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Interview

with Xavier Chen, Chairman of EUCCC Energy Committee, European Union Chamber of Commerce in China

20.01.2012 / Energyboardroom

en, your career has long been steeped in energy policy, including an early professorship at the Asia Institute of Technology, several years spent working with the International Energy Agency, and now, in addition to your ‘day job’ at BP, you are chairman of the EUCC Energy Committee. How would you describe China’s energy policies today, in light of the 12th 5-Year Plan?

I would first like to say a few words about the Energy Committee. The European Chamber is a 1600-company association, and on the Energy Committee there are around 40 member organizations. We serve as both a collective lobby with the Chinese government and as a business basis for energy tie-ups between the European Commission and the Chinese authorities.
In regard to the 12th 5-year plan: we have not yet seen the finalized strategy plan for the energy sector, as it is under intense discussion and has not yet been released. However, I can say that in the overall national socio-economic plan that was published in March 2011, we see continuing pressure and momentum for energy savings and emissions reduction.
Energy savings is no major ambiguitychange. The 11th 5-year plan called for a 20 percent reduction in energy intensity, and the 12th 5-year plan calls for an additional 16 percent.
Ambiguity Change arises, however within emissions reduction targets. Emissions reduction in the 11th 5-year plan was essentially about COD (chemical sites oxide demand) and sulfur dioxide. These are two local pollution targets. In the 11th 5-year plan we were not really speaking of broader carbon CO2 reduction, but rather local reductions.
In the 12th 5-year plan, the government has planned further work on local pollutant reduction—chemical oxide demand, sulphur oxide, but also nitrogen oxide , and ammoniac nitrogen reduction. As you can see, there have been two additional pollutants introduced in our the local emissions goals. Furthermore, unlike the previous plan, and for the first time in Chinese history, the current plan calls for CO2 intensity reduction. The momentum in energy savings and emission reduction continues.
The second scheme in the energy sector is the continuing momentum for non-fossil fuel development. Non-fossil fuels here mean nuclear, and all renewables—which include hydro, geothermal, solar and wind. The 12th 5-year plan is also a stepping-stone for the Chinese international commitments announced just before the Copenhagen Conference. The government plans to achieve 15 percent of non-fossil fuels in China’s energy mix by 2020, up from 8.3 percent in 2010. That is a big jump, and the target also includes hydro and nuclear.
For this 12th 5-year plan there is a specific target for non-fossil fuels to achieve: from 8.3 percent to 11.4 percent of the energy mix by 2015. This is the momentum in renewable and non-fossil fuel development. The reason that the 12th 5-year plan in the energy sector is still being discussed and is not yet published is that all the questions around nuclear power have not yet been resolved. Nuclear is the second momentum and energy sector priorityimportant for China to achieve its non-fossil fuels target.
The third area of priority is, for the first time, to strengthen energy saving aspects; and, in particular, to control energy demand. Chinese policy makers have realized that this country’s energy demands, and energy supplies, cannot keep up with widespreadwild, unchecked demand. So there must be a measure, or sets of measures, to control the overall energy demand of the whole country. As a result, the authorities are in the process of discussing the control target as a ceiling for energy consumption in 2015, and defining the measures and how to determine the overall consumption volume of different entities.
Per capita energy consumption in China is low. However, China has almost 1.4 billion people. If the Chinese people reach Western levels of energy use, not only the Chinese system would not be able to support them, but also the global energy system would not be able to support them. We have to find a new way for growing the economy, and growing the well being of our people, without significantly increasing energy levels.

you mention the intense focus on reducing emissions and shifting toward greener energy sources. Indeed, China reduced its CO2 emissions by 1.5 billion tons between 2006 and 2010, the biggest decrease of any country in the period. What, then, is the role of fossil fuels like oil and gas in China?

