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Supply and Demand for Oil and Natural Gas in China and India: Present and Future Outlook

Supply and Demand for Oil and Natural Gas in China and India: Present and Future Outlook. May 11, 2010 Arab Energy Conference, Doha. China and India in energy markets. T he two countries together will account for 45% of the increase in world energy demand through to 2030.

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Supply and Demand for Oil and Natural Gas in China and India: Present and Future Outlook

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  1. Supply and Demand for Oil and Natural Gas in China and India: Present and Future Outlook May 11, 2010 Arab Energy Conference, Doha

  2. China and India in energy markets • The two countries together will account for 45% of the increase in world energy demand through to 2030. • Dominance of hydrocarbons in energy baskets. • Their total oil use increases from 9.3 mb/d in 2005 to 23.1 mb/d in 2030 – accounting for 42% of the global increase in oil demand in the period. • Stagnant production levels at home. • Three quarters of the growth in world oil production and 43% of gas production comes from West Asia and Russia.

  3. China: Oil and NG sector China’s Oil and Natural Gas Statistics, 2008 (Source: BP 2009) • Primary energy demand will more than double from 1742 Mtoe (million tonnes of oil equivalent) in 2005 to 3819 Mtoe in 2030. • Became the second largest consumer of oil after the US in 2003, and is expected to lead global consumption in less than 20 years.

  4. … China • The demand for oil in the transport sector quadruples between 2005 and 2030, constituting more than two-thirds of the overall increase in oil demand in the country. • The consumption of natural gas increases at 6.4% per year between 2005 and 2030, but the share of the fuel in total demand climbs only up to 5% from 2% in 2005. China’s Primary Energy Demand in IEA’s Reference Scenario (Figures in Mtoe) Source: IEA 2007

  5. Output of Oil • The country’s proven oil reserves amount to 16 billion barrels. • The IEA expects the total national output of oil to peak at 3.9 mb/d in 2012, rising slightly from the 3.7 mb/d figure of 2006. • The refining capacity of China stood at 77 32 thousand b/d in 2008, and is growing fast. As a convergence of interests becomes evident with oil-producing countries, their investments in the emerging economies’ downstream sector may increase. In 2007, China approved foreign investment in domestic refineries for the first time. ExxonMobil and Saudi Aramco took combined stakes in two joint ventures (of 50% and 45% respectively) with Sinopec.

  6. Output of Gas • Proven reserves of natural gas account for 14 percent of total deposits, indicating the possibility of further increase in gas production. • The output of natural gas in China rose from 14.3 bcm (billion cubic meters) in 1980 to 58.6 bcm in 2006. • The IEA projects an increase up to 118 bcm by 2020 and then a decline in production to 111 bcm by 2030.

  7. Sector Organization • State-owned firms, China National Petroleum Corporation (CNPC), China Petroleum and Chemical Corporation (Sinopec) and China National Offshore Oil Corporation’s (CNOOC) dominate the oil and gas sector. • Since the regulatory reforms of the 1980s, the central government has allowed entry of non-state firms in certain segments; Shell, Chevron, BP, Husky, Anadarko, and Eni. • The National Development and Reform Commission (NDRC), a department of the State Council, is the primary policymaking and regulatory authority in the area of energy.

  8. … Sector Organization • In July 2008, the government launched the National Energy Administration (NEA). The NEA, linked with the NDRC, has the mandate to approve new energy projects in the country, set domestic wholesale energy prices, and implement energy policies, among other responsibilities. • In December 2007, China released a public draft of the ‘Energy Law of the People’s Republic of China’ which outlined its energy policy goals. • The government functionaries need to possess enough information, expertise and ability to reconcile interests in the bureaucracy and the oil and the energy industry which may often be at variance.

  9. India: Oil and NG Sector India’s Oil and Natural Gas Statistics, 2008 (Source: BP 2009) • From 537 Mtoe in 2005, the country’s primary energy demand will more than double by 2030 reaching 1299 Mtoe, with an average annual growth rate of 6.3% , making India the third largest energy consumer in the world by 2030.

  10. … India • The demand for oil increases by two and a half times (from 129 Mtoe in 2005 to 328 Mtoe in 2030) and it caters to 25% of India’s primary fuel demand in 2030, up from 24% in 2005. • Natural gas use registers a three-fold increase over the outlook period from 29 Mtoe in 2005 to 93 Mtoe in 2030. India’s Primary Energy Demand in IEA’s Reference Scenario (Figures in Mtoe) Source: IEA 2007

  11. Output of Oil • India’s proven reserves of oil stood at 5.6 billion barrels in 2006. • The country’s oil output is projected to increase from the figure of 793 thousand b/d in 2006 up to 2010, and then decline to about 520 thousand b/d in 2030. • The country has an installed refining capacity of 2992 thousand b/d.

