Latin America´s Energy Reforms will be tested in upcoming elections

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FROM: Interamerican Dialogue / Lisa Viscidi / 9 de Enero de 2018

 

2018 will be a pivotal year for energy in Latin America, as the region’s top oil producers are set to hold presidential elections that could lead to sweeping policy changes. Recent market-oriented energy reforms in countries like Brazil and Mexico have increased investment pledges, but the region is still seeing an overall oil production decline.

The upcoming presidential elections could be decisive in advancing policies to maintain oil revenues. However, in the current climate of growing polarization and deeply unpopular incumbents in Latin America, the elections are generating tremendous political uncertainty. Several left-leaning candidates are against current oil policy but not for the same reasons. Some oppose investor-friendly policies based on oil nationalism; others contest the exploitation of energy resources on environmental grounds.

2018 will be a pivotal year for energy in Latin America, as the region’s top oil producers are set to hold presidential elections that could lead to sweeping policy changes.”
In Mexico, independent candidates are allowed to run for the first time in the July presidential election, opening the way for a broad field of contenders. The front-runner, leftist nationalist Andrés Manuel López Obrador (AMLO), has made opposition to Mexico’s 2013 energy reform a cornerstone of his campaign. President Enrique Peña Nieto of the PRI party, who led the reform, is hugely unpopular. The business-friendly PAN party, which provided the critical votes to pass the reform in congress, is divided. Polls show AMLO with over 30 percentof votes, a sizable lead over the PRI and PAN candidates who are polling at about 17% each. Mexico has no second round of elections, so a candidate can win with a relatively small percentage of votes.

The energy reform eliminated Pemex’s decades-long monopoly on oil production, and dozens of private companies have since won contracts in bid rounds that will bring an estimated $59 billion in investment.”
The energy reform eliminated Pemex’s decades-long monopoly on oil production, and dozens of private companies have since won contracts in bid rounds that will bring an estimated $59 billion in investment. But this is only a fraction of the capital needed to return to Mexico’s 2004 peak oil production of 3.4 million barrels per day (mbd) compared to 2 mbd today. The government’s best-case projections see production rising only in 2019, meaning Mexicans will cast their vote before the reform starts to bear fruit.

AMLO has seized on weak oil production as proof that the sector’s opening is not delivering as promised and pledged to hold a public referendum to overturn the reform. Only a two-thirds congressional majority – which AMLO is unlikely to secure – can undo the constitutional reform, and it would be legally difficult to change existing contracts. And, despite his provocative stance, AMLO could choose to support private investment once in office in a bid to generate more oil revenue for his government. However, the president has broad powers to halt the opening of the sector. The energy ministry designs oil auctions and their timelines, selects the contract type for each oil block and can hand any field to Pemex. Many investors fear that an AMLO administration would make terms less attractive or cease holding the auctions that have allowed private firms to enter the country altogether.

In Brazil, the October presidential elections will also be a bellwether for the energy sector. President Michel Temer introduced energy policies making terms more attractive for international investors. He removed onerous local content requirements from bidding criteria, set a regular pre-salt bid round schedule and signed a law allowing companies other than state oil giant Petrobras to operate Brazil’s high-cost offshore pre-salt fields. The results have already been visible; in an October pre-salt auction, six of eight blocks on offer received bids, and signing bonuses totaled $1.9 billion.

While it is too early for formal candidacy announcements, former President Luis Inácio Lula da Silva is currently the clear front-runner despite having been convicted in July on charges of corruption, which he is appealing. If elected, Lula would likely reinstate his previous nationalist oil sector policies. In recent rallies with supporters, he has criticized Temer’s government for selling off Brazil’s wealth to foreign corporations and said Petrobras should be used as an instrument of development and job creation. If Lula is behind bars, he will likely throw his support behind another Worker’s Party candidate with a similar platform. Following Lula in the polls is right-wing nationalist Congressman João Bolsonaro. He has so far focused on security and social issues, and his positions on energy are unclear. Probable centrist candidates Geraldo Alckmin and João Doria – governor and mayor of São Paulo, respectively – favor investment-friendly policy. But both trail Lula and Bolsonaro in polls.

