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IHS ECONOMICS & COUNTRY RISK
IHS Financial SeminarThe Road to GrowthDealing with China’s Overcapacity:A Five-Year Outlook
19 April 2016 | Tuesday | Hong Kong
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CHINA’S NEW ENERGY REALITYIHS FINANCIAL AND CAPITAL MARKETS
Oversupply as Catalyst for Reforms
Xizhou Zhou, Senior Director+86 10 6533 4536, Xizhou.Zhou@ihs.com
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Key implications• China’s economic restructuring leads to hard
landing for energy. This has had a major dampening impact on energy demand, as industry accounted for a majority of the country’s energy consumption.
• Oversupply in China has spilled over into the international market. The oversupply that had been creeping up on China’s energy markets emerged dramatically in 2015. Exporters targeting China must reset their expectations.
• Low prices and oversupply are the catalyst for market reforms. Across all sectors, the government has sought to push out further reforms in a period when participants are more willing to embrace change. Low fuel prices have reduced the risk of spikes from tentative moves toward more market-based pricing and highlighted inefficiencies in incumbent state-owned enterprise suppliers.
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Changes in economic structure and growth have affected energy demand
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The heavy industrial “hard landing” has an outsize impact on power consumption
0 10 20 30 40 50
Services
Construction
Utilities
Light Manufacturing
Heavy Manufacturing
Mining
Agriculture
GDP
Power consumption
Chinese GDP and power consumption by sector, share of total, 2013
Source: IHS © 2016 IHSPercent share of total
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10 provinces experienced power demand contraction
National2015 power demand growth: 0.5%
Difference with 2014 rate: -3.3 percentage points
>10%
5–10%
0–4.9%
-4.9–0%
<-5%
Xinjiang7.0-4.7
Qinghai-9.0
-15.9
Tibet 19.2+8.3
Yunnan-5.9
-10.5
Sichuan-1.1-4.5
Gansu0.3-1.7
Ningxia3.5-1.2
Shaanxi-0.3-6.8
Shanxi-4.7-4.2
Henan-1.4-2.1
Hubei0.5-1.2
Guizhou0.0-4.5
Guangxi2.0-3.7
Guangdong1.4-6.9
Jiangxi6.7-0.9
Fujian-0.2-9.4
Zhejiang1.4-0.2
Anhui3.5-0.3
Jiangsu2.0
+0.9
Hebei-4.2-6.1
Inner Mongolia5.2-5.5
Liaoning-2.7-4.2
Jilin-2.4-4.6
Hunan1.2
+0.6
Hainan8.3
+0.1
Beijing1.7-0.9
Shanghai2.7
+5.6
Tianjin0.8-1.7
Heilongjiang1.2-0.5
Shandong0.5-2.9
Chongqing1.0-5.6
© 2016 IHSSource: IHS, China Electricity Council
2015 power demand growth
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Nationwide system reserve margin has reached an all-time highReserve margins in regional grids (2015)
© 2016 IHS: 50406-1
Notes: 1. Dependable capacity as of 31 December 2015. 2. Peak load may be from summer or winter depending on region. 3. Reserve margin is calculated as: (installed capacity – peak load) / peak load.4. Dependable capacity has been adjusted to include dedicated transmission lines between regions.Source: IHS Energy, China Electricity Council
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Coal oversupply continued, with Qinhuangdao FOB price further down 27% in 2015
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0
200
400
600
800
1000
1200
Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
China benchmark Qinhuangdao 5,500kCal price
Source: IHS, China Coal Transport and Distribution Association © 2016 IHS
RM
B p
er m
etric
ton
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Coal imports have contracted two years in a row and will likely continue to in the future
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0
50
100
150
200
250
2010 2011 2012 2013 2014 2015
Lignite Steam Other coal
China's annual thermal coal imports by type
Source: IHS Energy, China Customs
MM
t
© 2016 IHS
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Gas demand growth fell to 2.4% in 2015, affecting both imports and domestic supply
10
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
(1.5)
(1.0)
(0.5)
0.0
0.5
1.0
1.5
2.0
2.5
Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15
Domestic production Pipeline imports LNG imports Year-on-year supply growth
Year-on-year incremental gas supply
Source: IHS Energy, China Customs, CNPC © 2016 IHS
Bcm
Gro
wth
rate
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China has taken in LNG imports 6 MMt below contracted volumes owing to demand growth deceleration
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19.8 19.9
6.0
10
12
14
16
18
20
22
24
26
2014 Declines fromQatar
Other declines Non-NOCadditions
New 2015contracts
2015 Volumes undercontracted level
China received 6 MMt below contracted volumes in 2015
Source: IHS Energy, IHS Waterborne LNG © 2016 IHS
LNG
impo
rt v
olum
es (M
Mt)
Notes: Other declines include net volumes from CNOOC's Malaysia LNG and Northwest Shelf contracts, and CNOOC and CNPC's portfolio contracts with BG, BP, TOTAL, and Engie. Non-NOC additions include cargoes by Shenergy, Jovo, Guanghui Energy, and Pacific Oil and Gas. New 2015 contracts include Papua New Guinea and Queensland Curtis LNG contracts.
