.06% (GDP : 6.6%, P OP : 0.6%) In d ia : 3.56% (GDP : 5.7%, P OP : 1.2%) J a p a n : 1.22% (GDP : 2.5%, P OP : 0.1%) S Ko re a : 2.34% (GDP : 3.9%, P OP : 0.9%)

US

2000

Historical Projected

C h in a

1500

1000

In d ia

500

J a pa n S Ko re a

0 1985 1990 1995 2000 2005 2010 2015 2020 2025

Source: BIPP estimates

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World GDP ­ Regional Shares

100%

80% share of World GDP

60%

40%

20%

0% 1975 China India 1990 2005 2015 OECD 2030 Rest of World

Rest of Developing Asia

Developing Asia will account for more than half of the GDP growth between now and 2030, China alone for one-third

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Share of Industry in GDP, 1970-2004

55 50 45 40 35 30 25 20 15 1970

Percent share of industry in GDP

China India OECD

1974

1978

1982

1986

1990

1994

1998

2002

Industry contributes to 50% of China's GDP, well above OECD average, while India relies more on service sectors

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Share of China and India in the Global Coal, Oil and Power Capacity Growth, 2004-2030

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Coal demand China and India Oil demand OECD Power Generation Capacity Rest of the world

China and India account for a significant part of the growth in the global fuel demand and power generation capacity

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Chinese Power Generation by Fuel

8000 7000 6000 5000 TWh 4000 3000 2000 1000 0 2004 Coal Oil Gas 2015 Nuclear Hydro 2030 Other Renewables

Installed capacity in China will more than double by 2015, most of the increase is met by coal power plants

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Cumulative Power-Sector Investment, 2005-2030

3 500 3 000 billion dollars (2005) 2 500 2 000 1 500 1 000 500 0 OECD Pacific European Union United States

China

India Transition

Demand increase

Latin economies America

Capacity replacement

Growing electricity demand will spur investment in power generation, with more than $3 trillion requirements in China and $1 trillion in India

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Total Energy Consumption in China by Type of Fuel

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Vehicle Ownership, 2004

900 800 USA

vehicles per 1,000 people

700 Italy 600 500 400 300 200 100 0 0 Malaysia Mexico Brazil Thailand Indonesia China India 5000 10000 15000 20000 25000 30000 35000 40000 Korea Germany France Canada UK Japan

GDP per capita (dollars)

The potential for increased vehicle ownership in emerging markets, in particular China and India, is huge

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China's Oil Production and Consumption, 1990-2010

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China's National Oil Companies

Except for Offshore and Western and Northwestern Regions, China's Domestic Oil Production is Not Expected to Increase Significantly. CNPC Total Domestic Crude Production About 2.06 Million Barrels Per Day in 2009; Sinopec about 813 Thousand Barrels Per Day, CNOOC at 509 Thousand.

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CNPC, Sinopec, CNOOC, ConocoPhillips and ExxonMobil Liquids Production

2000-2009 (in thousand b/d)

2000

2004

2008

2009

CNPC Sinopec CNOOC Conoco Phillips Exxon Mobil

2071.7 744.8 351.4 n.a. 2553.0

2091.0 770.3 487.9 905.0 2543.0

2165.0 836.0 422.1 806.0 2405.0

2062.6 813.0 509.7 872.0 2387.0

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Chinese Top Ten Oilfields by Production

1998-2009 (in thousand b/d) ( 03/01/2010 and other sources)

Field Daqing Shengli Changqing Bohai Sea Yanchang Xinjiang Liaohe Tuha Jilin Tarim

Name

NOC CNPC Sinopec CNPC CNPC CNPC CNPC CNPC CNPC CNPC

Region NE NE NW NW NW NE NW NE NW

1998 1140.0 546.2 80.0 n.a. 35.0 174.2 290.4 59.0 79.4 77.0

2004 928.6 534.8 162.2 200.0 164.0 222.2 256.6 45.0 101.1 107.6

2008

2009

2009/ 1998 70%

804.0 800.0 554.8 275.6 220.0 218.0 244.2 224.6 120.0

558.2 102% 314.4 393% 270.0 n.a. 224.2 640% 217.8 125% 203.8 70% 132.0 223%

CNOOC NE

131.0 121.0 152% 129.0 110.8 143%

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Chinese Crude Imports by Source

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Sino-Kazakh Pipelines (EIA)

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China's Natural Gas Production and Consumption, 1987-2007

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West to East Gas Pipeline I

(A. Yan, China Gateway Consulting)

