The Rise Of China

By Eric Fox | January 11, 2012 AAA

China's demand for oil may reach a level comparable to the United States by 2040, despite aggressive efforts by that nation to manage demand through encouraging fuel efficiency and the use of electric vehicles. These conclusions come from a recent study forum organized by the James A. Baker III Institute for Public Policy at Rice University. (To know more about oil and gas, read Oil And Gas Industry Primer.)

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Chinese Demand
As China has advanced economically and demand for oil has increased at a rapid rate, moving from 5.6 million barrels per day in 2003 to 9.2 million barrels per day in 2010. Since China's domestic production is inadequate to meet this demand, net oil imports have also increased, moving from 2 million to 4.9 million barrels per day over the same time frame, according to the study.

Energy Policy
One might assume that China's centralized form of government would make it easier to implement an energy policy that attempted to constrain energy demand as much as feasible. The study found that energy policy here is no more successful than the "makeshift patchwork" of initiatives attempted in the U.S.

Acquisition Strategy Abroad
China has attempted to secure energy supplies through investments abroad, either through mergers or equity investments. The study also found this strategy lacking as China has encountered political instability in many countries it has invested in, as well as a political backlash in some areas.

Domestic Production
China is attempting to develop domestic sources of oil and natural gas, and has seen recent investments from several energy companies.

Chevron (NYSE:CVX) is developing the Chuandongbei natural gas field, located onshore in Sichuan Province. The project will consist of two facilities to process production from different areas of the field with peak production from phase one expected to be 558 million cubic feet (Mcf) per day. PetroChina (NYSE:PTR) is partnering with Chevron on the development of Chuandongbei, which will cost approximately $5 billion to complete.

While this level of peak production might seem to be fairly significant, it pales in comparison to production from other active natural gas plays. Cabot Oil & Gas (NYSE:COG) recently announced that production from the company's Marcellus Shale properties reached 606 Mcf per day in early January 2012. The company is only one of many operators active in the Marcellus Shale.

Chevron also has interests in several prospective deepwater blocks located in the South China Sea, and is involved in a partnership with CNOOC (NYSE:CEO) and ENI (NYSE:E) on producing properties in the Pearl River Basin area.

Royal Dutch Shell (NYSE:RDS-A, RDS-B) is also active in China, and recently reported the discovery of shale gas in the Sichuan Province. The company could not give a resource estimate on this discovery until more exploratory work is completed.

The Bottom Line
Winston Churchill is credited with describing Russia in the 1930s as "a riddle wrapped in a mystery inside an enigma." It seems that future Chinese demand for oil can also be described in this manner, with the only thing certain is that China's behavior will have a profound impact on future investments in energy. (For additional reading, check out A Guide To Investing In Oil Markets.)

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At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.

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