In Colombia, a crowded field of candidates with a broad spectrum of economic and energy policy platforms are competing for the presidency.”
In Colombia, a crowded field of candidates with a broad spectrum of economic and energy policy platforms are competing for the presidency. Colombia has seen a steep decline in oil investment and revenue since the 2014 oil price collapse. Crude production has fallen since 2015. Less drilling has led to fewer discoveries, and at its current production rate, Colombia will run out of oil reserves in about five years. This is due to lower oil prices coupled with widespread local opposition to the oil and mining sectors, as some communities are demanding additional economic benefits and others oppose drilling based on environmental concerns.

Whether or not the sector will return to its former role as a primary driver of Colombia’s economy depends largely on whether the government can generate local community support for oil projects or chooses to prioritize other economic sectors. The field of potential candidates includes conservatives who want to promote oil investment through market-friendly reforms and leftist candidates who say Colombia should wean its economy off of oil, which causes environmental damage and is not a viable long-term driver of growth in a low-carbon economy. With the crowded field and deep divisions over the controversial peace deal with the FARC, no candidate will likely secure a majority in May, and a second round in June is almost inevitable.

In contrast to the other countries, Venezuela is unlikely to elect a new president or substantially change energy policy.”
In contrast to the other countries, Venezuela is unlikely to elect a new president or substantially change energy policy. Its constitution calls for elections next year – and President Nicolás Maduro has promised to hold them – but with the National Electoral Council stacked with Maduro allies and the president’s penchant for circumventing the democratic process, analysts predict he will rig the election to remain in power.

Venezuela’s oil industry – responsible for 96 percent of exports – is on the decline. The global oil price collapse exposed long-standing issues at state oil company PDVSA like underinvestment, lack of maintenance and unsustainable payments to support government programs. Production has plummeted, and with massive payments due to international creditors and much of the country’s oil output being used to pay off oil-backed loans, PDVSA cannot make the necessary investments to turn production around. But rather than introduce the reforms necessary to put Venezuela’s economy and oil sector back on track, Maduro has doubled down on failed policies like exchange rate controls and energy subsidies in a desperate effort to retain power.

Many Latin American presidents are hugely unpopular and voters are looking for change.”
Many Latin American presidents are hugely unpopular and voters are looking for change. This landscape creates tremendous uncertainty for investors and companies in oil and other economic sectors. Energy has long been a politically charged issue in Latin America, leading to erratic approaches between one government and another and politically driven policies that have ultimately resulted in oil production declines. Rather than taking divisive positions on energy policy, the candidates should seek to build consensus and take a sober look at how to maximize productivity and deliver the greatest revenues for the state or prepare for diminished economic returns from the sector.

 

 

FROM: Interamerican Dialogue / Lisa Viscidi / 9 de Enero de 2018

 

RBC boss says chances of NAFTA being scrapped are rising

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FROM: Thomson Reuters / 9 de Enero de 2018

TORONTO — Royal Bank of Canada’s Chief Executive Dave McKay said on Tuesday he believes there is now a greater chance that the North American Free Trade Agreement could be scrapped.

“I think the probabilities are increasing that you’ll have some type of dynamic where there is an announcement of a scrapping of NAFTA,” he said at a Canadian Bank CEO conference hosted by RBC in Toronto.

Canadian bankers have expressed concern about the progress of talks to rework the trade agreement and how renegotiations could hamper the ability of clients to do business with customers in the United States and Mexico.

McKay said he agreed with other business leaders and the Canadian government that no deal would be better than a bad deal.

“We don’t want to be stuck long-term with a deal that hurts our economy,” he said.

McKay also said RBC, Canada’s biggest bank by market value, is now spending $3 billion a year developing new technologies. The bank is one of the biggest Canadian investors in technology such as artificial intelligence and blockchain and has increased the proportion of its technology spending on innovation compared with maintaining existing systems.

© Thomson Reuters 2018

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FROM: Thomson Reuters / 9 de Enero de 2018

Mexico to Discuss Security With U.S. in Parallel to Nafta

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From: Bloomberg / Eric Martin / 11 de Diciembre de 2017

 

Mexico’s top diplomatic and interior officials will visit Washington this week to discuss security cooperation with their U.S. counterparts at the same time that negotiators work to overhaul Nafta, according to four people familiar with the plans.