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West to East Gas Pipeline II

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Major Chinese Territorial Disputes

Aksai China (Claimants: India, Pakistan, PRC) 1962 Sino-Indian War; 1963 Pakistan ceded Kashmiri territory to China, without recognition from India Arunachal Pradesh (Claimants: India, PRC) Site of 1962 Sino-Indian War skirmishes Discrepancies in border alignment between Bhutan and China; undergoing cordial, if not legally binding discussions to resolve the issue

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Major Chinese Territorial Disputes

Scarborough Reef, Spratly Island & Paracel Islands (Claimants: China, Brunei, Philippines, Taiwan, Indonesia, Malaysia) Site of continued diplomatic bickering and a flash point in 1976 and 1988 with the deaths of dozens of Vietnamese sailors Senkaku-shoto (Diaoyu Tai) and Japan's unilaterally declared equidistance line in the East China Sea Location of major ECS natural gas reserves; point of overlap between Japanese and Chinese EEZ

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Major Chinese Territorial Disputes

Yalu and Tumen river islands between PRC and DPRK act as havens for refugees pouring across the border into China. Currently the site of fences being built to stem the flow of refugees. Land disputes with Russia, Tajikistan and Vietnam have mainly been resolved.

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Energy Resource Territorial Disputes

Chunxiao

The

Field of the Xihu Trough (East China Sea)

area surrounding Senkaku-shoto (Diaoyu Tai) is the site of extensive exploration by the efforts in the face of Japanese protests. Many western multi-nationals have pulled out of the exploration citing lack of commercial viability.

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Energy Resource Territorial Disputes

Natuna Island group (Claimants: Indonesia, PRC)

Believed

Philippines' Malampaya and Camago natural gas and condensate fields

Located Located

to be undisputed until the release of China's "area of strategic intent" in Chinese territorial waters in Chinese territorial waters

Fields off of the Malaysian Island of Sarawak Numerous fields off of Vietnam are disputed by the Chinese Gulf of Thailand fields (Claimants: Cambodia, Thailand)

Companies

have been unable to explore due to on-going diplomatic rows over the area

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The Other Side of Energy Security: Local Energy Policy and Demand Management in China

IEA Estimates China Will Need Investment in Power Generation of More Than US $ 3 Trillion Between 2004 and 2030 to Maintain Current Economic Growth Levels; Where Will The Funds for These Investments Come From?

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Proportion of Investment in Fixed Assets of SOEs in Energy Industry

(State Statistical Bureau, 2006)

Energy Industry

1995

2000 7.00%

2005 13.10%

Coal Mining, 13.94% Processing Petroleum & Gas Extraction Electricity Petroleum Processing/ Coking Coal Gas 24.67%

12.52%

5.86%

51.48% 7.98%

75.02% 3.34%

72.50% 6.17%

1.93%

2.11%

2.37%

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Investment in Energy Fixed Assets in Urban Areas by Central Government and Local Government, 2006

(China Statistical Yearbook, 2007: 206)

% Central Government Central (Billion RMB) Coal Oil/ Natural Gas Refining Power Coal gas 14.3 157.9 9.8% 86.6%

% Local Government Local (Billion RMB) 131.5 24.3 90.2% 13.4%

46.8 266.1 5.0

49.8% 36.5% 15.1%

47.1 461.2 28.0

50.2% 63.5% 84.9%

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The Other Side of Energy Security: Demand Management and China

Local Governments ­ Provinces, Autonomous Regions and the Four Municipalities of Beijing, Tianjin, Shanghai and Chongqing ­ Make the Vast Bulk of Investments in China's Energy Infrastructure: Total US $60 Billion in 2005 Energy Planning Officials in China's Localities Are Primarily Power Planners, With Relatively Few Exceptions: SEE SUPPLEMENTAL TABLE ONE

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The Other Side of Energy Security: Demand Management and China

Because China is a Regional Planned Economy Transitioning to a Regional Market Economy, and Because Chinese Localities Compete With Each Other and With the Central Government for Fiscal Resources and Domestic and Foreign Sources of Investment, Energy Policy Formation in China is a Mixture of Competition and Coordination: ("The Sky is High and the Emperor is Far Away") ("The Central Government Has Policies, Local Government Has Counter-Policies")

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The Other Side of Energy Security: Demand Management and China

China's Central Government Energy Security Policy is Primarily Focused on Demand Management Through Coordination with Local Governments, and Continued Use of Both Planning (Price Controls) and Market (Private Investment) Mechanisms: CCP General Secretary Hu Jintao at the Politburo Study Session on Energy, June 2005: "Actively Doing a Good Job in Resource Exploration and Also Giving Priority to Doing a Good Job in Conservation Should be the Basic Thinking Behind the Efforts to Resolve the Problem of Energy and Resources of Our Country...."