Let me fist clarify the reduction you are speaking about. This reduction is in comparison to the “business as usual” trajectory. It is 1.5 billion tons lower than the trajectory would have been had we not implemented efforts in technology and structureenergy saving and emission reduction. This is certainly a significant contribution, but nevertheless, CO2 emissions continue to rise.
So what is the role of oil and gas in this? Despite being fossil fuels, if properly developed, oil and gas can be quite ‘clean.’ China is facing a kind of dilemma. One is that this country wants to move into a higher quality of energy such as oil and gas, and but we are currently bogged down by a major coal dependency—and the quality of coal is getting poorer and poorer.
On the other hand, if we continue to increase our oil reliance, this of course encourages dependence, which is already very high—something like 53 percent last year. This causes a lot of concern; an overreliance on imported oil has international geo-political implications.
Natural gas, however, is a win-win. If you see the 12th 5-year plan, the authorities have set fairly ambitious target – they want to almost double the share of natural gas in total energy consumption within five yearss, and natural gas can play a significant role. In particular, oOver the past five years, natural gas demand has been increasing 20-plus percent. And domestic production is growing very fast. Therefore, natural gas continues to increase its role in the energy mix—but its use is still very limited: less than three four percent of the energy mix, and this includes gas as feedstock for fertilizer production.
Natural gas has does not have a captured the market like oil. It has to compete with alternative fuels—in particular, coal. Major cities over the last few years have had a massive conversion program from coal gas to natural gas, but there is a ramp-up that takes a lot of time.
Further, if you speak to a company in an industrial enterprise, its first and foremost concern is cost. And coal is much cheaper. So, despite all the environmental advantages, how do you make gas compete with coal?
And yet, all a major source of the pollution we see in China is from coal. A little more than 50 percent of coal is burned in power plants. A little bit less in boilers. You can control local boilerpower plants’ emissions, but it is extremely hard to control industrial boilers or heating boilers that burn coal. This is a major source of local pollutants and CO2 emissions. But, again, how do you replace the boiler fuel with natural gas? If you want to start, yYou have to make coal more expensive and gas more affordable to enable the substitution.
A third area is in power generation. Here again is the same problem for natural gas, in that it has to compete with coal. Gas is not able to compete on price, and it is less reliable because of the natural gas strategythan coal because lack of supply often directs gas from power plants to residential customers.

The infrastructure to transport natural gas must too be developed./i>

Natural gas pipelines have been emerging very quickly. Our critics would say that the infrastructure is not developed. But tThe west-east pipeline is a prime example – the 4000 km pipeline was built just within two years. of our advancement. The second loop has been built, and now there is discussion of a third loop. In addition to large trunklines, We havethere are many local extensions of pipelines in China, and also LNG terminals in different parts of coastal areas. A few years ago, there was no gas import pipeline, but now the pipelines from Kazakhstan and Turkmenistan have already been built.
It is amazing to see that, when I did the China natural gas study in 2001-2002, there was a map that had only a very fragmented natural gas infrastructure—and today, the natural gas network has really started to emerge. The infrastructural basis for more natural gas conception consumption can take offis being put in place.

How are your member companies responding to the changes in the market?

Oil and gas majors such as BP, and Shell and Total continue to intensify their China activities. However, if we speak about oil, it is a fungible product and it isin a global market. Companies—in particular, larger companies—go wherever they can find the biggest volume of scale. In their years of experience, they have found that maybe China does not hold very large prospects for larger-scale oil production. So they give priority to other regions.
But this does not prevent small and medium-sized companies from working with Chinese companies to look for oil both onshore and offshore. Helping Chinese enterprises in recovery and in deep water is often quite lucrative.
On the other hand, there are many finds in natural gas, and both majors and juniors are very interested. Gas is different from oil because it is a domestic market. The domestic market means whatever you can find within Chinese territories, will be consumed here.
The Chinese government just reformed the gas prices, and in June 2010, andlast year increased the well-head prices by 25 percent. That makes gas exploration more attractive onshore in China. Chinese companies have intensified conventional gas exploration and production activities, and there is a lot of effort in unconventional gas, such as shale gas and CBM.
In this country lots of effort is being made in unconventional gases and in deep water. But the outcomes are largely unknown because China itself does not have much capability in deep waterthese areas. Now more work is being put into unconventional gas exploration in partnership with international companies.

What are the chief concerns of your members this year? What is currently on your agenda as lobbying organization?

