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Tim Daiss

Tim Daiss

I'm an oil markets analyst, journalist and author that has been working out of the Asia-Pacific region for 12 years. I’ve covered oil, energy markets…

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The Unforeseen Consequences Of China's Insatiable Oil Demand

While it’s true that China's crude oil imports recovered slightly in July, it was still among the lowest so far this year due to a decline in demand from smaller so-called independent “teapot” refineries.

However, for the first seven months of the year, China imported some 8.98 million barrels per day (bpd) of crude oil, up 5.6 percent from a year earlier. Total natural gas imports, including both pipeline gas and liquefied natural gas (LNG), rose to 7.38 million tonnes during the same period, up 28.3 percent from a year ago, according to customs data.

Moreover, amid both economic growth as well as Beijing’s mandate that gas make up at least 10 percent of the country’s energy mix by 2020 to offset the effects of rampant air pollution from dirtier thermal coal power production, the long term trajectory for both China’s natural gas consumption, as well as oil usage, will continue to increase, posing both a geopolitical and financial dilemma for the country that the U.S. and many western powers grappled with for decades.

Gas matters

Going forward, China’s gas demand is projected by the IEA to rise by 60 percent between 2017 and 2023 to 376 billion cubic meters (bcm), including a spike in its LNG imports to 93 bcm by 2023 from 51 bcm last year. The IEA has also projected that China will become the world’s top natural gas importer (both pipeline and LNG) by next year.

This marked increase in Chinese LNG procurement has changed the global LNG market from one that was projected to remain in a supply overhang scenario until around 2022 or even later to one that is now projected to have possible shortfalls of the super-cooled fuel around the same time frame. It has also ushered in new confidence for global LNG producers and talk of pushing ahead more greenfield LNG projects to meet this demand, a possibility unheard of just a year ago. Related: Oil Prices Hit 7-Week Low As Trade War Heats Up

This increase in gas usage will also mean that China's domestic gas output, though it will be the world’s fourth largest gas producer by 2023, will be unable to keep up, with China increasingly becoming more reliant on gas imports from both established LNG producers like Australia, the U.S. (current trade tensions notwithstanding) and Russia, but also more geopolitically volatile producers such as Qatar, still the world’s top LNG producer, Yemen, Oman, Papua New Guinea, in time Mozambique, and others.

Stellar GDP growth

However, even more problematic for China than its increasing gas consumption projections will be its continued oil thirst. China's oil usage continues to increase amid a GDP growth rate that has been the envy of the western world. Admittedly, China’s economic growth is slowing but the question has to be asked, slowing from what level?

China had double-digit real GDP growth for much of 1980–2005, and energy demand more than tripled during that time. In 2010, China’s GDP grew at a stellar 10.61 percent, followed by 9.4 percent the next year. In 2012 and 2013 China’s GDP growth for both years reached nearly 8 percent, followed by an average GDP growth rate of 6.925 percent between 2014 and 2017. China’s economic growth rate did slip in Q2 this year but it still came in at an impressive 6.7 percent. The U.S., for its part, has not posted a GDP growth rate above 5.12 percent since 2006.

Oil thirst remains problematic

China surpassed the U.S. in annual gross crude oil imports in 2017, importing 8.4 million bpd compared with 7.9 million bpd for the U.S. China had become the world’s largest net importer (imports minus exports) of total petroleum and other liquid fuels in 2013.

Last year, 56 percent of China’s oil imports came from OPEC members. Though that was a marked decline from a peak 67 percent in 2012, it still represents over half of the country’s demand derived from OPEC members. Moreover, as China prepares to decrease imports of U.S. crude oil, OPEC imports, in addition to Russia, will increase to replace lost U.S. barrels.

This over reliance on imports from individual OPEC members puts China in a geopolitically precarious situation. Related: Why The U.S. Won’t Sanction Venezuela’s Oil

Though China could indeed see oil demand growth slow in coming months, in part due to the ongoing trade row with the U.S., in the mid to long term China’s oil consumption thus its reliance on foreign oil will continue to grow. The IEA said recently that China’s oil demand could reach 15.5 million bpd by 2040, after peaking in 2030.

Along with supply risk attributed to over reliance of imported foreign crude, there is the issue of transfer of wealth, again something that plagued the U.S. for nearly 40 years and forced its hand as it became involved in countless military endeavors in the Middle East.

Oil demand problems for China are being exacerbated by its maturing onshore oil fields and the inability to discover and develop new fields in sufficient quantity to offset these production loses – perhaps one reason China has pushed so hard recently in the thought to be oil and gas rich South China Sea.

By Tim Daiss for Oilprice.com

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  • Mamdouh G Salameh on August 10 2018 said:
    Two major factors will continue to underpin China’s insatiable thirst for oil: a fast-growing economy and a declining oil production.

