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with Raphael Schoentgen, Chief Representative Officer, GDF Suez China

24.05.2012 / Energyboardroom

Mr. Schoentgen, can you please begin by detailing your current understanding of the broad energy scenario in China, in light of the recent rollout of China’s 12th 5-year Plan?

In Premier Wen Jiabao’s various addresses before the international community over the past two years, a clear new trend has emerged. Mr. Jiabao has expressed that is it not important for China to realize a double-digit growth figure, if such growth comes at the cost of the environment and the people’s well-being.

China’s want for green growth is unmistakable, and it is no surprise that this idea is an integral part of the 12th 5-Year Plan. During discussions in Copenhagen, there was a bit of a pointing game towards China for not doing what the international community would expect from it. However, we foreigners active in the green business in China have noticed that there are many very clear objectives internally that have not yet come to the market. When leaders came to China after the Copenhagen conference, many also realized that the country is actually doing much in the right direction. Some may say it is not enough; but I can say, as a representative of a company that is active in the environmental and energy spheres, that the Chinese government has really taken environmental issues into consideration, and green development is now a key axis of their 5-Year Plan.

The current 5-Year Plan is in fact a re-balancing model for economic development: first, from growth to green growth; second, from coastal development to in-land development; third, from being the workshop of the world to adding and creating value; fourth, from being a country that develops large giants internally, to being a country which is expanding internationally; and lastly, from a country where economic development is put at the forefront to a country where social issues and people’s welfare come also in focus.

If we drill one level down, we can look at the developments that are directly related to energy in the plan. The first idea we come across is a very, very strong one: that China cannot proceed with its existing path of development. It cannot follow the same energy pattern, and must shift completely—toward cleaner energies, and more energy efficiency.

However, the question is what China can do for its current, existing heavy industries. Before it thinks about a new economy, or new industries or new companies, it must first reassess the ones it has and how to modernize them. To this effect, China has begun closing aging power and steel plants—a significant source of pollution—all throughout the country.

China has then decided to develop a new energy consumption pattern, integrating gas in new and significant ways.

While gas was forbidden for use in power generation just three or four years ago, because it was in priority devoted to industrials and urban commercial & residential users, this ban has been lifted. If we look at Tianjin and Guangdong regions, for example, the government is not authorizing new coal-fired power plants anymore. All new developments must be gas-based. And in Beijing, in the ten years to come, there will be an additional 20 GW of gas-fired capacity.

In terms of energy mix, coal is not going to vanish, but it will move outside of the cities. This means additional development of grids.

Gas is also increasingly entering cities. GDF SUEZis convinced that gas will be the key way to green Chinese cities. Proof of that is the fact that, more and more, we will see CCGT, trigeneration, and heating & cooling networks in cities that are based on gas. The limit is only in the infrastructure. Another potential limit is of course price, but this should be a minor constraint, because there is really a great demand for it. China wants to go green and needs to go green.

To accompany this gas development thousands kilometers of new pipelines are to be built, along with LNG terminals and means of storage.

I will give you an example to put things in perspective. Right now in Guangdong province, total consumption is of 7 bcm/year. Within ten years, the figure is targeted to rise to 70 bcm/year. To compare all of France is currently in the range of 50-60 bcm/year. While there is currently one LNG terminal active in the province —the Dapeng terminal—with a second in development, there are projects on the horizon to construct at least two more facilities. There are also only so far a few hundred kilometers of pipelines while plans are to reach rapidly several thousands and connect them to the West pipeline. If you are in charge of the grid network of this province, you must, within ten years, develop the same infrastructure that took France 40-50 years to construct ! If we look at all of China, the Guangdong story must be replicated in many different places. There are thousands of kilometers of pipeline to be built, and a large question looms: how to accommodate demand?

Further complicating matters are storage policies. While the total gas market in China is above 100 bcm, current gas storage capacities in China do not exceed 2 bcm. Plans are to reach 30 bcm and above by 2020. One trend is therefore driven by CNOOC, and involves the question of how to increase LNG storage on the coast. The other trend is driven by PetroChina, and asks how we can develop underground gas storage means.

I take the occasion of speaking on these matters to touch upon another issue, which is that, here in China, you do not have third-party access. You do not have an integrated grid network. There are discussions to this effect, and how to facilitate the conditions that will develop this market. However, the situation that people face in Europe, or in the U.S., is not the situation that people face in China. It is difficult to apply foreign models here. So, if you develop storage in modulation, how do third parties get access to it?

There was legislation passed last year that focused, pretty much, on the responsibilities of a city gas distribution network. But how about the interaction between a city gas network and the end customer? Or regulation of gas used in industrial sites by large customers ? What about regulation regarding pipelines, storages, and the interaction with gas distribution companies? We have therefore seen city gas distributors looking for solutions that could be provided by major pipeline actors—but as the interaction is not necessarily similar to that seen in other countries, actors are looking for solutions that one would never think about in other countries.

