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Interview

with Martin Schoenbauer, Executive Director, Department of Energy Office of the U.S. Embassy in Beijing

01.03.2012 / Energyboardroom

Mr. Schoenbauer, there has been talk of a looming “zone of uncertainty” wherein analysts suggest that by mid-century, there could be a gap between energy supply and demand that will be equal to the entire size of the energy market as it was in the year 2000. China has become the world’s largest energy consumer— surpassing the U.S. last year—and will drive the majority of this demand. These countries have a lot of global challenges in common, notably the question of how to address such vast need without sacrificing the environment. How are they working together, with the help of bodies like the U.S. Department of Energy, to address global energy issues?

At the U.S. Embassy to China, the Department of Energy works on issues that are very similar to those we work on in the U.S. Our department has three components: one is energy, which encompasses power generation, transfer, storage and use and includes fossil fuels, renewable energy, nuclear energy, energy efficiency, and the grid. Another major component is science and technology: here, we look into investing in technologies that are risky today, or maybe not profitable today—areas where government might logically provide investment—and try to facilitate the development of that technology so it can be brought to the market quickly. A good example of that is shale gas—the DOE invested in shale gas starting in the late ‘70s, which enabled this resource to be commercialized in recent years in a profitable way. The final element of our work is nuclear security, where we focus on reducing nuclear danger by ensuring that nuclear materials are properly safeguarded, cared for, accounted for, not illicitly trafficked, etc.

You framed quite well why we work with China. We are indeed the two countries that both produce and consume the most energy, and emit the most greenhouse gasses (together, we actually account for about 45% of the world’s greenhouse emissions). Because of that, we have shared goals, and a good reason to work together.

We both want to improve our energy security. As you mentioned, world demand—and particularly China’s demand—is growing at a pace where it would outstrip supply as we know it today. Things have to change: we can either create new supplies, or diversify differently, or reduce demand. China and the U.S. have a common interest in ensuring that this happens, and ensuring that energy is available to our two countries—and on a global level as well, because energy affects everybody.

Another common interest we have is to shift to greener technologies, and grow our economies in the process. We also have a commitment to ourselves—although I am not speaking of a firm commitment on an international level—to shift to a lower carbon footprint, such that we lower our greenhouse gas emissions.

We are driving in the same direction. We realize that, by working together, we can benefit each other—so why not do that? Since the Obama administration, and, in particular, Secretary Chu taking over the Department, we have expanded our government-to-government agreements with China, across the energy sectors I described.

In the past, these have been largely dialogues and exchanges of information. We recognize in order to advance our goals more rapidly we must involve industry. Therefore, today, all of our new agreements have been those that involve public-private partnerships. In a typical paradigm, we would bring in 15% government, and 15% national laboratories, universities, and related institutions. The bulk of the participants, however, are now industry members. By working together in this way, jobs are generated, and technology is deployed—and the faster you deploy the technology, the more efficient it gets, the less it costs, and market demand increases.

The U.S. and China have complimentary differences that enable US-China cooperation to be mutually beneficial. For example, the U.S. has a lot of good technology. China has a wealth of capital, a different risk profile, and a different decision track (which we call ‘China speed,’ wherein the decision process happens about twice as fast as in most countries). Therefore, China has the ability to rapidly deploy U.S. technology on a large scale, which allows it to be rapidly proven, and therefore accepted.

Then the technology can improve: the first cell phones were large and cost a lot; today, they are tiny and have more computing capacity than a 1980s desktop. The idea is to do the same with clean energy technologies: more and more people producing them, more and more of a pull from the market to deploy them. We want to drive down costs and improve efficiencies, as more of the industry gets involved, more innovation gets involved, and people look to be more profitable. This allows government to reduce their subsidies and let the market take over.

On the subject of clean energy technologies and ‘China speed:’ China has surpassed the U.S. as the top nation in clean energy investment via public market financing. However, some have noted a gap in China between reported investment, and practical outcomes on the ground. Do you feel there is a strong correlation in China between ‘saying’ and ‘doing?’

This is a good question. In our science and technology portfolio, we have seen some of this phenomenon.

The issue is that the sector is fairly new in China. They are building brand new institutions, and spending a lot of money on creating the capability to do large-scale experiments, to perform various analyses, to put super-computing capability into place, etc. When you walk into their institutes, they look almost unused, because they are not fully populated.

China recognizes this, and has a number of programs in place. One is that they bring back to China people who have earned their doctorate in the U.S., or perhaps have done some work in the U.S. or Europe.

During Secretary Chu’s recent visit he had several different conversations with the Chinese that focus on the education system. He has experience in post-doc education and is able to provide an experienced based perspective. He frequently points to the Chinese teaching methods that do not advance innovation. The education method here is largely based on memorization, and it is more focused on the engineering side than on the science side. It doesn’t lend itself, therefore, to people thinking outside the box, or thinking innovatively about different ways of accomplishing goals. Their thinking is more along the lines of: “Who has done this before? How do I learn from what they have done?” That is why the Chinese excel at engineering, but do not have strong innovative tendencies.

