IHS ECONOMICS & COUNTRY RISK IHS Financial Seminar · © 2016 IHS. ALL RIGHTS RESERVED. IHS ECONOMICS & COUNTRY RISK IHS Financial Seminar The Road to Growth Dealing with China’s

© 2016 IHS. ALL RIGHTS RESERVED.

IHS ECONOMICS & COUNTRY RISK

IHS Financial SeminarThe Road to GrowthDealing with China’s Overcapacity:A Five-Year Outlook

19 April 2016 | Tuesday | Hong Kong


CHINA’S NEW ENERGY REALITYIHS FINANCIAL AND CAPITAL MARKETS

Oversupply as Catalyst for Reforms

Xizhou Zhou, Senior Director+86 10 6533 4536, [email protected]


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.

3


Changes in economic structure and growth have affected energy demand

4


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


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


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


Coal oversupply continued, with Qinhuangdao FOB price further down 27% in 2015

8

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


Coal imports have contracted two years in a row and will likely continue to in the future

9

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


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


China has taken in LNG imports 6 MMt below contracted volumes owing to demand growth deceleration

11

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.


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.


A series of reform documents represent a holistic approach to power market reforms


The China’s power market structure will be significantly altered following power market reformsChina power market structure (before and after reform)


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

17


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.

18


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

19


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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