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The Other Side of Energy Security: Demand Management and China

"...We Should Continue to Persist With the Basic Guideline of Rooting Ourselves Within the Country; Step Up the Exploration and Development of Domestic Resources; Boost the Development and Exploitation of Coal, Petroleum, and Natural Gas; Actively Develop Hydropower Resources; Speed up the Development of Nuclear Energy; Encourage the Development of New Resources and Reusable Resources; and Improve the Structure Related to Energy and Resources..."

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The Other Side of Energy Security: Demand Management and China

"...At the Same Time it is Necessary to Actively Carry out International Cooperation on Energy and Resources, and Make Full Use of the Two Markets and the Two Kinds of Resources Both at Home and Abroad."

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The Other Side of Energy Security: Demand Management and China

Case Study: Top 1000 Enterprise Program Goals and Actors

Achievements: Initial Modest Successes; Coordination Problems Between Central and Local? Implementation: Benefits and Potential Obstacles

Require 1000 Largest Industrial Enterprises, That Together Consume 1/3 of China's Primary Energy, To Reduce Consumption by 100 Mtce by 2010. NDRC Will Coordinate with Local NDRC, SOEs;

SEE SUPPLEMENTAL TABLE TWO Ties in With Emissions Control, Water Pollution and Shuttering of Sunset Industry Goals; Ties in With Some 33 of the 198 Central Owned Enterprises; Relies on the the Three Politically Powerful NOCs for Implementation Because 10% of the Top 1000 are in Petroleum and Petrochemical, and 25% are in Chemical Industry, and Because List Includes Politically Powerful and Economically Influential Oilfield Administrations (Daqing, Shengli, Sichuan).

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The Challenge of Decentralization and Privatization of Energy in China

Historically Weak Central Government Energy Planning Authority: Delayed Formation of Energy Ministry; Now Only Energy Commission Persistence of Informal Leadership Organizations (Leadership Small Groups) to Coordinate Energy Security Policy with Economic Development Policies in General; Relative Weakness of Energy LSG; No LSG for Future Major Energy Projects, Including SPR; Persistent Under-Development of Energy Research and Analysis; High-Level Ties of NOCs in Particular; Direct Ties to Politburo With Increasing Energy Imports, Rise in Local Energy Security Policies: Decreasing Coal Independence, Increasing Oil Independence of Localities (SEE SUPPLEMENTAL TABLES THREE AND FOUR); Different Energy Strategies for Each Province. Specialization of Energy Administrations in Chinese Localities -- Shanghai, Beijing, Tianjin, Xinjiang -- Make Coordination With Each Other and With Central Government Complex. 38

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Obstacles to Corporatization of Chinese NOCs

Gradual Structural Marketization of Chinese Energy Industry, Including Growth of Competing Private Companies; Continued Decentralization of Economic Policy Making and Development Planning in China, Protection and Growth of New Energy SOEs by Localities; Accelerating Integration of Chinese Energy Industry Professional With the Global Economy, But Only Gradual Erosion of Nomenklatura System; NOC Executives Still Chosen from Within, Focus on Domestic Operations; Increasing Competition Between Central and Local Government Over Role of NOCs in Efforts to Develop National Social Welfare System and Environmental Cleanup Programs: Who Will Pay for These? 40

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Conclusions

China and India Will Define World Energy Demand for Next 25 Years. Oil and Gas are a Relatively Small Part of China's Energy Sector, But the Part Posing Potential Conflicts over Territory. China's Major Energy Policy Decision-Makers are Local Governments and NOCs. China is Making Enormous Investments in Renewable Energy, But also Trying to Manage Demand of Largest Users. Chinese NOCs Still Face Large Obstacles to Corporatization and Transformation in to Competitive Global Oil and Gas Companies. 41

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THANK YOU

Contact Steven Lewis at [email protected]

Thanks to the following colleagues and student interns for help with research presented here: Amy Myers Jaffe, Jason Lee, Amy Lin, Brian Mathes, Ken Medlock, Grant Parks, Ron Soligo, Dale Swartz, Andy Wang,Ting Wang, and Yuanzhuo Wang.

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