Nonetheless, if someone gives them a great new idea, they can turn that idea into something that they can manufacture. That is another reason we mix well: because our companies bring in different ideas, and the Chinese are able to discern how they can turn that into a manufacturing process and quickly bring it to scale.

At the same time, the Chinese perhaps recognize that they are too dependent on foreign innovation, and they are trying to establish innovative industries of their own. That is why they are pumping a good deal of money into R&D, and signing different agreements with different countries on science and technology collaborations; we signed two such agreements with them this year alone.

A study released Dec. 2 by the James A. Baker III Institute for Public Policy at Houston’s Rice University notes that the U.S. system of open and competitive private sector investment is stimulating more innovation in the American energy sector than the Chinese energy industry is able to produce under its own nationalized system, especially in the area of unconventional oil and gas. In your opinion, does China require any policy shifts to achieve its targets in exploiting the technically difficult assets it has its eye on, such as shale gas?

We have perhaps seen the ramifications of the system in their educational shortfalls, which I have just discussed.

Policy-wise, if you look at the 12th 5-Year Plan, we are in the midst of a shift. If we look at innovation policies, they are heading in the direction of open competition. However, a lot of China’s policies are quite well written, but the implementation is perhaps slower. We have observed this in a number of areas: the U.S. may have criticized China in a particular sphere, and then found that, when we take a look at the policy, it is actually very good. Some regulations have even been directly adopted from Western countries.

But, again, implementation is lacking. This 12th 5-Year Plan is a strategic template of where the government wants to go; the implementation is done by state-owned enterprises at the provincial level. Their attention varies depending on where the central party is grading them. The new 12th-Year Plan is a major shift: whereas the heavy emphasis has always been on GDP growth, now the strategy is more diversified, and it recognizes the train wreck we mentioned earlier in the supply and demand of energy. The plan looks at both supply and demand, and energy efficiency, the environment, innovation, rule of law, and etc. are all stressed. The real test will be implementation, and to what degree it will change behavior, and how long that behavior change will take.

Mr. Schoentengen of GDF Suez has called the 12th 5-Year Plan a ‘rebalancing:’ from growth to green growth, from manufacturer to innovator, etc. What kind of opportunities does this rebalancing create for the U.S.?

We see many opportunities. And that is another reason why we want industry much more involved—so that they may realize the potential. In the oil & gas sector, there is indeed a shift, and we see several pilot projects coming online.

For example, a good article was recently released on the pilot China has done in shale gas, and one of the resulting observations is that the country does not have the infrastructure in place to deal with this gas yet; they do not have the regulations in place; and they do not have a good handle on the different technology. Since we started working in this field in the U.S. in the ‘70s, we have learned a lot of lessons. The idea is to shorten China’s own lesson-learning process by working together, because this country has a lot of potential shale gas reserves—which perhaps could be leveraged not only in China but also globally.

There are great opportunities for collaboration: from pipelines and distribution, to all the different support equipment that comes along with executing a fracking operation. We have a lot of different service organizations—Halliburton, etc.—that are being presented with a slew of new opportunities here. U.S. industries are coming to the region to work side-by-side with the Chinese.

China has several challenges in shale gas, one major challenge is water: the U.S. is blessed with ample water supplies while China has very few. Most of their water is from rivers and other runoff, and a lot of it is already heavily polluted. Moreover, the coal industry is already using 20% of their water for its own purposes. To take another high percent for the buildup of a huge shale gas enterprise would be too much, when you look at how much water is available per person here. This and other regulatory issues are challenges that China needs to solve, and we are offering our expertise from multiple sources and levels to aid in the process. We try to provide a base where our officials, Chinese officials, and industry members can come together to solve common problems.

Chinese energy companies have been increasingly looking toward the U.S. and Canada, investing a total of $12.4Bn in North American unconventional oil and gas projects. We have come a long way from CNOOC’s failed attempt to acquire Unocal six years ago. U.S. companies, for their part, have been present in China for a number of years. Do you feel there is reciprocity in the existence of a level playing field for FDI from each country into the other?

As the Department of Energy, when we create capabilities and opportunities, we are very clear with the industry people in delineating that they need to figure out their own risks and benefits in terms of collaboration, and base their decisions on what suits them best. We will tell them what we want to achieve, and try to make the market available for them to work in, and do it in such a way that we make the playing field as level as possible.

However, again, we really look to the companies to make their own informed decisions. What risks are they willing to take? We see a lot of rule of law challenges, a lot of property rights issues, and a lot of other things that can happen here, where the central government can just say, ‘Well, that was a great contract, but we have changed our mind and we’re going to have a new contract tomorrow.’

On the other hand, in some of our forums, we know that China wants to invest more in the U.S., but they see risk there from unknowns in terms of our tax code, lawsuits, etc.—these are risks that they are not used to dealing with. They look to our companies to help them navigate what they consider risky waters, and our companies look to their companies for the same here in China. There are risks on both sides. By working together, those risks can be reduced.

What is your final message to the international readers of Oil & gas Financial Journal?

The main message is that there is a lot of opportunity here, and by working together, we can benefit each other. We can benefit our government interests; we can benefit our industry interests. And because we are the largest consumers and producers of energy, we can affect the global markets significantly.

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