Steven Poruban
Senior Staff Writer
HOUSTON, Oct. 20 -- China's oil and natural gas sector is at a "critical juncture" in its development, according to views presented Oct. 5 by partners of international law firm Fulbright & Jaworski LLP.
The country's regulations for oil and gas have been rationalized, and its national oil companies are well-settled and exerting themselves in the marketplace, Fulbright partners said.
Acknowledging that its domestic supply cannot catch growing demand for energy, China has placed a heavy emphasis on imports, including gas. Proposals include cross-border pipelines and LNG terminals.
"The ultimate utilization of gas in China will be constrained only by the development of the infrastructure to receive and distribute it," the partners said.
Bourgeoning economy
China is the second largest energy consumer in the world, trailing only the US, said Jeffrey A. Blount of Fulbright's Hong Kong office. The country has generated one third of the world's incremental demand for oil during 2002-04, he said.
With gross domestic product growth of 9.1% for 2003 and projected GDP growth of 9.7%/year for the first half of this year, China is the world's third largest importer of goods, Blount noted.
In 2003, the US made $53.5 billion in foreign direct investment (FDI) in China, which was the No. 1 destination worldwide in 2003 for FDI, he said. For comparison, Blount said India's FDI for 2003 was $4 billion, and Russia's for the same year was $1 billion.
Also, relations between oil and gas companies and the Chinese government have improved in the past few years, Blount noted.
"When you deal with the government now, this is a very different group of people," he said, although many decisions about Chinese resources continue to be made at local levels.
Energy drivers
Despite efforts by Chinese authorities to slow down their country's economy, the rapid growth of GDP and increases in personal income are raising demand for electric power, said Michael E. Arruda, also of Fulbright's Hong Kong office.
Domestic energy supply can't meet demand. Production from China's old oil fields, such as Daqing, which was discovered in 1959, is in decline. Investment in new production capacity has been insufficient. There have been shortages of hydropower due to drought in parts of the country. And there have been coal shortages, all of which have led to shortages in energy supply, Arruda said.
Installed power capacity in China's large cities is not sufficient to meet demand, either, Arruda said. In Beijing, he said, installed capacity is 10% less than demand, in Shanghai, 20%, and in Zhejiang and Jiangsu, 30%. China expects to spend $24 billion on electric power in 2005, he added.
According to a 5-year energy plan, Chinese officials intend to increase natural gas's share in the country's energy mix to 7% by 2010 from the current 2.5%, Arruda said. Gas imports also are being encouraged to supplement domestic development, he said.
"Pipelines and LNG are acknowledged to be the underpinnings of the increased role of natural gas in the China energy mix," he said.
Also part of the plan are several major cross-border pipeline proposals that would bring gas to China from Russia, Kazakhstan, and Turmenistan, as well as Japan.
The construction of LNG terminals is viewed as a viable option for China given its large energy needs; its location; its large underexploited gas supplies and lower tanker costs that have reduced overall project costs; the low political risk, due to lack of transit countries; and the increased availability of LNG on the spot market. And LNG does not exclude other options but might be more feasible in the short and medium terms, Arruda said.
Contact Steven Poruban at [email protected].