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Oversupply as a catalyst for market reforms
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Weak fuel prices present a fertile environment for reforms• A series of energy market reforms are targeting different parts of the value chain.
• Low fuel cost provides an important opportunity for policymakers to start on powerwholesale and retail market reform.
• Upstream sector opening will create new opportunities for non-NOCs, while continuing to support the NOCs amid the low oil price environment.
• Third party access and midstream unbundling has already started, but drastic changes will take time.
• Oil and gas market reform is closely related to the reform of state-owned enterprises. Mixed ownership has been one of the most acceptable measures for different stakeholders.
• Reforming the Chinese energy market is a complex process that requires coordination among different stakeholders. Reform objectives include securing energy supply, promoting investment, improving operational efficiency, and maintaining market stability. The prioritization of each depends on market conditions and stakeholders involved.
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A series of reform documents represent a holistic approach to power market reforms
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The China’s power market structure will be significantly altered following power market reformsChina power market structure (before and after reform)
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Multiple reforms are ongoing along the oil and gas value chain, with varying levels of progress
Upstream Midstream Downstream
NOC NOC reform;Mixed-ownership
NOC reform;Mixed-ownership;Potential midstreamunbundling
NOC reform;Mixed-ownership
Non-NOCs
Exploration and production licensing system
Third party access Crude import licensing
Fiscal and pricing
Tax adjustment; Subsidies adjustment
Oil and gas trading platformsPrice adjustments
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NOC reforms are only part of the broader SOE reforms
September 2015, “Guideline for deepening the state-owned enterprises’ reform” (深化国有企业改革的指导意见):
• The state should be the controlling equity holder for SOEs in key strategic sectors.
• The mixed-ownership model will continue.
• SOEs will need to turn in more profit to the state.
• State investment and operation companies (国有资本投资运营公司) will be established
NOC Reform
Capital and profit
Energy security and
social responsibility
Efficiency and fair market
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Upstream: Six conventional blocks opened to non-NOCs with modest market response
Beijing Energy Investment Holding Co., Ltd.北京能源投资(集团)有限公司
Shandong Polymer Bio-chemicals Co., Ltd. 山东宝莫生物化工股份有限公司
Removed from list by Ministry of Land Resources due to “technical reasons”
Did not attract the required minimum of three bidders.
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Mixed-ownership has become an acceptable reform direction for many different market players
SinopecEngineering (Group) Ltd. for downstream EPC went public.
CNPC upstream JV “Jin Gebi”
CNPC looked for buyers for its Eastern Pipeline Company
Sinopec mixed-ownership reform sold 30% of its sales company
Sinopec oilfield service sector went public by reverse merger.
Sinopec oilfield equipment manufacturing sector went public by reverse merger.
CNPC JV with Guanghui Energy Co. Ltd. in marketing and sales sector
Sinopec upstream JV “Xinchun”
CNPC upstream JV “Hongshan”
CNPC upstream JV “Yan’an”
CNPC West-East pipeline III assets
CNPC equity of its West-East pipeline I and II assets’ western part
CNPC JV in Xinjiang for sales and marketing
2012 2013 2014 2015
Ups
trea
mM
idst
ream
Dow
nstr
eam
Oil
serv
ice
NOCs: Increase investment while maintaining the operator roles. Non-NOCs: Access to unprecedented opportunities to invest in oil and gas assetsLocal governments: Higher tax payment and improved local employment from JVs
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Midstream: Independent pipeline operator(s) under discussion
What will it include?• Long-distance gas transmission will
almost certainly be included, but will still be majority state-owned.
• LNG terminals and gas storage facilities are more difficult to break off because more players are involved.
• Provincial-level transmission and local distribution networks are not the current focus.
What will the ownership structure look like?• The new company could own and operate
all midstream gas infrastructure.
• Alternatively, it could only control system operations, allowing companies to maintain ownership while freely allowing others to access midstream infrastructure.
•Midstream unbundling, legally or physically, can take a long time to be truly effective. In our base case, an independent national pipeline company takes shape only
towards the end of this decade.
?
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Reforms must balance the interests of a multitude of market participants and governmental entities
State Council
MEPMinistry of
Environmental Protection
NDRCNational Development
and Reform Commission
MLRMinistry of Land and Resources
SASACState-owned
Assets Supervision and Administration
Commission
MOFMinistry of Finance
SATState
Administration of Taxation
Chinese state-owned enterprises
International oil companies
Service
EPC
Market
Consumer
Local governmentsXinjiang, Sichuan, Chongqing, Shandong, …
…
E&P Midstream Refining & chemical
Market & sales
Service & engineering R&D …
Policy-makers and regulators
Suppliers Consumers
Competitors and partners
Equipment
……
Trader
……
Other NOCs
Chinese Privates
Other Privates
National Oil Companies (NOCs)
CNPC Sinopec CNOOC
NEANational Energy Administration
MOFCOMMinistry of Commerce
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Q & A
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