China's energy demands will drive future of global oil and gas industry

Rising energy consumption in China coupled with limited domestic supply has forced the world's most populous nation to go outside its borders to aggressively seek oil and gas imports. Spurred by rapid industrialization and urbanization, China has emerged as the world's second largest consumer of energy, just behind you-know-who.

As the legendary baseball pitcher Satchel Paige is reported to have said, "Don't look back. They might be gaining on you."

In this case, that might not be a bad thing. Who wants to be known as the world's biggest consumer? Personally, I get enough sarcastic comments from my family about my "middle-age spread." So I don't feel too bad about my country being overtaken by China in the race for energy consumption superiority. Being No. 2 won't hurt my feelings. On the other hand, I wouldn't mind moving up the food chain when it comes to energy exports.

China's oil and gas consumption grew at an annual average growth rate of 6.8% in the decade from 2000 to 2009. Projected AAGR growth of 2.5% is forecast for the next 10 years. As a result, by 2020, 63% of China's total consumption will be met through imports.

So how is China handling this rapid change?

The short answer: aggressively.

In its effort to secure massive supplies of energy to assure its move towards industrialization and modernization won't come to a halt, China's national oil companies have been acquiring interests in companies and oil and gas assets in Asia, Africa, and North and South America. The People's Republic even has formed a partnership in South Texas, where China National Offshore Oil Corporation (CNOOC) has forged a deal with Chesapeake Energy in the Eagle Ford shale. CNOOC is paying Chesapeake $1.08 billion for a one-third stake in the Oklahoma company's Eagle Ford holdings and will also pay $1.08 in drilling costs.

The deal gives CNOOC its first onshore energy asset in the US after its aborted attempt to buy Unocal Corp. in 2005. The Chinese company withdrew its offer amid significant political opposition. To date, there has been no such opposition to its deal with Chesapeake.

CNOOC and China Petroleum Corporation (Sinopec) have been especially active the past two months expanding their asset base in South America. CNOOC and Buenos Aires-based Bridas Corp. took advantage of BP's fire sale of its assets to pay $30 billion in claims from the Deepwater Horizon disaster. Together, the two companies paid BP over $7 billion for Pan American Energy. In March 2010, CNOOC paid Bridas $3.1 billion for a 40% stake in the company.

In December, Sinopec purchased Occidental Petroleum's Argentine assets for around $2.5 billion. Industry observers expect China to close on additional deals in Latin America this year, as the country changes its focus from Africa to South America.

This winter, China could face a natural gas shortage up to 9 million cubic meters a day during peak demand periods, according to Lin Changhai, a PetroChina executive. In anticipation of this happening, the state-owned company plans to import 610 million cubic meters of LNG to supplement domestic gas output. China's two gas pipelines to Beijing from the producing region near Shaanxi are currently running at full capacity, and PetroChina is rushing to build a third pipeline to meet the expected increase in winter demand.

Gas demand in Beijing alone may exceed 60 million cubic meters per day during the coldest days this winter. China is also encouraging large commercial and industrial users to find ways to reduce usage and conserve gas. Some supplies are being diverted from petrochemical and chemical users to residential use to meet peak winter demand.

China's energy-hungry economy is driving the future of global energy. Its growing middle class wants the same conveniences and luxuries that we in the West want, especially gas-guzzling automobiles. However, the Chinese government's current push for green energy may help curtail the growth in oil demand. If it succeeds, the US could reclaim its place as the world's No. 1 consumer of hydrocarbons, although that's not a title I particularly relish.

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