Asia’s and China’s Energy Challenges

Authors:

Christian Heiberg - Managing Director of Nordic China Advisory (NCA) - NCA is a boutique investment advisory firm specializing in cross border advisory and transaction services, with a focus on opportunities between the Nordic countries and China

Brenda Wei – Investment associate and part of our Shanghai practice.

Asia’s rapidly growing economies will be the primary drivers of increasing global energy demand. Rising per capita incomes, industrialization, urbanization, increased transportation and motorization in Asian economies require consistent, stable, and increasing energy supplies. Accordingly, the priority that governments place on energy security has risen.

For China, supply-side energy security involves securing transport routes and overcoming choke points at sea, diversifying its energy mix (incl geographical), strengthening its petroleum storage capacity, and managing foreign relations.

Strategic energy investments

Despite the European and American debt crises, the oil and gas market has been firm over the last years. As a consequence, the offshore activity in the oil and gas industry has increased. However, existing production capacity is declining, and in 2035 there is an estimated gap of about 100 million barrels per day between the forecast of current production facilities and estimated demand, largely due to global energy consumption growing by 53% from 2008 to 2035.

As transporting and building adequate infrastructures takes time, China’s current energy issues will not be solved overnight. China will increasingly look to invest in countries with abundant natural resources . We have already seen Chinese companies acquire production and exploration fields and companies, on- and offshore. Last week the Russian state-owned company Rosneft got CNPC as partner in exploring three offshore Arctic areas for oil. Therefore, the trend of increased Chinese acquisition activity around the world will continue, as China looks to diversify its geographic risk.

China - a major oil player

China’s primary oil demand is expected to rise from over 8 mb/d in 2009 to 12.2 mb/d in 2020iv. In 2011, China imported over 5 mb/d of crude oil, accounting for about 54% of its total demand. More than 50% of the total crude oil imports came from the Middle East, and more than 70% when including Africa.

From Beijing’s perspective, the closest and the most secure oil & gas resources in the long term should lie within the East and the South China Seas. The East China Sea is estimated to hold nearly 17.5 trillion cubic feet of natural gas, and 20 million barrels of oilv. The South China Sea may contain 17.7 billion tons of crude oilvi . Despite these huge reserves, activity level is relatively low in these areas largely due to the lack of sufficient expertise and technology in deep water exploration. Through our extensive discussions with various Chinese oil companies, we can feel their appetite for overseas acquisition, which is an efficient way to tap into foreign know-how and expertise in the offshore industry.

The High North is a region of opportunity and a geopolitical scene. Great potentials could be perceived for multilateral cooperation in the High North, 25 per cent of the World's new oil and gas resources are located in the Norwegian and Russian part of the Barents Sea. The exploration and development of the petroleum resources in Barents Sea will initially activate economic development. Thus, the presence of strategic resources – in particular hydrocarbons and important minerals – in this vast but scarcely developed region has led both Russia and Norway to emphasize the role of international cooperation.

Both nations depend on oil and gas taxation for their budget revenues and natural resources are an essential driver for the overall economic activity. In addition, petroleum exploration and development are emphasized in national and foreign policy and serves as a stabilizing gauge for national economic performance. Accordingly the energy security is of utmost priority and is based on long-term principles of stability, reliability and predictability.

Norwegian Continental shelf is one of several opportunities

The Norwegian Continental shelf (NCS) is one of several geographic areas where Chinese interests can expand. Norway is the fifth largest oil exporter in the world, with exports amounting to nearly 2.5 million barrels per day. It is also the second largest exporter of gas to Europe. As of today, Norway has exported more than 1 100 billion scm of gas – only about 20% of the total expected recoverable resource. Thus, Norway is, and will continue to be, a long-term stable provider of oil and gas. Two out of the top four oil discoveries in 2011 were made on the NCS. In fact, companies from more than 40 countries are now involved in oil and gas production in Norway.

The development in the Barents Sea is going to be a dominant driving force for future economic development in the North (in and around the Arctic). Many believe that 25 percent of the world's future oil and gas reserves are in the wider arctic region. The results from exploration in the Barents Sea are promising. The exploration in harsh offshore environments has driven innovation. Combined with knowledgeable financial investors this has yielded significant value creation.

