The Ying and Yang of China’s Oil & Gas Industry

September 2016

Dear Reader/Member/Colleague,

I wanted to share with you some reflections from our China Oil & Gas Assembly in Beijing last week. Against a backdrop of ‘important political discussion’ at the G20 in Hangzhou and the ratification of COP21 by China and the US, our gathering was well timed as China continues to transition into a super power in the global energy markets. Points 1-5 below are directly associated with China. Points 6-11 are associated with both China and our industry at large…

  1. Energy policy and regulation reform needs to be happening at a much faster pace to encourage new investment: China’s long-term vision will be realised but it risks doing so by creating a market only it can play in and has access to.
  2. International companies cannot and should not increase their investment footprint in China without more transparency on energy policy reform coupled with access to scalable new business development opportunities. Without those there are simply better investment destinations worldwide for foreign companies to deploy capital.
  3. Chinese coal demand has peaked. If you are in coal, get out. China is now a driving force in renewable energy, adopting greater reliance on natural gas in their future energy mix and funding projects to the tune of billions of renminbi to take them further away from oil and coal dependence.
  4. The semi-liberalisation of some domestic energy markets (i.e. petroleum trading and imports) has been hugely successful, catalysing the epidemic growth and influence of indigenous energy companies, especially the ‘tea-pots’ (more respectfully known as ‘independents’). Their growth is driving the market and new Chinese energy demand, not the Chinese NOCs, and therefore liberalisation should be encouraged across more market sectors.
  5. Niche investment opportunities remain, especially across energy infrastructure (import terminals, regas facilities, pipelines, FRSUs), tight gas and for the long-term (and very patient) investor, shale gas.

 

Ok, so what about big picture ideas that weaved their way throughout the discussion…

  1. Disrupt the norm! Our mindset (and that of everyone in the oil & gas industry) needs to be one of revolution, not evolution. Get out of your box and start thinking differently. Repeating history is not progress and it will not save us. Seek new ideas from new sources.
  2. Technology will be the step change and enabler of our industry’s survival. Not big data but big intelligence. Technology beyond equipment, towards a new and unexplored digital frontier, disruptive technologies and applications that will unlock our potential as they have been doing so successfully across other industries.
  3. Huge cost savings and investment opportunities are still to be found in supply chain optimisation, ecommerce, automatic decision making tools, sensors and robotics.
  4. The energy value chain is shortening. Power, utilities and downstream energy companies are increasing their investments in midstream/LNG and upstream assets. Energy security begins now at the source, not the supplier. Get to know these companies, they are today’s buyers and tomorrow’s market makers.
  5. Innovation and courage are needed to do deals and secure capital. We work today with more unknowns than ever before; new players, new investors, new financiers, new data, new deal structures. If you are working with dinosaurs, you will deservedly be frozen in the Ice Age and you could be in for a long freeze.
  6. Get into gas! Yes, I’ve said it before but you need to. The success of your investment pitch, competitive edge, market capitalisation and exit strategy depends upon your future exposure to gas. It is where your future market will be and what your customer/acquirer will want to buy.

Many thanks for your time in reading these short thoughts and for letting us be part of your business plans across this transformational (/revolutionary) era for our industry.

Yours

Ross Stewart Campbell
Non Executive Chairman, Oil & Gas Council
www.oilandgascouncil.com

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