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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.
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: Quantitative Analysis of Scenarios for Chinese Domestic Unconventional Natural Gas Resources and Their Role in Global LNG Markets
Significant resource potential has been identified in shale gas plays in North America. Furthermore, developments in North America have sparked interest in shale gas resource potential in other parts of the world, and the experience gained producing shale gas in North America will likely translate to those other regions, including China. There is growing interest among American firms to become involved in China’s nascent unconventional natural gas market. Conoco Phillips is undertaking a major exploration program for coalbed methane in the Shizhuang North, South and Quyuan areas of the Qinshui Basin, and American firms are hoping that U.S. success with shale gas development can be repeated in China. ExxonMobil has been in talks with Petro China to develop unconventional resources in China while PetroChina signed its first deal for shale gas with Royal Dutch Shell in November 2009.
This project will undertake a major research into 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 Medlock, Baker Institute
Peter Hartley, Rice University
Amy Myers Jaffe, Baker Institute
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 Advisor, Baker Institute
Project Three: U.S. China Diplomatic 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
Amy Myers Jaffe, Baker Institute
Jareer Elass, Baker Institute
Project Four: The Transportation Sector in China: Implications for Oil Markets and Greenhouse Gas Emissions
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.
Generally speaking countries undergo several shifts in the pattern of energy use in the course of economic development. In the early stages the energy intensity (the amount of energy used per unit of GDP) of the economy grows as resources are funneled into the development of a manufacturing sector. In time, the growth pattern shifts towards services, which are much less energy intensive. The result is that the energy intensity of the economy declines. Total energy use and hence GHG emissions continue to increase, but at a declining rate.
One sector that does not show signs of significant declines in energy use as per capita income increases is transportation. Two forces are at work. First, the number of automobiles will continue to grow as more people can afford automobiles. Second, those with cars will increase the use of their vehicles, i.e. increase the number of miles driven. Both factors increase energy use and 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.
Ronald Soligo, Baker Institute
Kenneth Medlock, Baker Institute
This study was made possible through the generous support of the Institute of Energy Economics, Japan and the Baker Institute Energy Forum Sponsors.