Investing in Norway offers a stable and attractive fiscal regime, and gives access to know-how, experience, and technology within several areas, namely the development and operation of large complex projects, subsea engineering, seismic data collection and interpretation, design and operation of deep sea drilling ships and platforms, floating production, and specialised equipment and services.

The Norwegian offshore oil- and gas activity has since the mid-eighties slowly moved towards North. It was early realized that the offshore activity could not be served in a cost effective way through the existing port facilities. New and special designed supply bases had to be built, very often on new land to secure good expansion possibilities. Since the early nineties when the subsea technology arose, subsea development solutions were gradually more preferred for future development concepts offshore, -new and bigger ports and industrial facilities had to be built in addition to the existing supply bases. Securing regional development has always been an important part of the Norwegian oil- and gas strategy, and the experience from the South is now being implemented in the North – offering high, stable and predictable activity. This will provide a necessary foundation for:

  • Establishing new infrastructure in terms of port facilities and land (private or public)
  • Companies with international experience to establish themselves in the area alone or in cooperation with local companies

Opportunities going forward

To obtain the necessary high level of activity the Norwegian policy is to have many companies operating at the same time. Today there are approx. 55 awarded licenses outside Finnmark being operated by 13 different operators and additional 15 different license partners. In May 2013 approx. 70 new licenses are expected to be awarded and through that a substantial increased number of operators and partners will be present in the Norwegian part of the Barents Sea. This pattern of operation will secure a very high level of activity as well as in innovative geology & geophysics (G&G) thinking. In addition it represents a spread of cost shearing and risk taking which is necessary in the Barents Sea. Development of high variety with respect to qualified vendors and manufacturers is another likely consequence. On each of the awarded licenses the Government requires a strict work program to be followed – e.g. in terms of G&G activity and drilled wells that have to be fulfilled within a specified time (few years). From a regional point of view this is the guarantee for the high level of activity.

Over the last decade, several Norwegian suppliers have gained a strong international position. This is a direct result of the will to develop and use new technology on the Norwegian shelf. The interaction between the oil companies on the shelf, the supplier industry and the research environments has yielded good results. From 1995 to 2009, the Norwegian supplier industry has increased its international sales more than fivefold. In 2009, Norwegian petroleum related companies had sales totaling NOK 118 billion abroad, compared with NOK 15.5 billion in 1995.

Development and use of new subsea technology is also an important focus area both on the Norwegian shelf and internationally. With future energy projects in Russia requiring more advanced technology (due to location and environment) and more capital, both Gazprom and Rosneft need foreign investment and modernization. Norwegian offshore and oil service companies have extensive expertise in exploration and development of oil/gas assets. For example, proprietary skills in subsea activities and technology, which have yielded competitive advantage in offshore operations worldwide. Using subsea facilities, small fields can be tied into larger facilities and field centers. The useful life of existing platforms and infrastructure is extended, and in such cases, subsea technology will contribute to recovering more resources from the field areas. The advances within subsea technology also facilitate development in very deep waters. The subsea segment has been a business area where the Norwegian supplier industry is an international leader in technology.

NCA is actively involved in introducing opportunities on the Norwegian Continental Shelf (NCS) to Chinese interests. We are also representing Norwegian interests in the oil fields on NCS and is currently working to introduce Chinese companies to co-invest in the upstream development of the fields. As a matter of fact New Norwegian blocks those were announced to the applicants in the 22. Concession Round 2012 (to be awarded in May 2013). The Norwegian Parliament is expected to approve the opening of the socalled Barents Sea Southeast (Norwegian part of the former disputed area) in June 2013. Furthermore, it is assumed that this area will be included in the “23 license round” followed by license awards in 2015. In this scenario the first wells are likely to be drilled in 2016. In the present plans for the Norwegian sector of the Barents Sea, the investment volume for the next 10 years will pass 300 billion NOK (USD 56 billion), - and at least as much on the Russian side of the Barents Sea

Finally it should be mentioned that NCA is also working to help Chinese oil companies identify partners in the Nordic Region who can bring in not only resources, but also industrial know-how and advanced technologies. Our industrial background and extensive network put us in a unique position to identify the right players, design the best strategy and assist the company in the whole transaction process.

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