CHINA WHY DO WE CARE? CHINA’S ENERGY FUTURE NS Winter 2013 Dan Jones Nick Devorak Ryan Harris Zeb Daniel

Outline History of China Energy China’s Energy Infrastructure Energy Breakdown Internal/External Factors 2040 Outlook Why Do We Care? Where do we go from Here?

History of China Energy China's real gross domestic product (GDP) grew at an estimated 9.2 percent in 2011 and 7.8 percent in the first half of 2012, after registering an average growth rate of 10 percent between 2000 and Note: China mitigated the 2008 global financial crisis with a massive $586 billion (4 trillion yuan) stimulus package spread over two years. Was a net oil exporter until 1990 and in 2009 became the world's second largest net importer Changes Trending: Breakup of large single Electricity provider into 5- smaller ones Oil Providers divesting from specialized roles, integrating upstream and downstream operations Static Trends: Loose Political Control over Coal, decentralized suppliers Strong Political Control over pricing (NECs gaining leverage)

China’s Energy Infrastructure Central Control and management of resources Historically inflexible and time lapsed National Energy Companies ministry-level SOE until 1988 Now, diversified, canned competition OIL – making news PetroChina Co Ltd (CNPC) – north/upstream Sinopec – south/downstream CNOOC Ltd – worldwide/upstream Sinochem – downstream COAL – China’s current energy source – 75% Highly diversified in both mining, generation, and transmission – inefficient/loose eco regs NUCLEAR – up and coming

Coal Industry Production: 3, million short tons Consumption: 3, million short tons Imports: million short tons Future Issues and/or Shortfalls: In 2009 china became a net importer of coal for the first time in over two decades. This was a result of increase cost of domestic coal, difficulty of transportation to the power plants, and increased environmental and safety concerns.

Oil Industry Production: China produced an estimated 4.3 million barrels per day (bbl/d) of total oil liquids in 2011, of which 95 percent was crude oil. China's oil production is forecast to rise by about 170 thousand bbl/d to nearly 4.5 million bbl/d by the end of Over the longer term, EIA predicts a flatter incline for China's production, reaching 4.7 million bbl/d by Consumption: 8,924 Thousand Barrels per Day Imports: 4, Thousand Barrels per Day Future Issues and/or Shortfalls: Domestic Price Regulations

LNG and Natural Gas Industry Production: 3,334 Billion Cubic Feet Consumption: 3,768 Billion Cubic Feet Imports: 435 Billion Cubic Feet Future Issues and/or Shortfalls: China became a net importer of natural gas in 2007 for the first time in over two decades. Currently accounts for a small percentage of power generation, with the projection of an increase role.

Energy Generation Production: Quadrillion BTU 18% Hydroelectric, 80% Coal Consumption: Quadrillion BTU Imports: Quadrillion BTU Future Issues and/or Shortfalls: Industry accounts for 75% of electricity consumption. Became the largest producer of Hydroelectricity in 2010.

2040 Energy Outlook China’s population will peak around 2030, will see a steep drop in its working-age group. This shift, tied to policies on family size, helps explain why China’s gross domestic product (GDP) growth – and its energy demand – is expected to moderate in coming decades. Non OECD energy demand will grow by close to 60 percent. China’s surge in energy demand will extend over the next two decades then gradually flatten as its economy and population mature. Elsewhere, billions of people will be working to advance their living standards – requiring more energy. China, which today accounts for close to 50 percent of global coal demand, will see its coal usage fall by more than 10 percent through China, which today is one of the largest users of energy for residential/commercial purposes, will see demand flatten in this sector after 2025 as its population nears a peak and energy efficiency continues to improve. China’s industrial energy demand continues to grow; over the next two decades, it will rise by about another 20 percent. Starting around 2030, China’s industrial energy demand will peak as the country’s population reaches a plateau its economy matures and its infrastructure expands at a more measured pace. China’s electricity demand will more than double by However, China will do what the United States and Europe have been doing, which is to shift its electricity generation away from coal. China’s natural gas demand growth of 15% will be split between the industrial sector and the residential/commercial sector, where distribution lines are being rapidly expanded and gas is very competitive versus liquefied petroleum gas (LPG). Source: Exxon Mobile and EIA

Key Internal Factors Centralized Command and Decision Making vs Global Markets Diversification of Energy Sources - How to get off of coal? Energy Demand is Driven by Heavy Industry (Industry-Led Demand) Consumption-Driven Demand

External Factors External According to Whom? – Taiwan – Spratly Islands Developing Alternative Means – Kazakhstan – Myanmar (Burma) How far can Chinese Foreign Policy Reach? – Sudan

Why Do We Care? “Strategic Pivot” – Taiwan – Japan – Australia “String of Pearls” – Chinese Alliances/Agreements Positive Effects – New Power to Develop Capabilities/Negotiate

Where Do We Go From Here? Directly to War: Do not pass “Go,” Maybe Collect Profits Joint Ventures in Energy – Agreements to Sell American LNG (in future) – Tech Aid to Harvest from Latent Shale Reserves Status Quo – A “Next Cold War?”

Questions?