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International Consultants LtdAndrew Leung

EU-Asian Energy Politics in the 21st Century

Andrew K P Leung, SBS, FRSA International and Independent China Strategist

Hong Kong Polytechnic University, HKSAR, PRC

10-12 March, 2016

Disclaimer

All materials contained in this presentation, including any analysis, comments, remarks, opinions and pointers are for information, debate and discussions ONLY. No warranty of their accuracy, completeness, timeliness or reliability is implied.

Any reliance on these materials in any way assumes total exemption of any liability whatsoever of Andrew Leung International Consultants Limited and Andrew K P Leung including all their current and future Affiliates, Associates or Assigns.

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Connecting dots

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Million tonnes, BP 2013 Statistical Review of World Energy

Geopolitics, Price Volatility, and Climate Change intervene

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Geopolitical energy choke points

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Plummeting oil prices – back to the future?

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Major oil exporters struggle to cope

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World Gas Reserves

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•Conventional recoverable = 120 yrs current consumption•Total recoverable = 250 yrs•All major regions at least 75 yrs•Share of natural gas in global energy mix to increase from 21% to 25% overtaking coal by 2035•Non-OECD = 80% total increase

Technically recoverable shale resources

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2/3 of assessed, technically recoverable shale gas resource concentrated in six countries - U.S., China, Argentina, Algeria, Canada and Mexico.

Fracking technology

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Massive injection of fluids with biocides and ceramic proppants . Drilling well site ~ 100 sq meters. Steel and cement casing guards against leakage and seepage.

Fracking environmental challenges • Massive water usage - 1 – 5 m gallons@;

surface or aquiver water depletion; ecological/ bio-diversity impact; truckloads of water transport –congestion and emission. Xinjiang rich in shale but water scarce. Coalbed methane needs de-watering in extraction, highly salty and sodic.

• Toxic fracking fluid (“múd”) - 750 secret ingredients, such as methanol.

• Methane leakage during production and transportation

• Fluid leakage and seepage to aquifers• Treatment of waste water return rate (20 -

50%, saline and slightly radioactive)• Noise and fume• Abandoned walls• Liable to cause earthquakes• Highly energy- intensive, net energy- loser,

worse than coal in carbon lifecycle 11http://www.youtube.com/watch?

v=dEB_Wwe‐uBM

• Exponential depletion rate –output declines 60% - 70% 1st year; maximum production a few years

• Need to drill more and more wells. Roughly 7,200 new shale gas wells to be drilled each year at simply to maintain current levels of production. As most productive locations are drilled, drilling rates and costs will only increase over time.

• Upfront funding turns increasingly to high-interest junk-bonds (20% of market)

• Massive supply drops as crude prices below $60@barrel in May, 2015 > ~ $48 @barrel for shale drilling viability, while higher efficiency may lower threshold.

• China has 50% more shale gas reserve, though in much more difficult terrain.

• US to share technology with China, likely biggest customer for US shale gas.

Golden Rules • Golden Age of Gas will come about only if vast unconventional resources developed

profitably and in environmentally-acceptable manner• Golden Rules – Measure, Disclose and Engage; Watch where you drill; Isolate wells and

prevent leaks; Reduce and Treat water responsibly; Eliminate venting, minimize flaring and other emissions, Think big in coordinated environmental impact containment especially water use and disposal, land use, air quality, traffic and noise; Ensure high quality performance including regulation, innovation, evaluation, verification, emergency response. Supporting infrastructure and market development including creation of economy of scale such as water pipelines and treatment facilities .

• Golden Rules no magic- Accessibility (In China, only 20% shale and 40% coal-bed methane accessible), regulation, technology, infrastructure, water, markets + pricing.

• Output in Golden Rules Case requires > 1 million new unconventional gas wells worldwide between now and 2035, 2X U.S. operating gas wells. Only 40% invested of $ 6.9 trillion required for infrastructure globally.

• Drivers are China and the U.S. By 2035, US (820 bcm) to overtake Russia (785 bcm) as largest gas producer. China to become largest importer and 2nd largest producer of unconventional gas, if environmental challenges overcome.

• Lack of public acceptance = Low Unconventional Case slightly above current levels by 2035, well < coal =1.3 % more CO2 emissions >Golden Rules Case

• Gas alone insufficient for 2-degree limit without vigorous wide-ranging policy framework –energy efficiency, clean energy sources and technologies such as CCS. 12

China’s unconventional gas plans

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• China plans coalbed methane production > 30 bcm andshale gas - 60 to100 bcm by 2020.

• Major international oil companies already in partnership with state-controlled companies. Shale gas and coalbedmethane classified as “mineral resource” outside CNPC/Sinopec exclusivity. Foreign projects majority stake allowed in coalbed methane projects.

• Environmental compliance more stringent and water scarcity a major hurdle

• Domestic coalbed methane industry price subsidies between RMB 0.2/m3 ($0.03) and RMB 0.25/m3 ($0.04). Shale gas might receive a similar or higher subsidy.

