Authors: John Auers, Elizabeth Hilbourn and Wei Li
Considering the growing importance of China to the energy markets and the recent and high profile developments and speculation about economic activity there, we continue our discussion on the “Sleeping Giant” (a nickname given to China by Napoleon). Today, we note that the 70th anniversary of Japan’s defeat in WWII, a conflict that took between 15 and 20 million Chinese lives, was celebrated in grand fashion recently (on September 3, 2015). You have to hand it to China, similar to the 2008 Olympics; they do everything extravagantly. The sky was blue and everything was new and modern. Many global leaders were distinguished guests; however, there was a marked absence of North American and European leaders. The attendance of President Putin was a given considering the two countries’ increasingly close ties, especially on a military and energy level. With fears of market instability creeping in, an event like this could build confidence and gain a little domestic support, at least for a very short while. Somehow, they even made the balloon release (shown in the middle picture) look like a graph of the stock market. It depicts a series of recent ups and downs with a final upswing. Energy markets have also been impacted by developments in the overall economy in China and these are playing a major role in global energy sentiment. EIA recently issued their September Short Term Energy Outlook and revised growth in global consumption for 2016 downward by almost 0.2 million b/d, compared with last month’s forecast, as China and other Asian economies continue to show signs of weakness. In the same report, China’s growth in oil consumption is expected to average slightly less than 0.3 million b/d in 2015 and 2016, below the 0.4 million b/d growth in 2014. But does EIA have it right – is China demand growth really slowing? Some real-time demand actually shows growth continuing at a strong pace. Today, we’ll cover some of the agreements coming out of Russia’s “Pivot to the East,” and how these might impact the energy environment; plus, we will also take a look at the conflicting signals regarding Chinese oil demand.
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Energy Deals after the Parade
Russian President Vladimir Putin and troops joined China’s parade celebrating the victory over Japan 70 years ago. Vladimir Putin made use of his time in Beijing by meeting with Chinese President Xi Jinping after the celebration. They further enhanced their energy cooperation by initiating many energy agreements.
- Rosneft Signs ChemChina, Sinopec Deal
Russia’s top crude producer, Rosneft, made a general conditions agreement with China Petrochemical Corporation (Sinopec) on developing Western Siberia’s Russkoye field and East Siberia Yurubcheno-Takhomskoye field. Furthermore, Rosneft and China National Chemical Corporation, ChemChina, made a general conditions agreement on the planned purchase of a 30% stake in ChemChina Petrochemical Corporation (CCPC). Finally, a majority stake in Far-East Petrochemical Company (FEPCO) was proposed to be acquired by ChemChina in a memorandum of understanding.
Rosneft said that this deal means the Chinese group of companies has the right to acquire a 49% stake in East Siberian Oil and Gas Company (ESOGC) and Tyumenneftegaz, which hold the exploration licenses for Russkoye and Yurubcheno-Tokhomskoye fields. Because Rosneft, just like other Russian oil and gas companies, is unable to access U.S. and E.U. capital markets and technology, the deal with China will secure finances and technology for those field developments.
The deal on Rosneft’s purchase of a stake in ChemChina’s petrochemical arm CCPC is balanced with a 1.5 million barrels a year supply of Urals crude. A Memorandum of Understanding was signed to supply alternative crudes, such as ESPO or Sokol. The parties are to hold further negotiations for crude to be supplied over a three-year period.
- Novatek to sell Yamal LNG stake
Novatek made an agreement to sell a 9.9% stake in its Yamal LNG project to China’s Silk Road Fund (SFR). If the deal is approved, China’s CNPC will own 29.9% stake, France’s Total still holds a 20% stake, and Novatek’s share will drop to 50.1%. The Yamal LNG project in the Northeast of the Yamal Peninsula is one of the most prospective and competitive LNG projects in the world, according to SRF President Wang Yanzhi. According to Novatek data, the Yamal LNG project may be construction of an LNG plant with capacity of 16.5 million mt/year based on the feedstock resources of the South-Tambeyskoye field. By the end of 2014, the South-Tambeyskoye field contained 926 Bcm in proven and probable natural gas reserves.
- CNPC, Gazprom sign MoU on pipeline gas
Gazprom made a Memorandum of Understanding with CNPC on pipeline gas supplies from Russia’s Far East. This is a new way for Russian gas deliveries to China, the third in two years in row. Gazprom mentioned earlier this week it was proposing a new route of delivering around 15 Bcm/year of gas from Sakhalin in case the Vladivostok LNG project was canceled.
Will There be a Victory in the Market?
There are impending concerns over weakening economic growth in China and its surprise devaluation of its currency, as well as plunging commodity prices. Because all eyes have been on China since it has been an engine of growth for the global economy over the past decade, markets were rattled by signs that growth has slowed more sharply than expected. We originally explored the facts and myths surrounding Chinese petroleum demand in the August 11, 2015 blog, “Ancient Chinese Secret, huh?” As shown in the figure below, petroleum demand in China has been increasing at approximately the same rate since late 2010, with no “flattening” apparent yet. It should be noted that because of month to month variability, it is difficult to look at China petroleum demand on a real-time basis and this is why we plotted semiannual data along with sporadic monthly data. Data through the first half of 2015 (which is the most recent data available) indicates continued and perhaps even accelerating demand. This certainly contrasts with EIA’s recently released pessimistic views in their September Short Term Energy Outlook, which we suspect is based more on “feel” rather than hard data and trends. Others have expressed similar views as we have. Morgan Stanley analyst, Adam Longson of New York, said in an August 24, 2015, research report, “Despite poor headline macro-data, most China oil demand data points remain resilient.” The International Energy Agency posted in their September 11, 2015 Highlights, “We expect China to keep up its crude purchases despite the recent stock market collapse, currency devaluation and steady stream of negative macroeconomic news.” It is certainly very possible and in fact seems logical that petroleum demand in China could follow the negative trends that recent economic-growth indicators and stock market performance have shown in China and that EIA expects to materialize. However, actual demand data appears to be hanging tough and we wouldn’t discount the “Not So Sleepy Giant” yet.
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As the Chinese economy and energy markets enter into what could be an important “transition period”, Turner, Mason & Company actually views the last several years as a transition period for the entire global market, one seeking a new equilibrium with regards to supply, demand and commodity prices. We analyze this developing equilibrium and the factors which will determine the outcome in a new study, The Evolving New World Order: Rebalancing Global Oil Supply in the Next Decade. Turner, Mason & Company has collaborated with Schlumberger Business Consulting (SBC) on this report which seeks to provide an integrated perspective on liquids starting from upstream production and extending to downstream demand for different qualities of crude with the aim to inform all players in the energy arena as they attempt to make important investment and operating decisions. The prospectus and a subscription form can be found by clicking here and we are available to answer any questions directly by phone or email.
We have also explored these issues in our most recent edition of our biannual Crude and Refined Products Outlook (The 2015 Midyear Outlook). This report evaluates and discusses issues and drivers related to the global refining industry and provides an independent view of mid- to long-term supply and demand balances for both petroleum feedstocks and products. It includes a comprehensive price forecast for key regions around the world, with the goal to help industry participants in evaluating business strategies, capital investments and financial decisions. An Outlook brochure or subscription form can be obtained by clicking here.
We encourage you to log on to the web and watch a video of China’s Victory Day Parade. It was splendid and filled with pomp and circumstance. As the world’s markets continue their adjustments, Turner, Mason & Company keeps a constant watch on developments in all segments of the petroleum industry. For more details about any of our publications, studies or other TM&C services, please visit our website, send us an email or give us a call.