 

The visit by Mexican Foreign Relations Minister Luis Videgaray and Interior Minister Miguel Angel Osorio Chong to meet with Secretary of State Rex Tillerson and Homeland Security Secretary Kirstjen Nielsen on Thursday is a follow-up to meetings in May, according to the people, who asked not to be named before the agenda is made public. It’s aimed at coming up with strategies to combat transnational criminal organizations, the people said. The press office of the Mexican Foreign Ministry and the U.S. State Department declined to immediately comment.

 

The meetings coincide with a sitdown by negotiators from the U.S., Mexico and Canada to update the North American Free Trade Agreement at the demand of U.S. President Donald Trump, who says the deal is responsible for hundreds of thousands of lost manufacturing jobs in the U.S. In an interview last month, Videgaray said that if the Nafta renegotiation encounters trouble, it could impact other areas of cooperation with the U.S. such as security and immigration. Mexico this year has seen homicides surge to the highest levels of this century, surpassing the previous record levels of the drug war from 2010 to 2012.

“It’s good for Mexico that we cooperate with the U.S. on security and also on migration and many other issues,” Videgaray said in the interview in Vietnam on Nov. 11. “But it’s a fact of life and there is a political reality that a bad outcome on Nafta will have some impact on that,” he said. “We don’t want that to happen, and we’re working hard to get to a good outcome.”

Videgaray told reporters last month that Mexico is prepared for the end of Nafta if it can’t reach a deal with the U.S. and Canada that benefits the nation. The three countries in August began talks to rework the pact after Trump pledged during the 2016 campaign to overhaul or end it.

This Week’s Talks

The latest meetings to revamp Nafta, taking place at the Mayflower Hotel, will run through Friday, largely out of the spotlight. Cabinet-level officials aren’t scheduled to attend for the second time since negotiations began, and the Trump administration is preoccupied with efforts to push through tax cuts by year-end and avoid a government shutdown. Videgaray’s portfolio includes the broad bilateral relationship with the U.S., while a team led by Economy Minister Ildefonso Guajardo has been focused on the commercial details of the Nafta negotiation.

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From: Bloomberg / Eric Martin / 11 de Diciembre de 2017

Jefferson Energy Companies Originates the First ExxonMobil Unit Trains of Refined Products to Mexico

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From: GlobeNewswire / 11 de Diciembre de 2017

 

NEW YORK, Dec. 11, 2017 (GLOBE NEWSWIRE) — Jefferson Energy Companies (“Jefferson”), a subsidiary of Fortress Transportation and Infrastructure Investors LLC (NYSE:FTAI), is playing an important role in ExxonMobil’s recent Mexico market entry.  With logistics support from Jefferson, ExxonMobil is the first company to provide an integrated product offering along the entire fuels value chain in Mexico.  Unit trains of gasoline and diesel delivered to Central Mexican markets originated at Jefferson’s terminal in Beaumont, Texas.  The unit train loading was done under an agreement with ExxonMobil. These volumes originated at Jefferson were safely delivered through a destination terminal in San Luis Potosi to retail gasoline stations in the Bajio region. ExxonMobil previously announced its intent to spend $300 million in fuel logistics, product inventories and marketing in support of Mobil-branded stations and Synergy-branded fuels, and these unit train shipments are part of that program.

About the Jefferson Energy Terminal

Jefferson Energy CEO and President Greg Binion said, “We are excited to be an integral part of the transformation of the Mexican energy sector. Further, we are very pleased that ExxonMobil recognized the operational flexibility and advantages that our terminal provides. As this opportunity in Mexico expands, we plan to continue to enter into other contracts to provide logistics for refined products export to Mexico. We also plan to continue to invest in associated tanks as well as rail and loading infrastructure in order to meet the rapidly growing demands of this market.”

The terminal is owned and operated by Jefferson Energy Companies, a midstream oil and terminal company that serves the Gulf Coast. The terminal is located on 243 acres in Beaumont, Texas, positioned in one of the largest refinery markets in the U.S., located in the center of the 9.2 million bbdGulf Coast refining market (PAD III). The terminal is a public-private partnership between the Port of Beaumont Navigation District of Jefferson County, Texas and Jefferson Energy Companies. The Port of Beaumont is the fourth busiest port in the United States, according to the U. S. Army Corp of Engineers tonnage statistics, and the busiest military port in the U.S. The terminal is currently served by three Class I railroad carriers, allowing delivery from most origination terminals and plants in North America.  