There are a number of elements to our agenda. As Chinese energy market continues to grow, our number one issue is market access – access to both E&P opportunities as well as downstream market. The same market access issues applies to renewable and nuclear sector, where a number of our member companies are working.
Number one in the oil and gas sector is natural gasTake gas for example. Natural gas is the publicly declared preferred fuel. Everyone company wants to intensify and increase their share of the gas market. At the same time, a lot of effort has been put into natural gas imports—from Russia and Central Asia, and in the form of LNG,, for example.
We believe that natively within Chinese soil, a lot of gas is present—both conventional and unconventional. Therefore, this country needs to put forward a set of coherent policies above ground to extract gas, and encourage more funding and private investment in the gas sector.
We also believe China should reform natural gas prices in line with international prices, and extend supportive policies to players within the Chinese territory. Most of our member companies have legitimate entities within China, so we are also Chinese companies. We usually operate in partnership with domestic Chinese companies, and not on our own. Any gas that we discover and produce is for the Chinese market. There is no way that BP can discover produce gas here and then ship it back to the UK.
The government has also introduced international cooperation licenses for CBM. For a Chinese entity to cooperate with a foreign company for CBM exploration and production, that entity needs a license for international cooperation. We have been urging the government to give more licenses to Chinese entities so they can absorb international best practices and technologies through partnership. As China encourages development of unconventional gases, we believe the government should the right to all domestic entities to work with international partners freely. As such, obtaining an international co-operation license only obstructs the co-operation. We suggest the Chinese government to not set the requirement for such a license on shale gas development.
The PSC for gas, particularly in the unconventional gas sector, is 40 years in many other countries—but here it is 30 years. So we believe the government should extend the unconventional gas PSC term to a much longer term so companies can have more stability.
All of our oil and gas member companies are very keen to have contribute to China’s ambitious achieve different gas market targets. But it will be much more beneficial for this country to open up to more foreign and private participation and create a more equal playing field.

How do you feel that the dialog between foreign companies and national companies has evolved over the years?

It is quite interesting because Chinese national oil companies have grown quite significantly in regard to domestic capability—and that also goes for project management. They have a tremendously large labor force, full of very capable and hard-working engineers. Chinese players are hence able to increasingly look outside of China for promising assets.
Some people believe that most domestic oil companies go overseas to lock resources for the domestic market. But in reality, this is not true, and I believe it is a tremendous misunderstanding. The last report that I saw from a Chinese source stated that all the Chinese oil companies together produced 6016 million tons of oil last year overseas. Only five million was shipped back to China—one twelfth! One cannot say that Chinese oil companies are only working for domestic energy security. Chinese oil companies are in fact producing oil for the rest of the world. If they produce oil in Africa, why ship it back to China when they can sell it to the European market?
Import dependence is a reliance on the global market. The global market is everywhere. So you do not need to ship back the oil from where you produce it—this will not solve the foreign oil dependence issue in China.

For foreign players, this creates partnership opportunities internationally. However, on the local front, it seems that when local Chinese companies have developed their expertise past a given point, they are not going to need foreign partners. Is that a threat?

It certainly adds pressure on some companies. Twenty years ago China needed money, technology, and management expertise. Now, Chinese companies have developed these areas themselves. Foreign companies have to make distinct offers. They cannot just bring money, or bring technology, or expertise.
What else is there? Number one is cutting-edge technologies—not just ordinary technology. For example: deep-water capability, with all the associated engineering and management skills, and the digitization of oil E&P activities. As Chinese companies have evolved, foreign companies have also evolved tremendously over the past 20 years. They can offer competencies not just for a simple project, but also for extremely sophisticated processes.
There is also, of course, the idea of risk sharing. Today companies increasingly need to manage risk as they search for resources in ever more challenging areas.
Partnerships will always be needed. Today, even if BP is able to complete an entire project independently, it has partners for most the projects. BP will want to work with Shell or Exxonothers, because then different people come together to jointly develop and complement each other, and manage risk together.

Finally, as a native Chinese executive working in the China subsidiary of one of the world’s largest energy companies—a $4.7Bn investment on the part of BP—how would you characterize the change in approach that large Western oil & gas players have had toward integrating into the Chinese market?

All the big companies working here have local staff—not only in the energy sector, in other sectors as well. At the very least, in China, you need to speak the language. There are cultural differences, and you have to understand the market. Most companies have a Beijing office, and more and more, they are moving their Asia headquarters to China. It is also beneficial to develop local talent to be able to better understand the environment and to fully integrate China operations into the Chinese model of development and cultural evolutionenvironment.
We should do more than say, “China evolves too quickly for us to catch up, and Chinese laws are too protective.” It is up to all international companies to develop the capabilities that will allow them to integrate into the Chinese business environment.

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