    With the world’s largest economy estimated at $25.24 trillion in 2018 based on purchasing power parity (PPP), the world’s largest importer of crude oil and with the successful launch of the petro-yuan, China is a force to be reckoned with in the global oil market well into the future.

    China’s oil imports are projected to top 10 mbd in 2018 driven by a very healthy economic growth for a mature economy projected at 6.7% this year and declining oil production from China’s two largest oilfileds: Daqing and Shengli.

    Whilst China’s oil production is projected to decline to 3.85 million barrels a day (mbd) in 2018, its dependence on oil imports is projected to account for 73% of its oil needs this year rising to 76% in 2020 and 80% by 2025.

    When it comes to gas demand, China’s demand is growing by leaps and bounds with demand of natural gas projected to hit 376 billion cubic metres a year (bcm/y) by 2023 and with China becoming in 2019 the world’s largest LNG importer. This means that both China’s oil and gas imports will continue to dominate the global oil and gas markets for years to come. However, part of the accelerated demand for gas aims at offsetting the effects of rampant air pollution from dirtier thermal coal power production.

    China’s growing dependence on oil imports has created an increasing sense of ‘energy insecurity’ among Chinese leaders.

    China’s oil imports must pass through two major chokepoints: the Straits of Hormuz and Malacca. Any future conflict with the United States could affect Chinese oil imports passing through both Straits.

    China is overwhelmingly dependent on the Strait of Malacca as 80% of its oil imports pass through it daily. The Strait links the Indian and Pacific Oceans, and is the main route for oil from the Middle East to reach Asian markets.

    The Strait is only 1.7 miles wide at its narrowest point, creating a natural bottleneck with the potential for collisions, grounding, or oil spills. China, the largest oil importer in the world, has a strategic interest in seeing uninterrupted tanker traffic through the Strait.

    With the American Navy patrolling the southern end of the Strait of Malacca and the Indian Navy patrolling the northern end, China feels sandwiched in and strategically vulnerable. The former president of China, Hu Jintao, has referred a number of times to what he describes as the ‘Malacca dilemma’.

    China’s answer to the “Malacca Dilemma” was the newly-opened China-Myanmar crude oil pipeline which runs from the port of Kyaukpyu on Myanmar’s west coast and enters China at Ruili in Yunnan Province. It loads oil shipments from the Bay of Bengal and ships it to China’s Yunnan province. The pipeline with a capacity of 442,000 b/d bypasses both the Straits of Hormuz and Malacca.

    China has also been considering a multi-billion-dollar pipeline that would carry crude oil from Pakistan’s coastal port of Gwadar to Western China. That initiative has not broken ground, although Gwadar figures into a much broader strategic plan for China, beyond oil shipments.

    However, there is another geopolitical side to China’s growing demand for oil and gas.

    China claims sovereignty on 90% of the South China Sea on the basis of documents and maps it says it has had since the former Chinese empires. The prospect of the existence of vast crude oil and natural gas reserves strengthens China’s resolve to maintain its sovereignty over the South China Sea.

    Estimates of recoverable oil and gas reserves range from 28 billion barrels (bb) to 130 bb of oil and some 266 trillion cubic feet (tcf) of gas. Not even the threat of war is going to force China to relinquish its claim of sovereignty over the South China Sea.

    The South China Sea could be a flashpoint between the United States and China. China is continuing to develop installations on reefs and islets in the South China Sea, including putting in place military assets, in an obvious attempt to militarize and control the area. It is also continuing to beef up its navy in case it needed to challenge the supremacy of the US Navy in the region.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Jeffrey J. Brown on August 10 2018 said:
    GNE = Combined net oil exports from (2005) Top 33 net oil exporters (BP + EIA data, total petroleum liquids)

    CNI = Chindia’s Combined Net Imports (BP, total petroleum liquids)

    ANE = Available Net Exports, GNE less CNI

    In regard to China & India ("Chindia") using the BP data base Chindia's Net (total petroleum liquids) Imports, or CNI, increased from 5.1 million bpd in 2005 to 12.8 million bpd in 2017, which I would round off to 5 and 13 million bpd respectively.

    Following is a link showing my GNE/CNI chart for 2002 to 2011, using EIA data:
    http://i1095.photobucket.com/albums/i475/westexas/Slide1_zpsu5daownl.gif

    Note that the extrapolation (based on the 2005 to 2011 rate of decline in the GNE/CNI Ratio) shows the ratio falling to just above 3.0 in 2017, on track to approach 1.0 (the Chindia region theoretically consuming 100% of GNE) by 2030.

    Using the updated data, the GNE/CNI Ratio fell to 3.5 in 2017, on track to approach 1.0 by the year 2033 (EIA & BP Data).

    What I define as Available Net Exports (ANE, or GNE less CNI) fell from 40 million bpd in 2005 to 32 million bpd in 2017. This is the volume of Global Net Exports of oil available to importers other than China & India.

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