• In the Golden Rules Case, by 2035, China’s unconventional gas to attain 83% of total gas production, predominately from shale gas (56%), coalbed methane (38%), and tight gas (6%). Unconventional gas imports would amount to nearly 120 bcm, ~ 20% of total gas demand.

• In Low Unconventional Case, at 260 bcm or ~60% of demand.

China changes global energy demand

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Intended Nationally Determined Contribution (INDC) under the COP21 Paris Climate - by 2030, -(a) to peak CO2 emissions around 2030 and making best efforts to peak early; (b) to lower emissions intensity @unit GDP by 60-65% v 2005; (c) to increase share of non-fossil fuels in primary energy consumption to around 20%; and (d) to increase forest stock volume by 4.5 bcm v 2005. To set up RMB 20b South-South Climate Cooperation Fund

Share of non-fossil fuels in primary energy consumption to expand to 15% by 2020 and 20% by 2030.

To implement green dispatch system for renewable sources in electricity distribution, to be supported by rapidly growing solar and wind capacities. Clean coal measures, coal caps and coal-free zones to be introduced. Vehicle fuel quality standards are to be enhanced.

Brookings Institution (Nov 2015) -

• China to double wind capacity to 200 GW and to > triple solar capacity to 100 GW by 2020 from 2014 levels. Over 2010-2014, solar capacity has jumped by 3,161.6% to 28.05 GW, wind capacity by 225.8% to 96.37 GW, nuclear by 83.7% to 19.88 GW, biomass by 72.4% to 9.48 GW, hydro by 39.7% to 301.83 GW, and geothermal by 7.1% to 0.03 GW. Overall, increase by 73.3% to 455.64 GW in just 4 years.

• ½ China’s energy use today subject to mandatory efficiency standards. National emissions trading scheme expected in 2017.

• Chinese economy on the way towards becoming 85% less energy-intensive, v past 25 years. With large-scale deployment of wind, solar, hydro and nuclear power, China’s CO2 emission growth to flatten and then peak around 2030.

China’s energy profile

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China’s “Supply Side Reform” • New Normal of slower but more

competitive and sustainable growth • De-stocking of overcapacity• State-owned enterprise reform• Made in China 2025• Greener, more innovative and more

sustainable economy. • Currency and interest rate

liberalization• Debt and deflation management• Old-age healthcare• On the cards - subsidized sales of empty

housing to migrant workers, innovations to enhance productivity in finance, natural resources, manpower, equipment and technologies

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4th Industrial Revolution begins

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Made in China 2025

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Owned by China

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China leads global urbanization

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China’s emerging urban billion

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Massive energy and resource implications

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Drive for smart cities

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Bloomberg (19 February, 2014), China spent more on smart grids than the U.S. for the first time in 2013, with $4.3 billion invested, accounting foralmost a third of the world’s total.

Internet of Things

Tectonic shifts to a New China • Special Report 15 Dec 2015 by Natixis, a

French corporate and investment bank, examines the following tectonic shifts in China -

(a) The RMB - Cheap to Expensive(b) Demographics - Rural to Urban(c) Growth - Catching-up to Innovation(d) Consumption - Essential to Leisure(e) Geopolitics - Status Quo to Revisionist

• Explosive digitization from online to offline commerce embrace of COP21’s low carbon future

• Finance, Business, Lifestyles, Values + Distribution of Global Power.

• Things unlikely to stay the same

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One Belt, One Road (OBOR) game-changer

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81,000 km (50,000 miles) high-speed rail to be built in 65 countries. Potential investment estimated at $1.4 trillion = 12 x Marshal Plan ($120b in today’s prices)

Silk Road Economic Belt to be linked by high-speed rail

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A high-speed rail grand vision of continental proportions to connect China’s world’s longest high-speed rail network, across the Eurasian Continent, to the Middle East, Western Europe, and Africa.

•Third Eurasian Land Bridge – proposed railway network linking the Port of Shenzhen to Kunming onwards to Myanmar, Bangladesh, India, Pakistan and Iran, across Turkey to Rotterdam.

•Across 20 countries in Asia and Europe over 15,000 km, 3,000 to 6,000 km < sea route via the Indian Ocean and Malacca Straits.

•Total annual trade volume of the regions traversed - $300 b in 2009.

•A branch line to start in Turkey, cross Syria and Palestine, and end in Egypt, facilitating transportation from China to Africa.

•A new Chongqing-Xinjiang-Europe high-speed line via Duisburg proposed by President Xi during visit in April, 2014

With an alternative to Panama Canal ?

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• Nicaragua's Congress has granted Wang Jing's Cayman Islands-registered HKND company a 50-year concession to develop a 286-km (178-mile) canal connecting the Caribbean with the Pacific via Lake Nicaragua, at a cost of $40 billion, to be completed in 6 years.

• The canal is three times longer than Panama and can accommodate the largest container vessels, thoseShanghai’s Linyungang can accommodate as the world’s deepest container port.

• To anchor China’s commercial and geopolitical interests in Latin and South America

• Likely partner – China Railway Construction

And an even grander vision or pipedream?

