China Oil & Gas Demand, Supply, and the Road Ahead

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China China China. Like Jan Brady clamoring for attention, all solutions to the current soft oil and gas market eventually intersect with the energy consuming Marsha that is China. (Take that Tortoise vs. Hare metaphor from a couple weeks ago!)

Fair enough. There are after all 1,376,000,000 people in China, and that’s 1,376,000,000 new customers for most everything. And what is more fundamental for a growing economy than the need for energy?

Even with the Chinese markets closed until Thursday, the early week rally in oil price was largely driven by positive VLCC (oil tanker) surge prices indicating a healthy demand for more oil to China. And that in spite of Saudi Arabia lowering its oil price to Asia and US markets!

Just looking at natural gas, the CNPC (China National Petroleum Corp) expects demand of at least 330 billion cubic meters by the year 2020 (vs.178.6 bcm in 2014), and are largely looking to Russia for that supply. Lets take a look at some of the dynamics at work now and into the future.

Demand in China

Most reporting regarding the steep decline in the price of oil over the past year have referenced slowing growth in China as one of bigger factors in the drop. More recent analysis shows that China’s oil demand is “up 9.2 percent year-over-year, as of August…” and that much of that growth is shifting away from industrial product (like diesel) and towards a more general domestic demand (like gasoline and kerosene), which is consistent with China’s current trends in other commodities (like metals).

China Oil & Gas Demand, Supply, and the Road Ahead
Image Source: https://www.bloomberg.com/news/articles/2015-09-29/jefferies-china-s-demand-for-oil-is-totally-misunderstood-by-the-market

John Kemp at Reuters estimates “the probable envelope for oil demand growth lies between 1.0 million bpd (if China’s consumption has been flat) and 2.3 million bpd (if China’s consumption has grown as much as its own data show).” Which itself is close to the IEAs projection of growth in demand globally for 2015.

Drillinginfo’s CEO Allen Gilmer recently compared China’s relationship with heavy crude producer Venezuela to overzealously embarked-upon student loans, and highlights that the oil supply from Venezuela is likely much less consistent than China had planned.

The big problem here of course is that China exists outside of the IEA, so is not compelled to report accurately (or at all) their actual consumption figures. Further obscuring the reality of Chinese growth in demand is they are likely the destination for much of the world’s gray market for crude (ie Iran) and have an array of independent refineries (teapots) that are even further beyond our grasp.

One thing that is certain is that China appears to be firmly on a trajectory away from coal and towards natural gas for power production. Addressing environmental concerns, China’s president Xi Jinping recently announced a cap and trade carbon program, encouraging a stronger market for the much cleaner burning natural gas in spite of coal’s continued cheapness.

Russia

China National Petroleum Corp expects to import 100 bcm natural gas annually from Russia over the next decade – between a quarter and a third of their expected demand. The following chart shows Russia’s current natural gas export profile.

China Oil & Gas Demand, Supply, and the Road Ahead
Image Source: https://www.bloomberg.com/news/articles/2015-09-27/putin-courting-chinese-gas-market-stuck-with-europe-for-decade

Now that Putin’s Russia has stuck a bear-sized claw into the affairs of the middle east with its pro-Assad bombing of Syrian targets, one wonders what their deeper motives might be. Due to the nature of their targets, there is a possibility that their actions may further inflame the Sunni/Shiite sectarian conflict in the region. If Russia does manage to prop up the Assad regime, they will stand to profit from their 2013 deal for offshore gas exploration. Contrary to the more mainstream sectarian or hydrocarbon narrative behind Russia’s recent actions, The Economist suggests “…Russia’s support for Mr Assad has less to do with Syria per se, than with the West. The Kremlin watched the Arab Spring in horror, seeing uprisings against authoritarian leaders as American conspiracies.” So we may be watching an ego-driven analog of last century’s domino theory, rather than an actual pragmatic action on Russia’s part.

Saudi Arabia and other natural gas sources

Saudi Arabia continues to aggressively pursue Natural Gas (and Oil) drilling programs, although this level of activity vs. production does indicate that perhaps the flow of hydrocarbons from their fields is not quite gushing as it once did. Additionally, Saudi Aramaco is investing directly in China, this week announcing investment in a refinery and some retail hubs. The Shell and BG merger, a lot of which was driven by BGs excellent position in global gas projects, continues to go forward. The Kra Canal project may become a reality, easing the flow of natural gas from middle east sources. America is steady at work building many liquefaction terminals for excess capacity from the Marcellus, Haynesville, Eagle Ford and other domestic plays.

Conclusion

With less than encouraging jobs numbers in the U.S. from last week indicating that the fed may not raise interest rates at all this year and the resulting weakening of the dollar, we will expect to see China (and emerging markets in general) strengthening. The trade gap between the U.S. and China continues to widen, as the Yuan overtook the Yen this week as the 4th most used currency. Although on the surface the international weakening of the dollar seems like a bad thing, the cheaper energy that that represents is likely good for Oil & Gas in the U.S.

Your Turn

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Eric Roach

Eric Roach is the editor of Drillinginfo's blog, which was selected as the Top Oil & Gas Industry Blog based on visibility, engagement and relevance. He also prepares a weekly newsletter of top industry news for blog subscribers, and would be grateful if you would subscribe and tell your friends. (There's a box on the upper right of the page where you can subscribe).