About Fortress Transportation and Infrastructure Investors LLC

Fortress Transportation and Infrastructure Investors LLC (NYSE:FTAI) owns and acquires high quality infrastructure and equipment that is essential for the transportation of goods and people globally. FTAI targets assets that, on a combined basis, generate strong and stable cash flows with the potential for earnings growth and asset appreciation. FTAI is externally managed by an affiliate of Fortress Investment Group LLC, a leading, diversified global investment firm. For more information about FTAI, visit www.ftandi.com.

 

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From: GlobeNewswire / 11 de Diciembre de 2017

 

German firms more upbeat on Mexico, wary on NAFTA collapse – survey

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From Euronews / Dave Graham, Andrew Hay / 5 de Diciembre de 2017

German companies are more upbeat about the business outlook in Mexico than they were a year ago, but more than two-thirds believe that an end to the NAFTA trade deal would hurt their business there, a survey showed on Tuesday. The poll by the German-Mexican chamber of industry and commerce (CAMEXA) showed that more companies planned to invest and increase staffing than they did when surveyed a year ago, shortly after U.S. President Donald Trump’s election victory.

Some 54.6 percent of firms said they would boost staffing levels in 2018, a rise of nearly 10 percentage points from a year earlier. Almost 68 percent said they planned investment in the coming year, an increase of some 6 percentage points. The survey, which was carried out at the end of November, showed that 69 percent of firms believed that a collapse in the North American Free Trade Agreement (NAFTA) would have a negative impact on their business in Mexico. A total of 130 companies took part, CAMEXA said. Trump has repeatedly threatened to withdraw from NAFTA if he cannot rework it to the advantage of the United States. Negotiations between the United States, Mexico and Canada to rework NAFTA have made only halting progress so far, and many major points of disagreement remain with the Trump administration seeking to promote his America First agenda. The three nations have vowed to continue talks to overhaul the almost 24-year-old trade deal through March, when the Mexican 2018 presidential campaign begins in earnest.

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From Euronews / Dave Graham, Andrew Hay / 5 de Diciembre de 2017

Mexico Spent About $1.26 billion on 2018 Oil Hedges

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From Oil&Gas People / 1 de Diciembre de 2017

 

Mexico spent some 24.1 billion pesos ($1.26 billion) on contracts to hedge its 2018 oil exports, Finance Ministry Chief Economist Luis Madrazo said on Tuesday, part of government’s efforts to stabilize its budget.

Madrazo did not specify the number of barrels of export production that Mexico had hedged with derivatives contracts nor did he detail the average price per barrel of put options that the government has purchased.

In September, the Finance Ministry proposed a 2018 budget that based expected oil export revenue on an estimate of $46 per barrel. Members of Congress increased that estimate to $48.5 per barrel earlier this month as global oil prices rose.

For more than a decade, Mexico’s government has paid for a hedge every year in a bid to guarantee its revenues from oil exports by state company Pemex. The program is seen as the world’s top sovereign derivatives trade.

Last year, the government bought put options at an average price of $38 per barrel to cover 250 million barrels of crude at a cost of $1.03 billion and underpin the 2017 budget, which was based on an average price of $42 per barrel.

The government set aside $4 a barrel from a special fund to make up the difference between its put options and the budgeted price.

This year, Mexico is on track to not see any income from its oil hedge as prices for Mexican crude are currently near $54 per barrel, well above the put options. In 2016, Mexico saw a $2.65 billion payout from its oil hedge.

Mexico hedges its crude every year and deals are closely watched by the market since the trades are big enough to affect prices. The program is a longstanding part of the country’s strategy for safeguarding oil revenues from market volatility.

Mexico used to receive about one-third of federal revenues from oil sales, but it now funds less than one-fifth of the budget with oil sales after the collapse crude prices in late 2014 and a decline in production.

 

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From Oil&Gas People / 1 de Diciembre de 2017

 

Oil prices are poised for a pullback after OPEC announces its output cut decision

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From CNBC / Tom DiChristopher / 28 de noviembre de 2017

 

Market watchers see few opportunities for oil prices to rally — but plenty of room for them to fall — after a critical meeting of energy ministers later this week.

