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Market News

 October 22, 2013
Demand dogs China despite pumping billions more into exploration

 Despite its ever-increasing investment in exploring oil and gas resources, demand continues to outpace supply in China.

China's state news agency, Xinhua, last month quoted the Ministry of Land and Resources stating that the government this year will spend 80 billion yuan, or $13 billion, to search for energy stockpiles in the country. It's a move to reduce the growing nation's reliance on imports and ensure security of supply. Up to 2011, China had about 5 billion metric tons of petroleum reserves and 2.6 trillion cubic meters of natural gas that had yet to be tapped.

The opaque Chinese government does not regularly disclose comprehensive spending figures. According to the Ministry of Land and Resources, the amount spent on digging out oil and gas in 2002 was 19 billion yuan ($3.1 billion), jumping to 67.3 billion yuan ($11 billion) in 2011.

Yet China is still expected to surpass the United States as the world's biggest crude oil importer by 2017. The big question for now is: How can China generate domestic production that can keep up with demand?

Developing alternative energy, acquiring global assets and curbing demands appear to be solutions. But nothing can be done overnight. And it is expected that about 59 percent of China's crude oil demand will be satisfied by imports this year, according to the Economic and Research Institute of the biggest state oil company, China National Petroleum Corp. China is expected to import about 289 million tons of crude oil in 2013, up 7.3 percent from 2012.

Eyeing the boom in the United States, the Chinese government has participated in the race to discover shale gas. While many youngsters have flocked to Texas for job opportunities, industry insiders in China are pessimistic about the development of such a new energy source at home.

"The state-owned oil giants are reluctant to invest in an area where even the accurate official figure of gas reserves is missed," an insider said.

The Chinese government, which still quotes the ballpark figure of the Ministry of Land and Resources, said there is 25 trillion cubic meters of shale gas in the country. But the U.S. Energy Information Administration said that China tops the world with technically recoverable shale gas resources at 33.6 trillion cubic meters. While investors are waiting for a confirmation, there is no sign that a concrete number is coming out soon.

Some company executives and government officials discussed the prospect of shale gas development in an internal meeting in July. They concluded that "no groundbreaking progress in shale gas exploration can be seen by 2015 unless the state oil giants are aggressive enough to extract resources from wells," according to an attendee of the meeting who doesn't want to be named. There is also a lack of competition, because private firms are limited in their ability to jump into what's known as the sensitive sector of the country.

Buy, buy, buy

Given the arduous long-term investment of drilling out new energy resources from underground, Chinese companies have tried to take a shorter route: overseas acquisitions.

It might be a smart enough move to buy out the assets of the others. But the Chinese executives are set to get over the rocky experiences. Policymakers and top bosses of state oil giants became cautious after CNOOC failed to take over Unocal for $18.5 billion due to political head winds in Washington, D.C., back in 2005.

CNOOC later on succeeded in acquiring Calgary, Alberta-based oil and gas company Nexen Inc. for $15.1 billion. Some achievements have been marked, finally, for a bureaucratic-structured Chinese state oil giant like CNOOC. But other issues, which include integrating different company cultures and nurturing management skills, could take a long time.

The Chinese government and industry players have started to accept the fact that enhancing domestic supply could be tougher than expected. Therefore, an overall demand cut appears to be a quick way to reduce reliance of oil and gas imports.

But that is easier said than done for China. The country is aiming to record a pretty high growth of gross domestic product, at 7.5 percent in 2013, or an average of 8.5 percent for the coming few years. The International Energy Agency estimates oil demand growth in China will be relatively eased. But the mentality of the Chinese to improve their lives is what drives needs.

In its 2013 medium-term market report for oil, the IEA commented that, "As the Chinese population is expected to become progressively more prosperous each year through to 2018, household demand for motorized transportation will inevitably increase, which will lend substantial support to Chinese gasoline demand and, to a lesser extent, gas, oil or diesel demand."

What's more, environmentally friendly pure-electric vehicles and hybrids are far from mature and popular in the country. And Chinese car buyers in general would like to go for big gas-guzzlers, due to the conventional mindset that "huge means power."