Research: The Rise of China and Its Energy Implications

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Background Information

In recent years, rising Chinese oil and natural gas demand has been a major feature influencing global energy markets. Chinese oil consumption has close to doubled over the last decade and now represents over 10 percent of global world demand, with oil imports topping 5 million b/d last year.  China’s imports of liquefied natural gas have also soared from 1 bcm in 2006 to 7.63 bcm in 2009, making China a major force in Asian energy markets.

There is also growing interest among American firms to become involved in China’s nascent unconventional gas market. The Baker Institute estimates that China’s shale gas production could be as high as 1.2 bcf/d by 2020 and 2.6 bcf/d by 2030. Coalbed methane production is projected to reach 1.8 bcf/d by 2020 and 4.5 bcf/d by 2030. China’s National Development and Reform Commission has stated that the country may have as much as 1,000 trillion cubic feet of shale gas reserves in place, but this figure remains speculative. A successful foray into unconventional natural gas in China would have large pricing and supply implications for the global gas market.

Some analysts are predicting China’s oil imports could rise to as high as 9 million b/d in the coming years, forcing China to seek a more diverse portfolio of suppliers. China has been using government to government loan agreements to give easy entry to its national oil companies looking to invest in oil and natural gas upstream assets and exploration acreage. Chinese NOCs are involved in oil exploration almost all major regions.

In addition to substantial oil and gas acquisitions abroad, China has also invested over $34 billion in clean energy projects in 2009, and the country is emerging as a leader in installed wind power capacity. The possibility that China will also increasingly shift to electric and natural gas powered vehicles has raised questions about the future path of Chinese oil demand.

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Event and Research Presentations

The Rise of China and Its Energy Implications
December 2, 2011

Study Aims and Procedures

The Baker Institute and the Institute for Energy Economics of Japan are undertaking a major research initiative to investigate the implications of China’s oil and natural gas policies and domestic energy market development on global energy markets. This study will focus on the influence of China’s energy development on U.S. and Japanese energy security and global geopolitics. Utilizing geopolitical and economic modeling and scenario analysis, the Baker Institute will study various possible outcomes for China’s domestic energy production and its future import levels. Researchers will also consider how trends in China’s energy use will influence U.S.-China relations and the level of involvement of the U.S. oil industry in China’s domestic energy sector.

The specific aims of the project are defined as follows:
a)    assess the importance of Chinese oil and gas demand on international energy markets
b)    study how China’s energy strategies will impact its relations with the United States and Japan
c)    evaluate how development of China’s unconventional natural gas resources could change the outlook for Asian and global LNG markets, export flows and pricing 
d)    evaluate how different scenarios for Chinese economic growth will affect its influence in global energy markets and oil and gas price trends and geopolitics

The study will include scenario analysis of:
1)    The impact of development of domestic Chinese unconventional natural gas on global LNG markets
2)    The role of American companies in China’s domestic energy sector
3)    Changes in Chinese oil demand trends based on differing penetration rates for electric and hybrid vehicles into the Chinese automobile fleet 
4)    Oil and natural gas demand under different scenarios for future Chinese economic growth paths

Proposed Working Papers

Project One: Chinese Unconventional Natural Gas Resources and Their Role in Global Gas Market Development

This study will analyze possible scenarios for China’s unconventional natural gas production and China’s natural gas demand in the coming two decades. This investigation shall be conducted by using geopolitical and economic modeling and scenario analysis to study various possible outcomes for China’s natural gas sector, including forecasts of long term trends in Chinese natural gas demand. In addition, emphasis will be placed on identifying the important role U.S. companies and technology may play in the development of China’s unconventional resources, including detailed analysis of U.S. company strategies in China’s natural gas industry, U.S. perceptions of the opportunities in China’s unconventional natural gas industry, and U.S. partnerships with China’s national oil companies in China’s unconventional gas development. 

Baker Institute researchers will conduct analysis of the impact of various scenarios for China’s natural gas sector on Asian and international LNG markets by utilizing its World Gas Trade Model as well as assess the importance of China’s demand and unconventional natural gas supplies to international energy markets and energy geopolitics in the coming decades.