Gas is a booming market, and a market that China needs. The use of all energies is going to increase here, but gas will grow fastest.

Let’s move to another part of the plan: what about international presence? CNOOC, PetroChina, and Sinopec are some of the largest Chinese companies, and the plan is that China is now to become global. We must take this into account. CNOOC’s goal has always been to go outside of China; PetroChina is more balanced; and until recently Sinopec was more focused domestically. But all this changes and all of them are going to expand. We will probably also see international expansion of the major power companies (which, for now, have looked mostly to domestic work), taking advantage of several large Chinese EPC companies in China also expanding internationally.

If you look at what has happened in the textile industry or in the IT industry, there is no reason why the largest Chinese energy companies would not become global. Beyond the 5-Year Plan, it simply makes economic sense. We at GDF SUEZ believe that this is something normal, and something that we must play with.

At GDF SUEZ, we are number one on the gas chain in Europe on several segments, and in China the gas market is picking up. The interaction between this market and us is therefore essential. It is a question of environmental concern, and of future development. Bringing gas to China, along with the right technologies, is key and we are ready to help.

We are of course also working to partner with Chinese companies outside of China. There are very large developments to be executed in the gas upstream industry and in power. We have to deliver gas to our markets and power to our clients, and we do it often with partners. Partnering is a way to share risks. When there is collaboration, not only are the risk shared, but also operations are executed better. Why not do it with Chinese partners?

Let’s look a bit more closely at your partnerships. The past two years have, for example, been marked by your first medium-term agreements with a Chinese NOC: a 2.6 million ton, four-year LNG deal with CNOOC. Furthermore, last August, you struck a landmark partnership agreement with the China Investment Corporation (CIC) across multiple segments, that will see CIC, as a first step, become a 30% stakeholder in your gas E&P business. How do such collaborations reflect your strategy in the region?

As recently as three years ago, GDF SUEZ had no real large-scale interactions with Chinese partners on the energy side.

This happened despite the fact that we started operating in China some 30 years ago, and had 7,000 employees and 30 JVs by 2008. We mainly concentrated in fact on water and waste management projects. We have 14 million customers in water today in China; that we can compare with our 12 million customers at home in France. And we have four companies under Suez Environment in the country: one is an engineering company, one is in water distribution, one is in waste management, and the last one is concerned with power.

Three years ago, we decided to extend to our energy activities China, on top of Suez Environment activities, and several new business lines started scrutinizing the market, notably the gas market. We began discussions with various potential partners and, as you can see, what have come fastest are our deals with CNOOC. CNOOC is perhaps most predisposed to work with multinationals due to its origin. We signed an agreement to supply them with LNG, and, last October, we moved one step further and provided them with a floating LNG terminal, a first for China.

Coming to the CIC deal: CIC is an investment organization, and for us, they are a financial partner. Their target is to invest by taking minority positions, and generating adequate returns, in various assets worldwide. You can see that the way they spend their money is a bit like hedging their different positions by utilizing capital from the reserves of the Chinese state. First and foremost, CIC’s stake in GDF SUEZ is a friendly, minority position.

GDF SUEZ offers them a very interesting and different platform for investment. Why? Because we are active in many different businesses, and we are present in 70 different countries worldwide. We decided therefore to engage in a global partnership.

There are three pillars to this partnership.

The first pillar is that we look, on a regular basis, at their pipeline of projects and our pipeline of projects, as well as what is going on in our markets, and decide if we can do something together that is going to be beneficial to both parties. This covers all geographies, and all our GDF SUEZ businesses.

The second pillar is that CIC grants us access to financial resources or partners. This means that they can offer capital themselves, or they can link us to other possible sources. This summer, we signed for instance a deal with ICBC, China’s largest bank—and this is a direct consequence of our work with CIC.

The third pillar involves the fact that, at this juncture, CIC knows us very well. We have had extremely regular exchanges for a year. CIC understands exactly which kinds of technologies we have, and which kinds of projects we are capable of. They also know where China itself stands, as they have close links to domestic companies at home. They have therefore acceptedto give us access to various people, with the understanding that we can partner with these people to do projects here, and later partner with them outside of the country. If we go outside of China with such partners, CIC can join the group as financial investor.

Looking again at the global development of Chinese companies in the gas industry, they want to secure upstream resources. The National Develeopment and Reform Commision now wishes for domestic players to not only have the right to purchase LNG, but to be part of the project upstream if there are to build an LNG terminal in China. This is an aspect of energy security. GDF SUEZ has discussions with various partners for upstream operations, naturally including Chinese. Whether CIC will come alongside us or not, as we work with major Chinese oil & gas and power enterprises abroad, is to be discussed. The first project we have done out of our partnership involves CIC who takes 30% equity in our upstream E&P business.

