China is making an aggressive entrance into the world of energy exchanges, but will it help the markets like some analysts suggest, or will it spell doom for oil prices?
Persistent oversupply in the global oil and gas market has created a difficult situation for smaller oil and gas companies who must find ways to compete in a debt-laden, low-priced environment against state-run oil titans like Saudi Aramco and deep-pocketed oil giants such as Exxon.
But the small oil and gas players—those private companies that are facing an uncertain future despite sitting atop a literal wealth of oil and gas in prolific US shale plays—may have just been handed their ticket out of trouble by the largest oil importer in the world, China.
Or have they?
China, in its quest to shore up its energy security, is launching a new energy exchange that will make it much easier for buyers and sellers of all things energy—including gas, oil, LNG, carbon credits, and even chemical products—to find each other and do business together in the robust Chinese market that might otherwise seem daunting to enter.
For smaller US energy businesses—which account for nearly 60-70% of all energy companies in the United States--the Greater Bay Area International Energy Transaction Center, as the exchange is called, could be just what the doctor ordered: easier access to a tricky but colossal market.
For China, the exchange is designed to protect its energy security at a time when its voracious appetite for crude oil exceeds its domestic production.
On the surface, it seems like a marriage made in oil heaven.
But concerns with the new energy exchange are widespread, and global--from the United States to the Middle East.
Small Independents
Today, there are approximately 9,000 independent oil and gas companies operating in the United States—this includes only those businesses that produced fewer than 75,000 bpd and have less than $5 million in oil and gas sales per year. This class of producers accounts for 83% of all oil produced in the U.S., and 90% of all natural gas.
It’s a booming business—and no doubt some of these smaller players will jump at the chance to engage with Chinese companies to sell their oil and gas products. There are concerns, however, that easier access to the huge Chinese energy market will erode prices further—a price situation that China is looking forward to.
As for those independents, some of which are struggling in the already lower oil price environment, additional price erosion could mean death.
Middle East
And then there are the Middle East producers. There was a time when the United States imported almost 150 million barrels of oil monthly from OPEC member countries, according to the Energy Information Administration. But then just a few years ago, the United States lifted the export ban on crude oil, and everything changed. In January 2017, the United States imported 117.6 million barrels of oil from OPEC. In September 2019—the last month for which there is data—the United States imported just 48 million barrels.
That’s less than half.
OPEC nations—mostly Saudi Arabia, Venezuela, and Iraq—had enjoyed hawking their wares on the US market. But as the U.S. slowed its oil imports, Middle East producers set their sites on another large market: Asia, including China.
Those same OPEC nations that were hurt by U.S. oil production will also be hurt by China’s courting of U.S. oil companies through this exchange. For OPEC, who has come up against the United States oil industry time and time again as it tries to lift prices through production cuts, American oil producers keep turning up like a bad penny.
A Geopolitical Foothold
China is hoping that the new international exchange platform will rival the LSE and NYSE when it comes to online trading of crude oil and other energy-related products, including settling trade and delivering it. In addition to crude oil, chemical products, and LNG mentioned above, it will also deal with LPG, methane, ethane, and energy derivatives. And there’s more: it will also make available market information.
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But the exchange will also increase—to the worry of many—China’s geopolitical foothold in new markets.
China is fast sinking money into developing oil and gas resources in foreign countries, despite lower oil prices. Its state-run oil companies, including CNOOC, have been throwing money at oil projects in Brazil, Mexico, Guyana, Nigeria, and Canada--and the US Gulf of Mexico, to name just a few. And while some see this as just a method of filling the oil void left by its own domestic production, others see this as China’s way of controlling oil resources across the globe for geopolitical gain.
China has already sunk money into Iran and Venezuela in the form of loans in exchange for cheap crude--two countries that have found themselves on the receiving end of US sanctions that have crippled their respective oil industries. This move has upset the geopolitical apple cart as the U.S. struggles to bring oil exports for both to zero--without China’s backing, the U.S. might have been successful in doing so.
The growth of a massive new energy exchange not only improves China’s global positioning to influence oil prices, but also increases its geopolitical clout as its money gives it influence in state-run oil companies that carry political sway within their governments--particularly with Venezuela’s PDVSA and Angola’s Sonangol.
There is no doubt that the exchange will increase the energy trade between smaller players. Whether this will have a positive result for small U.S. energy companies or whether this will crush prices and increase China’s political might remains to be seen.
Byt Julianne Geiger for Oilprice.com
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