  12. Output of Natural Gas • The country’s proven reserves of natural gas amounted to 1101 bcm in 2006. India’s gas production is projected to increase from 29 bcm in 2005 to 51 bcm in 2030. • Since 2006, ONGC has announced promising gas finds in the Krishna-Godavari and Mahanadi basins. Another important find is Reliance Industries’ D-6 block in the Krishna-Godavari basin. • Production is expected to reach its peak between 2020 and 2030.

  13. Sector Organization • Characterised by both public and private players even though public enterprises are dominant. ONGC is the biggest oil and natural gas company. Other important public players include Oil India Limited (OIL), Indian Oil Corporation Limited (IOCL) and Gas Authority of India Limited (GAIL), Bharat Petroleum Corporation Limited (BPCL), and Hindustan Petroleum Corporation Limited (HPCL). Reliance Industries Limited (RIL) is the largest private company in the sector. • BP, Cairn Energy Limited, and Royal Dutch Shell are some foreign firms active in the Indian oil and gas sector. • IOCL is the largest player in the downstream sector. • GAIL has extensive gas transmission and distribution infrastructure in the country.

  14. … Sector Organization • Public companies see marked government influence, and come under the administrative control of the Ministry of Petroleum and Natural Gas (MoPNG). • The New Exploration and Licensing Policy (NELP) made exploration blocks offered by the government open for a transparent competitive bidding process. Allowed foreign companies to own 100% equity in oil and gas projects. Progressive rounds of NELP have seen an increase in the number of private sector participants. • Other key stakeholders in decision-making and strategising also include the Ministry of Commerce, Ministry of External Affairs and the Planning Commission. In 2006, the Planning Commission drafted and released the Integrated Energy Policy for the country which has been subsequently revised.

  15. Securing supplies for secure energy futures • Importance of energy trade and overseas investment. • From 3.5 mb/d in 2006, China’s net oil imports are set to increase to 13.1 mb/d in 2030, taking its oil import dependence from 50% to 80%. • China started importing natural gas in liquefied form in 2006. The country could import as much as 130 bcm of natural gas in 2030, accounting for almost 70% of its total natural gas consumption. • For India, net oil imports could be as high as 6 mb/d in 2030. India’s import dependence for meeting its oil needs would reach 93% by 2031. • From almost negligible levels in 2001, import dependence for gas would reach 66%, bringing the overall energy dependence to 80%.

  16. Managing energy import dependence • Rising oil prices, volatility in energy markets, and uncertainty of fuel supplies from producer countries. • In a study conducted at TERI, India was ranked third in an oil vulnerability index of 26 countries, with only Philippines and Korea emerging as more vulnerable. China ranked 11 in the index. • Expanding and deepening trade/commercial ties • Strategic interventions/preparedness

  17. Trade/Commercial Ties • In 2008, Saudi Arabia and Angola emerged as China’s largest oil supply sources. India relies significantly on Saudi Arabia, Nigeria, Iran, Iraq and Kuwait. • About 45% of China’s oil imports and about 64% of India’s come from West Asia. • Need to diversify supply sources. Initiatives in this regard have seen both China and India • make inroads for oil in Africa, Central Asia and South America, both in terms of trade and equity investments • explore possibilities for trade in both liquefied and piped natural gas. • deepening of ties with energy supplying countries.

  18. Equity investments in E&P projects • Business investments pursued by the Chinese NOCs to diversify their profiles, the investments are also driven by perceived vulnerability of energy supplies, increased US presence in West and Central Asia after the attacks of September 11, 2001, and concerns about access to Western markets (these emerged following the US Congress’ opposition to CNOOC’s efforts to buy an American firm, Unocal). • Amongst the Indian NOCs, ONGC’s overseas arm ONGC Videsh Limited (OVL) has been the most active in the pursuit of equity abroad. Operations in 13 countries including Vietnam, Myanmar, Russia (Sakhalin Island), Iran, Iraq, Libya, Sudan, Brazil, and Columbia. • While India and China have both been active in acquiring stakes in oil and natural gas projects abroad, China has often outperformed India in this regard.

  19. Investment in pipeline projects • China: Has operationalized and is in the process of building a number of pipeline projects. China’s first transnational oil pipeline was operationalized in May 2006 when it began receiving Russian and Kazakh oil from a pipeline originating in Kazakhstan. • India: IPI, TAPI, Oman-India sub-sea gas pipeline. • India and China are also investing in LNG re-gasification terminals to facilitate and increase import of LNG. Also, India’s IEP recommends importing LNG through long-term contracts, enlarging domestic buffer stock of LNG, having redundancy in re-gasification facilities. In 1998, GAIL, ONGC, IOC and BPCL formed Petronet LNG, a major joint venture geared towards building and operating LNG import terminals. The first plant Petronet LNG Dahej, commissioned in 2004, is being supplied by Qatar’s Rasgas.