Our rationale in that deal was to look for a sound financial partner and CIC is a perfect one.

GDF SUEZ seems to be responding quite directly to China’s needs: its drive towards gas; its drive abroad. Let us consider the benefits of this strategic response for GDF SUEZ. The company wants to double the size of its Asia business over the next five years, and we have already discussed the fact that you brought your gas division to China quite recently. How will you achieve your share of this mandate to expand ?You are touching on the right issue: gas expansion is indeed the name of the game. In China, we have started by delivering gas to the shores. However, our competence spans over the full gas chain, from the LNG terminals to the end users—and the gas market, as we have noted, is booming here. What, therefore, are the different access points for our expansion ? Gas users, and everything that is related to gas infrastructure. Another of our business lines is concerned with delivering energy services. This involves both heating and cooling networks, and all of the related management for industrial zones and buildings. In that, you have a lot of gas use. So we tackle it and, for instance, in heating and cooling, we have a trigeneration project that is starting in Chongqing—one of the first large projects of this king in a downtown city in China – with Chongqing Gas as a partner. This is one axis.

A second axis is Tractebel Engineering: the engineering arm of our Group. With 3000 staff members it has experience all over the planet. We are now developing engineering services in China, and are in discussion with different partners. I mention this because we signed, last September, a large partnership with Beijing Gas—covering all of our areas of mutual competence.

A third axis relates back to our conversation about gas infrastructures: storage, modulation. We are number one in such areas in Europe, and we believe that our experience—not only from the technical side but also from the operational side and the regulatory side—can be very interesting for China, at a time when China is thinking of how it can develop its storage capacity. Once again, this is not only a technical issue, but a question of how to develop while utilizing sound business models, and creating appropriate regulation. Looking at this last point, our conversations in China are, therefore, not only with major companies, but also with the authorities.

It is a matter of getting further into the China gas market. We believe that we can really get something out of what is going on here – there is so much development ! And when I say “get” it means also learn. When you are developing a segment practically from scratch in a market, you are always in a position to develop projects with the latest technologies and the latest ideas. What we are developing here builds on our past experiences for sure but also is very modern and thus we use what we do in China as examples for later projects elsewhere.

I will give you an example: in Shanghai, we treat all the waste of the petrochemical zone. There, we have our most modern global incinerator worldwide—because it is one of the last ones that we have built!

You mention your strategy to become more deeply ingrained in this market. Do you intend to follow an acquisition strategy in this country, and what role will acquisitions play for the China affiliate going forward?

You must consider the fact that there is a trend, on the market, for Chinese companies to commit to IPOs. Sometimes, you see prices that are skyrocketing, and that, sometimes, have no real link to the true value of assets.

This leads me to the comment that you have to be very selective, and very careful, when considering acquisitions here. You might face completely unexpected valuation mechanisms.

This gives also extra value to the very long-lasting partnerships that one can build in China. We put a lot of value into our existing long-standing collaborations, whether or not they are translated to projects. Our partners in China have a lot of value for us, and we favor indigenous projects and development. So: nothing is excluded, but in many areas, we are currently more interested in partnership than acquisitions.

You have recently been nominated as a Young Global Leader by the World Economic Forum, which brings together people who have the interest and potential to affect a better future for markets globally. Have you found that GDF SUEZ is a strong conduit for forward thinking ? How is this company making good on its tagline of ‘by people for people’?

GDF SUEZ is a company people love to work for. It was rated two years ago, by an independent international survey, as the 6th nicest company to work for – with first and second place taken by Nintendo and Google, to give you an idea of where we stand. Why do people like to work for GDF SUEZ? It is certainly because it is very close to the people, and very close to their needs.

You talk about drive, the Young Global Leaders community and what can be done. GDF SUEZ, as a tool in this Chinese environment, is a strong vantage point for me to understand the intersection between economic development and a sound environment. If I can share this with other Young Global Leaders, it is useful in their own field of activities.

China is developing extremely quickly and needs global solutions from global players to save time and keep up with the pace.

Let’s look at the U.S. for comparison. They prefer to see highly specialized and different actors to talk to them, and foster competition niche by niche.

In China, things are different. Development is, again, very fast. Here you can come and say, ‘Hello, I am a big family; everyone has his/her own life and expertise, but we are linked by shareholders. So I can come and speak to you about your global problems and issues alongside my cousins from other specializations.’ In China, this kind of offer has a lot of value. With one stone, as they say here, you hit several birds. I do believe that a company like ours, with an integrated view, working hand-in-hand with local cities and local partners, contributes much to this environment. So yes, GDF SUEZ is a good conduit for forward thinking in China.

Coming back to your initial question, if I can contribute to the global trend of greening China by working here, then that is a strong link to what you have said about the Young Global Leaders community. There is a lot to do here and it is extremely exciting!



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