Asia and China's Energy Challenges

Authors:

  • Christian Heiberg - Managing Director of Nordic China Advisory (NCA) - NCA is a boutique investment advisory firm specializing in cross border advisory and transaction services, with a focus on opportunities between the Nordic countries and China
  • Brenda Wei – Investment associate and part of our Shanghai practice

Asia’s rapidly growing economies will be the primary drivers of increasing global energy demand. Rising per capita incomes, industrialization, urbanization, increased transportation and motorization in Asian economies require consistent, stable, and increasing energy supplies. Accordingly, the priority that governments place on energy security has risen.

For China, supply-side energy security involves securing transport routes and overcoming choke points at sea, diversifying its energy mix (including geographically), strengthening its petroleum storage capacity, and managing foreign relations.[i]

Strategic energy investments

Despite the European and American debt crises, the oil and gas market has remained steady over recent years. As a consequence, the offshore activities in the oil and gas industry have increased. However, existing production capacity is declining, and in 2035 there is an estimated gap of about 100 million barrels per day between the forecast of current production facilities and estimated demand, largely due to the expected global energy consumption by 53% from 2008 to 2035.[ii]

As transporting and building adequate infrastructures takes considerable time, making it difficult to quickly resolve China’s current energy issues, China will increasingly look to invest in countries with abundant natural resources.[iii] We have already seen Chinese companies acquire production and exploration fields and companies, on- and offshore. Therefore, the trend of increased Chinese acquisition activity around the world will continue, diversifying their geographic risk.

China - a major oil player

China’s primary oil demand is expected to rise from over 8 mb/d in 2009 to 12.2 mb/d in 2020.[iv] In 2011, China imported over 5 mb/d of crude oil, accounting for about 54% of its total demand. More than 50% of the total crude oil imports came from the Middle East, and more than 70% from the Middle East and Africa combined.

From Beijing’s perspective, the closest and the most secure oil & gas resources in the long term should lie within the East and the South China Seas. The East China Sea is estimated to hold nearly 17.5 trillion cubic feet of natural gas, and 20 million barrels of oil.[v] The South China Sea may contain 17.7 billion tons of crude oil.[vi] Despite the huge amount of oil and gas reserve, activity level is relatively low in these areas largely due to the lack of sufficient expertise and technology in deep water exploration. Through our extensive discussion with various Chinese oil companies, we can sense their appetite for overseas acquisition, which is an efficient way to tap into foreign companies’ know-how and competency in the offshore industry.

Norwegian Continental shelf is one of several opportunities

The Norwegian Continental shelf (NCS) is one of several geographic areas where Chinese interests can expand. Norway is today the fifth largest oil exporter in the world, with exports amounting to nearly 2.5 million barrels per day. It is also the second largest exporter of gas to Europe. As of today, Norway has exported more than 1,100 billion scm of gas – only about 20% of the total expected recoverable resources. Thus, Norway is, and will continue to be, a long-term stable provider of oil and gas.Two out of the top four oil discoveries in 2011 were made on the NCS. In fact, companies from more than 40 countries are now involved in oil and gas production in Norway.

The development in the Barents Sea is going to be a dominant driving force for future economic development in the North. Many believe that 25 percent of the world's future oil and gas reserves are in the arctic regions. The results from exploration in the Barents Sea are promising. The exploration in harsh offshore environments has driven innovation. Combined with knowledgeable financial investors this has yielded significant value creation.

Investing in Norway offers a stable and attractive fiscal regime, and gives access to know-how, competencies and technology within several areas - development and operation of large complex projects, subsea engineering, seismic data collection and interpretation, design and operation of deep sea drilling ships and platforms, floating production and specialised equipment and services.

The new Northern Sea Route

The new Northern Sea Route, also known as the Northeast Passage, is one of the recently emerging opportunities to secure transport. Compared to existing sea routes through the Suez Canal, the Northeast Passage takes 45% less sailing time from Europe to Asia. This provides significant savings in fuel and therefore reduced shipping costs. Today's traffic is growing in the Northeast Passage regardless of the support of icebreakers. Increased use of the Northeast Passage means that the "Gateway to China" is no longer the Suez Canal in Egypt, but Kirkenes in Norway.

The new Northern Sea Route could play an increasingly important role in several aspects. The Russian part of the Barents Sea has also proven to contain much oil and gas. Russia has now awarded three production licenses covering most of Russia’s new continental shelf area east of the delimitation line. Furthermore, mineral resources in Finland and Sweden are to be exploited. That would imply new railway lines from those two countries to the sea, which is the Norwegiancoastline. Thus, deep-sea ports will be required and will need to be constructed accordingly. The development of Barents Sea will also imply gas resources that need to be piped to the Norwegian coastline, enabling transportation with LNG tankers to Asia. These trends could be potential game changers for energy security in the Asia-Pacific.

For more information, please contact Nordic China Advisory: Christian Heiberg

  • Nordic China Advisory (NCA) is a management advisory company representing European oil & gas interests in China
  • NCA is offering advisory services to foreign companies and industries entering into, or bettering, its existing position in China
  • Hands-on experience in facilitating cross border investments between Europe and China
  • The company has offices in Beijing, Shanghai and Oslo, and cooperates with several expert environments such as international law, strategic communication and political issues.
  • Gerhard Heiberg is one of the founders, and member of the Board of NCA.
    • Bio on Gerhard: Mr. Gerhard Heiberg holds an impressive track record in national and international business and sports. Mr. Heiberg was the President of the Lillehammer Winter Olympics in 1994. He has been member of the International Olympic Committee since 1994 and was a member of the IOC Executive Board (2003 -2012), as well as Chairman of the Marketing Commission (2001- ). Thus he was actively involved when China was awarded and carried out the Beijing 2008 Olympics. Mr. Heiberg has travelled more than 100 times to China over the last 20 years – the majority taking place in the last 7-8 years. He has therefore built up an extensive network of contacts in China, within both business as well as politics.

[i] Han Xiaofei, “Shi Ding-huan: thorough analysis of China’s energy policy”, September 15, 2011.

[ii] Published by the U.S. Energy Information Administration.

[iii] China's "going out" strategy,” The Economist, July 21, 2009.

[iv] The New Policy Scenario of the IEA World Energy Outlook 2011.

[v] "Q&A: China, Japan and the East China Sea gas dispute," Reuters, September 20, 2010.

[vi] The Ministry of Geological Resources and Mining of the People's Republic of China.

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Nordic Capital Advisory (Shanghai) Co., Ltd

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