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• China-Russia-Canada-America" line –13,000km, entire trip to take two days, travelling at an average of 350km/h (220mph).

• Crossing the Bering Strait between Russia and Alaska in 200 km (125 miles) of undersea tunnel

• China to provide funds, technology and construction and to share operation with countries traversed in exchange for resources

• According to Beijing Times report 8 May, 2014, already in discussions.

• According to Inhabitat.com 23.08.11, Russia has already given the greenlight to $65 Billion Siberia-Alaska Rail and Tunnel to Bridge the Bering Strait.

Silk Road Infrastructure Fund

• China contributes $40 billion to set up a Silk Road infrastructure fund to boost connectivity across Asia, through building roads, railways, ports and airports across Central Asia and South Asia.

• To focus on China's Silk Road Economic Belt and the 21st Century Maritime Silk Road initiative.

• To be "open" and welcome investors from Asia and elsewhere.

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Asian Infrastructure Investment Bank

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• 57 Founding Country Members including 16 of world’s largest economies (except US, Japan, Canada, Mexico) and key US allies (latest Philippines)

• All BRICS countries included. Nearly all of Western Europe, except Belgium and Ireland.

• Non-Asian countries limited to overall 25% shares

AIIB as an alternative global financial institution

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• World Bank president reserved for an American

• IMF head for an European • ADB – Japan’s voting power 2X China’s• Bretton Woods institutions follow

Washington Consensus – full privatization and liberalization of markets, exchange rate, interest rates, trade and investment, tight budget – Not working for most developing countries

AIIB - 57 Founding Member Countries including key US allies, $50b paid-in capital, $100b authorized capital

New Development Bank (BRICS Bank)

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• Representing 41.4% (3 b) world population, 25% of world land mass and GDP

• HQ in Shanghai; African regional centre in Johannesburg

• Inaugural President from India

• Inaugural Chairman of B of Directors from Brazil

• Inaugural Chairman of B of Governors from Russia

• No veto power for any Member

• No increase in any Member’s share without other 4 Members agreeing

• Non-BRICS country can join but BRICS share > 55%

• Authorized lending up to $34 b p.a., to start in 2016

ASEAN infrastructure shortfall

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World Bank lent only $25 b for Asian infrastructure in 2011 = 50% of total WB capacity

South East Asia’s dynamic future

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Asia to 2050 depends on overcoming the Middle Income Trap High growth rates expected

Thinking outside the box in the South China Sea

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Potential investments in Central Asia natural resources

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Joint Chinese investment in Central Asia natural resources

Geo-economics and geopolitics of Melting Arctic

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How the World Will Change With Global Warming, Trausti Valsson, University of Iceland Press, 2006

Potential shipping routes will alter geo-economics and geopolitics So will new energy discoveries

EU-China energy politics in 21st century

• EU’s enduring strengths - amongst world’s largest economies- world’s leading values, institutions, and lifestyles - world’s leading scientific advances and creativity- some of world’s best development models

- amongst the world’s most ancient civilizations • Well positioned to leverage China’s OBOR Western tilt to embed China in European

standards and values e.g. EU/China FTA and Investment Agreement, CSR, food and product safety, human rights

• Partnership in energy and other resource developments including green and renewal energies, nuclear energy, energy efficiency, new materials

• JV in infrastructural investments• Joint R & D in agriculture, pharmaceuticals and healthcare, aerospace, ocean sciences • Banking, financial and professional services including e-commerce, smart city projects• Joint management of the Arctic • Honest broker in diffusing great power tensions – energy security, South China Sea,

maritime security38

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Andrew Leung International Consultants Ltd

Thank you

Andrew K P Leung, SBS, FRSAwww.andrewleunginternationalconsultants.com

International and independent China Specialist with over 40 years professional experience covering Hong Kong and Mainland China. Chairman of Andrew Leung International Consultants, founded in London now relocated to Hong Kong. Provides strategic advice on China-related finance, investment, politics and economics globally, including both business and governments. China Futures Fellow selected worldwide by Berkshire Publishing Group, Massachusetts. On the Brain Trust of Evian Group, a Lausanne-based think-tank. Founding Chairman of China Group of Institute of Directors City Branch, London. Advisory Board Member of China Policy Institute, Nottingham University, 2005-10. Governing Council, King’s College London, 2004-10. Visiting Professor with Metropolitan University Business School. Helped set up Standard Chartered Bank’s first merchant-banking subsidiary in Hong Kong (1983); oversaw the trans-migration of industries into China as Deputy Director-General of Industry; US-government sponsored month-long visit to brief Fortune 50 CEOs on China beyond Tiananmen Square (1990); Editor-at-Large of a London-based international consultancy on China’s energies (2007). Sponsored Speaker on China at international conferences, including Forum Istanbul, Turkey, Annual African Banking and Financial Institutions Conference in Accra, Ghana, and Low Carbon Earth Summit in Dalian, China. Regular interviewee on live television with CNBC, Aljazeera English, Times Now of India, BBC and other international channels. Awarded Hong Kong’s Silver Bauhinia Star (SBS) and included in UK's Who's Who since 2002.