About two dozen oil exporters, including top producers Saudi Arabiaand Russia, meet on Thursday in Vienna to discuss extending a deal to keep 1.8 million barrels a day off the market. The historic agreement has helped to reverse a three-year oil price downturn that wiped out hundreds of thousands of energy jobs and piled financial pressure on both free market American drillers and countries dependent on oil revenue.

The market largely expects the 14-member OPEC cartel and a group of other producers led by Russia to extend the deal, which began in January and expires in March, through the end of 2018.

But just days before meeting, Russia has not committed to the nine-month extension, raising concerns that OPEC could settle for a shorter extension or push off a decision altogether. Either of those scenarios would spark a sell-off, analysts say, but oil prices will probably struggle to grind higher from recent 2½-year highs even if OPEC lives up to expectations.

Here’s how analysts expect markets to move under three scenarios.
OPEC extends by nine months
Andy Lipow, president of Lipow Oil Associates, expects OPEC to lock down the nine-month extension. But he also expects a pullback on the news.

The reason: Hedge funds have recently increased their long positions in oil futures, or bets that prices will keep rising. That makes prices vulnerable to a slide because traders often book profits by selling high. At the same time, the number of oil rigs operating in U.S. oil fields crept up in November, a trend that tends to weigh on prices.

“The market has gotten very, very long and as a result you can have some profit-taking triggered by the increase in the rig count on Friday,” Lipow said.

Tom Kloza, global head of energy analysis at Oil Price Information Service, also thinks a nine-month extension has been baked into prices, making it hard for U.S. West Texas Intermediate crude to rally beyond Friday’s 2017 intraday high of $59.05.

“We may look back at Black Friday as the as-good-as-it-gets number for U.S. producers,” he said.

U.S. crude could take another run at the $59 per barrel level, but OPEC would have to get the messaging just right, said John Kilduff, founding partner at energy hedge fund Again Capital. That includes a show of unity among regional geopolitical rivals Saudi Arabia and Iran and a clear signal that OPEC will force member countries Libya and Nigeria to cap their output after giving them a pass this year.
OPEC settles for six months
However, Kilduff thinks OPEC will only be able to commit Russia to a six-month extension.

He said the country’s energy companies have pushed back on Russian Energy Minister Alexander Novak and President Vladimir Putin as U.S. producers pick up market share in Asia, an important oil growth market. Russian energy giants are concerned that extending the cuts prematurely could leave the market undersupplied, causing a spike in prices that leads to another crash.

“If they do go six months I would expect them to spin it and say they’re going to review it next year,” Kilduff said. “That’s going to be seen as a disappointment.”

In that scenario, Kilduff sees oil prices falling back to the mid-$50 range.
Barclays expects either a six- or nine-month extension but says the market is asking the wrong question. Michael Cohen, the investment bank’s head of energy markets research, says traders should be asking whether exporters will be held to the same production caps they agreed to last year.

“It would be a misguided assumption in our view to expect the group’s production quotas to remain set in stone in 2018,” Cohen said in a research note Monday. “The sustainability of the deal depends on how much longer Saudi Arabia, Russia, Iran and Kuwait are willing to sacrifice market share in the pursuit of revenue and market stability.”

 

From CNBC / Tom DiChristopher / 28 de noviembre de 2017

Renaissance Oil initiates multi-well drilling program at Amatitlán

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From Renaissance Oil Corp. / Craig Steinke / 27 de Noviembre de 2017

 

VANCOUVER, Nov. 27, 2017 /CNW/ – Renaissance Oil Corp. (“Renaissance” or the “Company”) (TSX-V: ROE) is pleased to announce the Comisión Nacional de Hidrocarburos (the “CNH”) has approved drilling permits for the Chicontepec multi well drilling program on the Amatitlán block in Veracruz, Mexico.  In conjunction with its partner Lukoil, Renaissance will conduct the following operations:

During the week of December 4th, 2017, mobilize Simmons Edeco Rig 836 to a multi-well drilling location and spud the first well, Amatitlán 1649, of the 10 well drilling campaign which will occur over the course of several months;

Each well will be directionally drilled, targeting multiple Chicontepec intervals, to a total depth of 1,975 meters; and

The second well in the program, Amatitlán 1708, will be drilled subsequently from the same multi-well location.