  20. Engagement with new exporting countries also poses physical, political and commercial risks (for instance, risks to pipeline infrastructure and trade routes, internal conflict in Nigeria and Sudan, civil unrest in some Central Asian states, and labour strikes in Venezuela). • International sanction may also influence investing countries’ engagement with host countries. India and China both thus need to build their capacity in assessing political and security risks in relation to their respective interests (possibilities of internal ferment in exporting countries, international conflict, resource nationalism, instability of regimes, and competition from other importers), and evolve appropriate response mechanisms to deal with crises.

  21. Strategicinterventions/preparedness Strategic Oil Reserves • Risk mitigation strategy; need for capital, the logistical enormity of the project and conflicting opinions on the efficacy of such an undertaking, have kept opinions within both India and China divided. • China: Three-phase oil reserve program initiated in 2001. Phase 1 completed in 2009 with a stock of 103 million barrels. Final stage expected to bring total capacity to 500 million barrels. Long-term goal is to maintain a 90-day stockpile. • India: Special purpose vehicle, the Indian Strategic Petroleum Reserve Limited (ISPRL) part of the Oil Industry Development Board. Target to create a storage capacity of 36.6 million barrels in the first phase by 2012 . At the end of the third phase, the stockpile will eventually reach 110 million barrels in 2016.

  22. Security of and access to routes for transportation of energy imports • Energy routes, both sea lanes of communication (SLOCs) and gas pipelines, are vulnerable to threats arising from inter-state tensions, terrorist and/or pirate activities, physical disruptions caused by natural disasters or accidents at sea. • The Malacca Straits and Bab-al Mandab are sea routes used for transport of energy goods to both China and India; at risk from piracy and violent attacks due to prevalent insurgent movements in the region. • Deployment of warships to fight piracy off the coast of East Africa. The Indian Navy has been playing an active role in countering piracy in the Malacca Straits.

  23. Towards stable energy markets: Engaging China, India and West Asia • In the Reference Scenario proposed by the IEA, almost three quarters of the growth in world oil production and 43% of gas production comes from West Asia and Russia. World oil resources are judged to be sufficient to meet the projected demand to 2030, “with output becoming more concentrated in OPEC countries – on the assumption that the necessary investment is forthcoming.” • Most of the additional oil needed by China by 2030 is projected to come from West Asian countries and to a lesser extent from Russia. A major share in China’s natural gas imports will come from Australia. India’s oil and gas import needs will be supplied mainly by West Asian countries.

  24. Given their respective imperatives, East Asian companies are keen on investing in upstream oil and gas sectors in West Asia while OPEC West Asia exporters are investing in downstream activities in China and India. • Oil is a “globalized commodity;” disruption in production would directly impact availability for China and India, the dependence of importers on transport routes implies that any blockades or transport disruptions across important routes such as the Straits of Hormuz would lead to an energy crisis. • The influence of extra-regional powers such as the US; pragmatism in policymaking: India’s and China’s engagement with West Asian states has continued along with their growing engagement with the US.

  25. Intertwined producer-consumer interests and futures • Consumer countries are interested in ensuring stability of energy supply, managing disruptions, and minimising costs. Producer countries are interested in stability of demand and in improving terms of trade. Price stability is of interest to both parties; according to Peter Voser, CEO, Royal Dutch Shell, “Volatility feeds uncertainty over the future price of energy... discouraging investment.” • Need for producer-consumer engagement. The development of the spot market in oil, and the producers’ extensive cooperation to meet importing countries’ needs during the Gulf War at the beginning of the 1990s, highlighted the mutual interdependence of producers and consumers

  26. The International Energy Forum (IEF) membership today includes members of the IEA, OPEC and other key energy players such as Brazil, China, India, Mexico, Russia and South Africa. • The IEA also holds producer/consumer expert meetings on a regular basis. • There needs to be regular interaction between the OPEC, the IEA and other initiatives such as the Energy Charter Treaty. The Cancun Ministerial Declaration approved at the 12th International Energy Forum on 1 April 2010 reiterated the importance of efficient and stable energy markets and fortified the countries’ commitment to a dialogue.

  27. Integration of China and India into international energy fora • Make inclusive the IEA. According to Carlos Pascual, “Expansion of the IEA’s reserve management system to China and India, and technical support to help them coordinate with others, will be an important confidence building measure…” • India’s IEP document states, “Major Asian oil importers like India, China, Japan, Republic of Korea and major Asian suppliers like Saudi Arabia, UAE, Kuwait, Iran, Qatar and Oman all have a stake in securing oil supply and demand. A cooperative relationship - perhaps under an Asian Energy Association - can help in reducing fluctuations in oil supply and prices” • Fossil fuel producers and consumers need to together promote R&D in carbon capture and storage. They also need to work towards reducing emissions emanating from production and consumption of liquid fossil fuels from a “well-to-wheel basis.”

  28. Depleting stock of hydrocarbons • State interventions to ensure security and sustainability of energy supplies/demand in a zero-sum game framework • Concerns over climate change Policies need to be tempered by the recognition of mutual stakes in furthering global energy security in a just and sustainable manner. Energy Trade An Integrated Framework Foreign Policy

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