China’s energy strategy will make waves for years to come

Follow the money, CleanBiz.Asia

The economic turmoil of the financial crash saw China being feted as a white knight with drawbridges being lowered to investment from Chinese companies. This has turned to bitterness, like a liberating army becoming an occupying force.

Even with struggling solar and wind sectors, China has become the dominant global power in terms of renewable energy companies. This has resulted in the US Department of Commerce increasing tariffs to between 23.75 and 250 percent on solar cells which it calls a way of offsetting subsidies provided by China through one mechanism or another. China calls it punishment for being smarter than them. Similarly the EU and India have also launched investigations

China’s complaints to the World Trade Organisation ring increasingly hollow as almost on a weekly basis there is another raft of bailouts of China’s solar companies by a bank owned by the provincial or state government or “helped” by some other state-owned industry. Sky Solar, Yingli Green Energy, LDK and, most notoriously, Suntech, along with wind turbine company Xinjiang Goldwind Science & Technology are amongst a plethora of firms that have benefited from cheap loans and debt refinancing packages with a large dash of direct or indirect government money.

Even as the row over indirect subsidies to China’s renewable’s sector have taken on greater momentum in the US and Europe, China continues to prop up its industries and redirect them toward growing domestic and regional opportunities.

The fact is that that short-term losses and international trade spats will have little effect on China’s dogged determination to secure a mix of energy sources, both from renewables and fossil fuels. Its powerful commercial and strategic interests coincide, and a few nations are beginning to notice it and reassess their own policies.

With attention drawn to China, increased scrutiny of its energy policies and practices has identified shale gas reserves and technology as important. China’s companies have been on the lookout for know-how as much as energy supply.

With shale gas becoming ever more prominent in the energy sector, China is desperate for the technology. Putting aside the issues of potential groundwater contamination and other environmental impacts, shale gas offers a way to reduce carbon emissions by substituting it for other fossil fuels.

The US Energy Information Administration has estimated that China has about 36 trillion cubic meters (1,300 trillion cubic feet) of recoverable shale gas, the biggest known reserves. And China itself has touted its importance and plans to pump 6.5 billion cubic meters of shale gas by 2015, according to the country’s 12th Five-Year Plan (2011-15).

Right now not very much is coming out and, while 83 companies bid for licenses to explore shale gas in China’s second round of exploration tenders – with foreign companies competing for the first time – there have been concerns over viability.

North American and European companies thought they had finally broken into China’s domestic energy market by being allowed to bid. Many companies pulled out when they looked at the complexity of each sites’ extraction and there are growing suspicions some of the sites were simply an exercise in learning extraction techniques by Chinese partners.

But China also has an eye on issues like domestic pollution levels and the medium-to-long term inevitability of international carbon emission caps. A cleaner burning fuel with additional carbon capture facilities, of the sort that Sinopec is investing up to USD1 billion in a Texas clean-energy project, is the type of long-term bet it likes.

The country’s elite knows that concerns with environmental issues are increasingly a focus of public discontent as the recent environmental protests in Ningbo City, Zhejiang province over a petro-chemical plant show. And, as with the unexpected implications of the Bo Xilai debacle on the sensitive process of selecting the new Standing Committee of the Politburo, China’s rulers are leery of anything that smacks of instability.

They are also aware just how close the country is to an environmental precipice. Through the weekly announcements from government departments and party officials on higher monitoring standards, promises of increased enforcement and warnings to local government on rule-ignoring, the populace has also become more aware.

It is probably no coincidence that China’s increasingly menacing tone on disputed islands in the South and East China seas gives the population a way to vent pent up frustrations. The dispute between Japan and China over the Senkaku/Diaoyu Islands shows how quickly the principles of free trade can be sacrificed when strategic issues raise their heads.

All these exploits show how economically, strategically-minded and politically astute a player China has become, especially as the traditionally economic counterbalances of Japan, Europe and the US are, to say the least, weakened.

And that brings us to state-owned CNOOC’s USD15.1 billion bid for Canada’s Nexen which, if approved, will be China’s largest foreign business takeover to date.

This is not only about international fuel supplies but access to top-grade technology in bitumen extraction from oil sands, of which China also has plenty. China estimates the oil-soaked sands it sits on could hold as much as 14.5 billion barrels, which would be double the country’s proven oil reserves. It also estimates it has huge reserves of heavy oil and shale oil.

But concerns that started reverberating around Wall Street, where Nexen is listed, have also made their way to Washington. With Chinese telecom firms Huawei and ZTE having recently been deemed by a congressional panel to pose a security threat to the US the hawks are out in force.

This has brought increased pressure on the Canadian government of Prime Minister Stephen Harper which wants foreign investment in its energy industry and in developing a pipeline to the west coast, as an alternative to its dependence on the US market.

The Investment Canada Act, however, requires foreign takeovers to provide a net benefit to the country with six factors – including the effect on jobs, competition within an industry, the degree of participation by Canadians in the business and Canada’s ability to compete globally – being considered.

Ruthless exploitation by a foreign state-owned company whose business interest could change at the whim of strategic concerns does not fit comfortably within these criteria.

Petronas, the Malaysian state oil company which has been attempting to buy Calgary-based Progress Energy Sources, has inadvertently got caught in the middle of all this. Its USD5.6 billion bid was vetoed by the Canadian government on October 19 even though Petronas is already partnering with Progress to develop a shale-gas field in British Columbia and an LNG terminal on the Pacific coast.

It seems Canada’s 11th-hour veto of the deal, according to Reuters sources, was because the government was “afraid that would tie the government’s hands when reviewing the much more controversial CND15.1 billion bid by CNOOC for Nexen”.

It also reflected other concerns. The report quoted Felix Chee, head of the China Investment Corp’s Canada office as saying: “I think there (would) be less of an issue if CNOOC … had bought an operating interest in the assets. What wasn’t expected was to buy the whole goddamn head office.”

It’s a common view more keenly focused when seen through the prism of energy security and strategic interests. As shown in Ernst & Young’s second Cleantech Matters on Global Competitiveness report, China dominates the cleantech sector in financial clout. As energy security, lower emissions and reserves become greater concerns, shale gas exploitation is close to the top of the energy agenda and it’s one of the areas European and North American companies have a technological advantage.

With western governments and corporations financially weakened, the promise of China’s cash may overcome security concerns. That’s the short term.

And whether China’s obvious realization of the dangers of climate change produces any change of heart in the upcoming climate change talks in Doha, is open to debate. That’s the short term too.

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