“As the first Canadian operated oil well drilled in Mexico, in almost a century, the Amatitlán 1649 is a historical milestone”, stated Craig Steinke, Chief Executive Officer of Renaissance.  He added, “Rig 836, owned by Canadian based Simmons Edeco, will also be used to drill the planned 4,200 meter measured depth horizontal Upper Jurassic shale well.”

Renaissance continues to make progress on its journey to become a major Mexican energy producer.

From Renaissance Oil Corp. / Craig Steinke / 27 de Noviembre de 2017

The Economic Yield Curve Is the One to Watch

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From: Bloomberg / Joseph Carson / 21 de noviembre

 

The difference between the federal funds rate and economic growth is unusually wide, consistent with a positive outlook. The rapid flattening of the U.S. Treasury yield curve is raising concern about the economy’s prospects. That’s to be expected, since the slope of the curve has gained in importance as a forecasting tool due to its consistent and reliable track record. In short, a narrow curve is associated with a slowdown in growth.

The economic signal is even stronger when there is an outright curve inversion, which is when short-term yields exceed those on longer-dated Treasuries. We’re not there yet, but what has everyone up in arms is that at 63 basis points, the difference between two- and 10-year Treasury yields has collapsed from 128 basis points in January and is now the narrowest since 2007, just before the start of the last recession.

For some, changes in the Treasury yield curve are sufficient to warrant a change in the view on the future path of the economy. Right now, though, it’s not. It is important to balance the changes taking place in the financial market’s yield curve with the economy’s yield curve.
The economy’s yield curve is the spread between the federal funds rate and nominal gross domestic product. This relationship is most important since it’s the ability of the consumer and businesses to carry or afford the higher borrowing costs that could eventually impact economic growth.

Based on third-quarter data, the economy’s yield curve is close to 300 basis points, which is calculated by taking the 4.1 percent annualized rate of growth in nominal GDP less the quarterly average for the federal funds rate of 1.15 percent. The gap has expanded by 65 basis points from a year earlier. Even if the Federal Reserve, as expected, raises rates by 25 basis points at its December meeting the spread should widen based on estimates of 4.5 percent to 5 percent growth in nominal GDP.

In a historical perspective, the economy’s yield curve is unusually wide, consistent with a positive growth outlook. To be sure, the average spread during the 1990s growth cycle was 100 basis points and in the 2000s it was 200 basis points. Moreover, history also shows that a flat or an inverted spread between the federal funds rate and the growth in nominal GDP always precede an economic slowdown or recession.

In contrast, the traditional financial market yield curve, or the spread between the federal funds rate and the 10-year Treasury, stood at 110 basis points in the third quarter. It will likely end 2017 with the narrowest quarterly spread since the start of the last recession, sending the same signal as the two- to 10-year part of the curve.

It is quite possible that the narrowing of the traditional yield curve reflects technical factors more so than fundamental ones. The quantitative bond buying programs by the Fed and other central banks have no doubt produced an anchoring effect at the long-end of the bond market that was not present in prior cycles.

Also, changes in monetary policy often influence investor expectations on the outlook for growth and inflation. Given the current low-inflation environment, it could well be investors are betting that current path of monetary policy will dampen future inflation risks and possibly to lead to a reversal in short rates at some point down the road.

In all likelihood, the signaling effect from changes in the yield curve to the economy may not be as robust today and limited to the financial markets. The economy, meanwhile, will be supported by the wide and positive spread between the federal funds rate and nominal GDP growth, helping to support corporate profits and equities. The outlook for the fixed-income market is less sanguine because the positive growth environment will compel the Fed to continue to normalize monetary policy by boosting rates further.

 

From: Bloomberg / Joseph Carson / 21 de noviembre

 

China’s promised energy revolution

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From: Financial Times / Nick Butler / 19 de noviembre

 

Can China transform its energy economy? For the last 30 years rapid economic growth – based on heavy industry, manufacturing and construction – has been sustained by hydrocarbons. Coal remains dominant; what has changed is the volumes involved. In 1990, China used some 446m tonnes of coal. This year the figure will be around 2.8bn tonnes. In parallel, oil demand has grown with the dramatic expansion of car numbers. Oil consumption was 2m barrels a day in 1980. Now it is almost 12m b/d, making China the largest oil importer. But growth has come at a cost. China, as last week’s announcement from the Global Carbon Project reminded us, is the largest single source of emissions and suffering badly from the low level pollution that covers many cities in smog. President Xi Jinping has promised dramatic change – an energy revolution “to make the skies blue again”.