Kenneth B. Medlock III, Baker Institute
Peter R. Hartley, Rice University

Project Two: China’s Oil Sector: Trends and Uncertainties

The pace of oil demand growth to fuel economic development in China will be incredibly important in determining the existing and future trends in the global oil market. To understand possible future trends, this paper will undertake sectoral analysis of the variables that will influence various oil product markets in China, with an eye to assessing possible drivers of continued growth or new regulations, fuel competition such as coal to liquids, or other factors that might curb demand in a particular industry or petroleum product. The paper will include analysis of expected changes in Chinese base refining capacity and how demand and refining balances will impact Chinese crude oil import patterns. Included in the analysis will be the planned investment and participation of American multinational oil firms in the Chinese oil sector, including discussion of U.S. business opportunities in China, U.S. company strategies in China, and U.S. oil company collaborations with Chinese national oil companies.

Alan Troner, Consultant, Asia Pacific Consulting and Adviser, Baker Institute

Project Three: U.S.-China Relations and Energy Cooperation

The Obama Administration has placed more emphasis on energy cooperation with China in its international energy and climate policy than previous U.S. administrations. U.S. diplomacy has included a joint U.S.-Gulf Cooperation Council (GCC) efforts to convince China to limit its crude oil purchases from Iran as well as efforts to forge common approaches on global climate negotiations and cooperation in energy research and development (R & D). 

This paper will assess evolving U.S.-China relations and the possibility of strengthened cooperation on energy matters. In particular, the paper will cover the impact of improving U.S.-China cooperation on the U.S. oil industry and U.S. alternative energy efforts as well as the geopolitical implications of closer U.S.-China energy cooperation.

Joe Barnes, Baker Institute
James D. Coan, Baker Institute
Jareer Elass, Baker Institute 

Project Four: Vehicle Stocks in China: Consequences for Oil Demand

China has now surpassed the United States as the largest market for new automobiles and the largest emitter of greenhouse gases (GHG). Robust growth in vehicle ownership will result in a rapid increase in oil imports with its consequent impact on world oil prices. And a growing vehicle stock will also lead to increased GHG emissions. 
Using the work of Medlock-Soligo and others, this paper will generate projections to 2030 of vehicle stocks as well as vehicle use in China and examine the implications for oil demand and GHG emissions. The paper will also look at the effect of different possible government automobile mileage standards and potential targets for electric car penetration on oil demand. The effect of more stringent standards will depend on policies regarding fuel prices since higher efficiency translates into lower costs per mile and therefore a rebound effect must be considered. The geopolitical consequences for global oil markets and for the United States, Japan and China-Middle East relations will be discussed.

Kenneth B. Medlock III, Baker Institute
Ronald Soligo, Baker Institute
James D. Coan, Baker Institute

Project Five: The Future of Urban Sprawl in China and Its Impact on Transportation Oil Use

In the next few decades, hundreds of millions of rural Chinese citizens are expected to become urban residents. How these urban centers grow to accommodate the new residents will have a significant impact on oil demand. Research from the United States finds that those who live in dense cities close to retail stores and transit options drive fewer miles and consume less oil for transportation. Promoting such development has been called “smart growth.” Inversely, residents drive more who live in “sprawling” areas with low-density development, residential areas located far from commercial centers and little access to public transportation. This paper analyzes how Chinese cities have grown over the past two decades and the degree to which they are sprawling. Urban plans and the statements of party leaders will be studied to access how concerned Chinese leaders are about sprawl. Finally, the paper will document the barriers China would face if it were to try to seriously promote smart growth.

