Are China’s Pipelines Ready: to meet its energy needs by 2030? A look behind some of the challenges, plans and projects being developed to deliver fuel to feed China’s booming economy and improve its environment Nicholas Newman Nicnewmanoxford.com August 2014 Are China’s Pipelines Ready: to meet its energy needs by 2030? Nicholas Newman www.nicnewmanoxford.com 15/08/2014

China’s Oil and Gas Market 2014 2013 2030 Forecasts Oil Consumption 10.7 million bbl./d 240% increase Oil Imports 4.5 million bbl./d Oil Production Gas Consumption 144 bcm per year 250% increase Gas Imports 53 bcm per year Gas Pipeline Imports 25 bcm per year LNG Imports 28 bcm per year Gas Production 5.5 tcf per year Sources: BP, China Daily, xinhuanet.com Nicholas Newman www.nicnewmanoxford.com 15/08/2014

What’s Driving Demand for Pipelines 7.5% economic growth per year China aims is to reduce dependence on coal power generation from 70% today to 50% of overall energy usage by 2030 The need to cut air pollution in China’s major cities The need to replace/convert town gas systems A study has uncovered nearly 20,000 disaster risks in its oil and gas sector Many pipelines over 40+years old and often built with poor quality materials Sources: EIA, Peoples Daily, IEA, Gazprom, Sinopec, Holmwood Consulting Ltd Nicholas Newman www.nicnewmanoxford.com 15/08/2014

Reasons for Pipeline Construction to bring in, and distribute, rising imports from Russia, Central Asia and Myanmar. to build up China’s intra-provincial pipeline network, which will benefit China’s 1,890 plus city gas franchisers and establish a nationwide pipeline grid to aid domestic distribution to bring shale gas from sites to market build the associated gas pipelines at planned LNG import terminals. Sources: BP, China Daily, xinhuanet.com Nicholas Newman www.nicnewmanoxford.com 15/08/2014

Some Current Pipeline Plans Project Project Leader State of Progress Capacity Estimated Date of Completion East West gas pipeline 3 CNPC Being constructed 1.1-Tcf/y On-stream 2015 East West gas pipeline 4 Front End Engineering Design stage 1.6 Tcf/y Unknown East West gas pipeline 5 East Siberian gas pipeline CNPC/ Gazprom Proposed 1.3 Tcf/y Taiwan Straits gas pipeline CNPC/CPC Corp. Source: Various sources Nicholas Newman www.nicnewmanoxford.com 15/08/2014

China’s gas pipelines 15/08/2014 Nicholas Newman www.nicnewmanoxford.com 15/08/2014

China’s gas pipeline network 2014 Gas pipelines 250,000 Kilometres City networks 2,166 Key natural gas processing plants 64 Gas power stations 187 LNG import terminals 43 LNG satellite plants 479 Shale gas fields 167 Onshore gas fields 662 Offshore gas fields 114 Coal bed methane fields 315 Coal to gas project plants 81 Source: IEA, EIA, China National Gas Map Nicholas Newman www.nicnewmanoxford.com 15/08/2014

China’s oil pipelines 15/08/2014 Nicholas Newman www.nicnewmanoxford.com 15/08/2014

China’s oil network 2014 Crude pipeline network 20,000 km Refined product pipeline network 18,000 km plus Strategic oil storage capacity 500 million barrels Onshore oilfields 791 Offshore oil fields 208 Critical refineries 104 Oil ports 101 Source: China Petroleum Map, IEA, EIA Nicholas Newman www.nicnewmanoxford.com 15/08/2014

Problems facing pipeline industry Slow pace of market reform Inefficient state owned companies and government agencies The need to reform the domestic capital markets to ensure sufficient capital is available for pipeline construction A business environment that favours the state sector at the expense of new private sector The reluctance of state energy companies to share pipeline access Nicholas Newman www.nicnewmanoxford.com 15/08/2014

China’s shale oil/gas basins Nicholas Newman www.nicnewmanoxford.com 15/08/2014

Operational Challenges Pipelines operating in hostile environments, due earthquakes and sub-zero temperatures Many pipelines constructed using poor quality steel and other materials Lack of adequate sensors to detect the drop in pressure typical of a leak or breach or even basic data needed to monitor the system Negligence of planning authorities and developers Criminal theft of fuel and vandalism Sources: EIA, China Daily, Holmwood Consulting Ltd Nicholas Newman www.nicnewmanoxford.com 15/08/2014

China’s major oil fields Nicholas Newman www.nicnewmanoxford.com 15/08/2014

Government action A "new" law (as of 2010) the first of its kind to be implemented in China to protect crucial oil and natural gas infrastructure Chinese Government have instigated a national safety review of all its oil and gas pipelines. Encouraging the partial privatisation of state energy companies Reforms to price controls – as of August 2014 customers paying $10.81 per 1,000 cubic feet, double US rate Measures to encourage private investment Nicholas Newman www.nicnewmanoxford.com 15/08/2014

China’s LNG Plants 2012 Nicholas Newman www.nicnewmanoxford.com 15/08/2014

Proposed Solutions Need to end the duopoly of CNPC and Sinopec Introduce transparency into regulation and markets Implement free market liberalisation and price reforms Privatise state-owned enterprises Encourage both local and increased foreign investment and competition by lowering market barriers Nicholas Newman www.nicnewmanoxford.com 15/08/2014

China is unlikely to construct sufficient oil and gas pipeline capacity by 2030 to meet its environmental goals and energy needs, unless it overcomes many structural challenges by reform of the energy sector a major political and economic priority Conclusion Nicholas Newman www.nicnewmanoxford.com 15/08/2014

Thank you! Any questions? Nicholas Newman http://uk.linkedin.com/pub/nicholas-newman/8/8/63b/ www.nicnewmanoxford.com Nicholas Newman www.nicnewmanoxford.com 15/08/2014