The rhetoric is great but are the promises deliverable? A comprehensive study of the Chinese energy market published last week as part of the International Energy Agency’s new World Energy Outlook is a great place to start for anyone wanting to understand what is happening and what might happen next. The facts are remarkable: China consumes 25 per cent of energy used globally each day. Coal continues to dominate Chinese energy use – in industry, power generation and heating – providing almost two-thirds of total demand. The country produces and uses over 50 per cent of all the coal burnt globally. Power generation has grown dramatically to meet electricity demand that has quadrupled since 2000. Gas use is relatively small but growing – mostly relying, for now, on imported LNG. China is the leading producer of wind and solar power. Advances in technology and production efficiency have cut costs and made the country the dominant supplier of solar panels to the rest of the world. China is building dozens of new nuclear plants – more than a third of the global total. Its nuclear industry is developing its own reactor technology, aiming to create a world-class export industry. The country leads the global electric vehicle industry. Of the estimated 2m electric vehicles on the world’s roads by the end of this year, at least 40 per cent will be in China. Remarkable advances in energy efficiency have been made, and the amount of energy used for each unit of China’s gross domestic product has fallen 30 per cent since 2000 but emissions remain a challenge. After three years when reported emissions were flat, renewed industrial growth has pushed them up again.

Each of these facts reflects a dramatic change in the last 10 to 15 years. But they do not represent an end point. The party Congress in Beijing endorsed the latest plan – a sweeping statement of intent entitled “Energy Production and Consumption Revolution Strategy”. The plan describes a transformation of the whole energy sector over the next decade and a half. The share of non-fossil fuels will rise to 15 per cent by 2020, and to 20 per cent by 2030, meeting most if not all incremental demand. By 2030, 80 per cent of all remaining coal-fired power stations will have ultra low emissions as old capacity is retired. GDP energy intensity will fall by 15 per cent and the amount of carbon required will fall by 15 per cent. Further improvements will come over the following decade to 2030 The target is to ensure that emissions peak by 2030. The long-term goal for 2050 is to reduce the share of fossil fuels to less than half the total, to rebase the whole system on leading-edge energy technologies and equipment and make China an important player in global energy governance. History suggests it is unwise to underestimate China’s ability to deliver on its plans but in this case there are good reasons for doubt. Infrastructure and market structures are needed to support the changing energy mix.

As the IEA analysis makes clear, the absence of infrastructure and a supportive regulatory regime already limit the potential of natural gas. The same problems could constrain wind and solar. Electric vehicle numbers are growing but the odds are still that the bulk of the electricity they use will be produced from coal for a long time to come. An excellent post by Simon Goess for the Energy Collective website spells out the reality. In addition, industrial changes have to be managed. In coal and the major manufacturing sectors many workers and whole communities remain dependent on activity that is likely to be transformed or eliminated by technology. The Chinese coal industry, for instance, employs 4m. Trade dependence also poses risks. The target of 80 per cent net self-sufficiency is probably achievable with the combination of coal, new nuclear and renewables, including hydro. But the remaining 20 per cent involves the critical supply of oil where import dependence has doubled in the last five years. On the IEA’s estimate, China will need to invest $6.1tn – $250bn a year on energy supply between now and 2040, two-thirds of which will go into the power sector. Another $2.1tn ($90bn a year) will be needed to deliver the required gains in energy efficiency. China is a dominant force in the global energy market. Next week I will look at the international implications of what is happening. But energy also matters for the survival of the regime in Beijing. The political process has not been ended by Mr Xi’s triumphant re-election. A sustained improvement in living standards over the last three decades has helped to keep the Communist party in power. That would not have been possible if the energy system had not been adapted to meet growing demand in what is now a consumer society. The “iron rice bowl” now extends beyond employment and food to mobility and increasingly to the demand for a cleaner environment. As ever, energy and power are inseparable.

 

 

From: Financial Times / Nick Butler / 19 de noviembre