James D. Coan, Baker Institute

Project Six: Carbon Management in China: The Effects of Decentralization and Privatization

This paper will assess the ability of the Chinese central government and Communist Party leadership to make credible commitments to reduce greenhouse gas emissions and to stem investment at the provincial and local levels in energy intensive enterprises. Because China’s reforms liberalizing its planned economy have used both decentralization of regulatory and ownership authority, as well as privatization of state assets, many of China’s economic policies are a mix of central- and local-initiated plans. By studying the success and failure of the Chinese central government’s 1,000 enterprise energy efficiency initiative launched in 2006 campaign in contrast with the various local campaigns, Baker Institute researchers hope to develop predictions about the emergence of a future Chinese national policy on carbon management. This study should also be useful for helping understand the potential for the migration within China of energy intensive businesses, of the potential for Chinese localities to serve as the location of energy intensive businesses migrating from overseas, and of the potential for Chinese energy intensive industries to migrate to other countries, especially its neighbors who do not yet have carbon management policies (e.g. Kazakhstan, Mongolia, Vietnam, North Korea).

Steven W. Lewis, Baker Institute 

Project Seven: Is Chinese Foreign Policy Targeting Sub-Saharan Africa? 

The conventional wisdom about Chinese economic expansion is that China is going around the world and making deals that will give it access to critical natural resources that will help its economic growth.  This could very well be true, but observers tend to focus on particular countries, notice the connection between the resources in that country and the links to China, and draw conclusions about overall Chinese economic strategy.

This paper will change the focus from selected targets of Chinese economic activity to an overall assessment of its general economic behavior.  Using data on all Chinese economic agreements since the end of the Cold War, this paper will develop general models that seek to interpret Chinese economic agreements and future behavior.  Researchers will study the notion that China is more likely to engage economically with countries that have large economies and are close to China, and attempt to quantify whether resource procurement is truly the driving force for Chinese global economic activity. One possible thesis is that as China grows economically, it is simply expanding its overseas presence everywhere. 

Richard J. Stoll, Albert Thomas Professor of Political Science, Rice University 

Project Eight: Chinese Growth Prospects in the Short to Medium Term

This paper will focus on the current state of international financial imbalances, and the nature of the latest phase of the ongoing international financial bubble, with China and Middle-East petrodollars at its heart.
Over the past decade, there have been gross financial imbalances, which contributed, among other things, to the mortgage-finance crisis in the United States – by depressing long-term interest rates to which mortgages are benchmarked, creating a bubble. There is little evidence that the financial imbalances that caused the 2008-9 crisis and recession are going away.

One side of the financial imbalances story is well known: Chinese and other trade surpluses had to be recycled to deficit countries in some way, and a large portion of these savings were eventually invested in U.S. government bonds and other Dollar-denominated debt (e.g. mortgage backed) securities. Another side of that story, which is less well understood, is that the financial sector in China and other developing nations remains relatively immature, mandating this style of financial recycling: Left to its own devices, export savings would fuel domestic bubbles (e.g. in real estate, as we have observed in China) and eventually lead to financial collapse and deep recession, as we observed in Japan two decades earlier. This paper will investigate the history of economic bubbles and export-led growth t shed insight into possible scenarios for China’s future economic trends.

Mahmoud A. El-Gamal, Baker Institute

Project Nine: China’s Relations with OPEC

As China has emerged as a major importer of oil, its bilateral interactions with members of the Organization of Petroleum Exporting Countries (OPEC) have increased. In recent years, China has looked to strengthen its ties with major oil producers who are influential in OPEC but so far China has stayed to the sidelines in trying to influence the producer group's policies. This paper will look at the history and current geopolitics of China’s relations with OPEC and key OPEC producers such as Saudi Arabia and Iran. In analyzing China’s current and potential future policies towards OPEC and the Gulf producers, the authors will shed light on the new geopolitical power politics of oil today.

Jareer Elass, Baker Institute
Amy Myers Jaffe, Baker Institute

Project Ten: China's Investment in Latin American Energy Resources: Comparative Asian Perspectives 

To meet its rising demand, China has undertaken a global effort to secure energy supplies, including in Latin America. This investment leads to inevitable economic and political changes in Latin American countries. Latin American nations must handle the increase in natural resource rents, preferably to the benefit of their citizens, and countries will have new or strengthened alliances with China. This paper will analyze the extent of Chinese investments in Latin American countries and discuss the ramifications of these investments to the recipient countries. The paper will include a comparison of the strategies of Chinese NOCs with those from India and South Korea.

David Mares, Baker Institute