China's pursuit of energy to put world relations to test: S&P

Singapore (Platts)--13Oct2005

China's aggressive search for oil supplies overseas is already "helping
rattle the global oil markets and straining international relations." Worse,
the pressure will grow over the next two decades, as the Chinese oil sector
struggles to meet skyrocketing industrial and consumer demand, ratings agency
Standard & Poor's said Thursday.
     China's dogged pursuit of petroleum resources could also further prop up
high energy prices, in turn threatening the financial and credit health of
companies that are energy-intensive and those whose customers buy less of
everything because they spend more on energy, S&P said in a research report.
     The second-largest oil consumer in the world behind the US, China last
year guzzled about 314-mil mt of oil, of which 122.7-mil mt or 39% was
imported. 
     The country will account for 20% of the world's incremental energy demand
over the next 30 years, the International Energy Agency estimates. The IEA
predicts China's oil imports will soar from less than 2-mil b/d now to almost
10-mil b/d in 2030--equivalent to more than 80% of its oil demand then.
     A "startling increase in car ownership" was one factor fueling China's
extraordinary growth in oil consumption, the S&P analysis noted. Before the
1990s, cars were mainly bought and used by government departments or
businesses, it said. In 1992, individuals owned a total of just 1-mil
vehicles. But by the end of 2004, the number had multiplied to 10-mil. 
     "As long as the economy continues to grow at its current
high-single-digit rate, car sales could increase by more than 10% annually for
several years to come," S&P said. It cited China's Development and Research
Center prediction that fuel demand for autos nationwide will reach 138-mil mt
by 2010 and 256-mil mt by 2020, accounting for 43% and 57% respectively of
expected total petroleum use. 

     INDUSTRY GUZZLING MORE OIL
     The country's growing industrial base is also sucking up fuel fast, S&P
said. Real GDP grew 9.5% on year in the second quarter of 2005 and industrial
output rose 16% in the year to August. "Even if the country's economic growth
slows, as many expect, the rapid pace of urbanization will continue to
increase China's oil consumption, possibly doubling it within a decade," the
ratings agency projected.
     Meanwhile, the gap between oil consumption and production is widening.
This year, China will produce about 180-mil mt of oil (about 3.5-mil b/d),
with little future prospect of squeezing more out of its aging onshore fields
in the east. New technology could improve recovery rates, but not enough to
catch up with the strong growth in consumption, S&P reckons. 
     In the meantime, as China steps up its search for oil, S&P sees a
worldwide impact in the following ways: Bilateral oil supply arrangements will
become more complicated; there will be more competition to acquire energy
projects and reserves; 'uneconomic' energy projects may get the green light
more quickly.
     China's oil strategy is "putting an undeniable stamp on international
relations", S&P said. The country is developing stronger commercial relations
with several oil-producing companies and government, fanning tensions
elsewhere. 

     SOME IN THE US FEAR COUNTRY'S MARGINALIZATION
     As China roams ever further in search of energy resources, "it is likely
to collide with the energy strategies of other countries," S&P predicted. It
noted that China's quest to find new supplies had already fueled a furious
debate in the US: Some observers there say that China's diplomatic advances in
Asia, the Americas, and the Middle East could marginalize the US presence in
these regions, where America traditionally has had a significant influence. 
     Japan, entirely dependent on imported oil, is also "alarmed by China's
growing influence". China has crossed swords with its northeastern neighbor
over gas fields in overlapping waters of the East China Sea, and hotly
contested for pipeline oil supplies from Russia's West Siberia.
     Meanwhile, oil producers in the Middle East, the Commonwealth of
Independent States and Africa have warmly received China's expansion plans.
Beijing has also been courting oil-rich countries in the Americas; Venezuela,
world's fifth largest oil exporter, recently offered China wide-ranging access
to its oil reserves as part of a trade agreement, S&P noted. The deal will
allow China to operate Venezuelan oil fields and invest in new refineries
there.
     Following the defeat of China National Offshore Oil Corp's $18.5-bil bid
for US independent Unocal earlier this year, the state-owned upstream major is
likely to pursue other prime targets overseas, S&P said. Integrated state
giant China National Petroleum Corp has offered $4.18-bil in cash to take over
Canada-based player in the Kazakh oil sector, PetroKazakhstan.
     Chinese appetite has already accelerated the development of projects that
were once considered uneconomic, such as LNG projects and oil sand operations
in Canada. Beijing will need to forge more alliances to supply and transport
energy, and "dialogue will be essential on all sides to avoid
misunderstandings," S&P said.

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