In 2010, Canada was the third-largest natural gas producer in the world, the sixth-largest crude oil¹ producer and the fifth-largest energy producer overall. Oil and gas companies account for about 24 percent of the Toronto Stock Exchange weighting². Given Canada’s significant role in the world energy market, it is logical to explore investment and business import/export opportunities in China, one of the largest energy consumers in the world (Appendix – Table A).

Energy Demand

An old Chinese maxim states that, of the seven most important items for a family, firewood for fuel is number one, and the remaining six items are all food-related. This highlights the historical importance of energy to households in China, a country that had a largely agricultural economy and society until the 1980s. With the rapid development of its manufacturing industries over the last 30 years, China became the second-largest economy in the world in 20103 (Appendix – Chart 4) and this has created substantial new energy demand from the industrial sector.

GDP per capita in China is expected to rise steadily to US$12,713 by 2017, a 170 percent increase from the 2011 level³. This growth is creating rapid expansion of China’s middle class, growth that can be seen in passenger and light commercial vehicle sales in China, estimated at 17.6 million units in 2011⁴, or 24 percent of worldwide vehicle sales for the year.

Energy consumption in China was about 3.25 billion tons of standard coal units in 2010, a compound growth rate of 5.4 percent per annum from 1978 (Chart 1).

Supply Statistics

In 2010, 77 percent of energy production capacity in China was coal-based; 9 percent came from hydroelectricity, nuclear, and wind power sources; 10 percent came from crude oil, and the remainder came from natural gas (Chart 2).

A summary of the Canadian energy production profile indicates that crude oil accounted for 39 percent of primary energy production in 2010, natural gas accounted for 38 percent, coal accounted for 9 percent, hydro and nuclear accounted for 10 percent, and natural gas liquid accounted for 4 percent (Chart 3).

China’s Five-year Plan Targets

In its twelfth five-year plan for 2011–2016 implementation, the Chinese Government has set clear targets to increase its use of renewables and nuclear power. There will also be increased government support for capital spending and technology investments to improve energy production, efficiency, and conservation.

In order to meet its increasing demand for energy, China has also established operational targets for further diversification of the country’s supply base. These targets are:

• Non-fossil fuel to account for 11.4 percent of primary energy consumption (in 2010¹, 9.4 percent of China’s production was non-fossil based). Efficient development of nuclear power and hydropower plants is to occur in the southwestern region of the country
• Improvement in energy efficiency, with energy consumption per unit of GDP to decline by 16 percent over the five-year period
• Reduction of 17 percent in carbon dioxide emissions per unit of GDP

Energy in China’s Equity Markets

The oil and gas sector accounts for about 13 percent of the Shanghai Composite Stock Index⁵ and consists of oil and gas producers, oil field equipment and service providers, and alternative energy production companies. Of the total oil and gas sector listing, a weighting of 94 percent (by market cap) is made up of oil and gas producers, 3 percent is made up of alternative energy providers, and 3 percent is made up of oil field equipment and service providers. Noteworthy investment features of these publicly-traded Chinese energy companies include the following:

• Sizeable market capitalization – There are three very large oil and gas producers in China: (1) Petro-China, the third-largest company in the world by market cap, at US$263 billion, (2) China National Offshore Oil Corporation (“CNOO C”), which ranks 60th among the world’s largest companies by market cap, at US$87 billion, and (3) China Petroleum & Chemical, which ranks 61st, with a market cap of US$86 billion. The coal-based giant, China Senhua Energy (H-share) has a market cap of US$73.6 billion and is the 77th-largest company by market cap in the world.
• Alternative energy production – The number of listed companies is rapidly growing in China, and so is the number of alternative energy companies. As of June 29, 2012, there are four companies included in the Shanghai Stock Exchange Composite Index that are engaged in alternative energy production and plant management. Two are in wind power-production-related industries (Sinovel Wind and Jiangsu Jixin Wind), and two are in solar cells and photovoltaic fab manufacturing activities (Jiangsu Zongyi and Xian Longi Silicon).
• Focus on conservation – There are three companies that trade on the H-share market in the energy-efficient product manufacturing business. TC Orient Lighting, NVC Lighting, and Neo-Neon are manufacturers of LED lighting products and road lamps in Mainland China.

Opportunities and Challenges

Three factors, the large demand for energy in China, the conservation-focused goals of the country’s five-year plan, and the need to establish a diverse energy supply base provide substantial investment opportunities. Most notable among them:

• It is recognized that global energy needs will still be largely met by hydrocarbon resources in the medium term. China’s plan is to increase domestic oil and gas exploration efforts, continue to upgrade generation technology, and improve transmission infrastructure, including pipelines, export terminals, railways, port operations, and tankers.
• China is a major coal producer in the world. With a 77 percent energy production weighting, China will continue with its investments (1) in technology to extract natural gas from coal and (2) in carbon capture-technology to reduce carbon emission levels.
• There will be increased Chinese government support of investments in alternatives—solar, wind, nuclear, hydro. Alternative energy production accounts for a much bigger percentage of the total world primary energy production than it does in China: the world average was 19 percent in 2009⁶, versus 9 percent in China. (World average statistics for alternative energy production: nuclear energy accounting for 5.8 percent of total production; hydro 2.3 percent; biofuel and waste 10.2 percent, and geothermal/wind/solar 0.8 percent.) It is expected that there will be much broader adoption of alternative energy production in China in the years ahead.
• The scope of energy conservation efforts will be broadened through subsidy programs for the purchase of energy-efficient home appliances. Experiences in other countries suggest that among the areas that will be positively affected are smart meters, energy-efficient building materials, and electric cars, which will benefit from tax credits.

References:

1. Canadian Association of Petroleum Producers, Fact Sheet, www.capp.ca.
2. Bloomberg, June 15, 2012.
3. Gross GDP (in US$), “IMF World Economic Outlook Database,” April 2012, www.imf.org.
4. BMW Group Annual Report 2011.
5. “SHCOMP Index,” Bloomberg data, June 15, 2012. The largest company on the global listing by market cap is Apple Computer at US$534 billion, followed by Exxon Mobil at US$384 billion (also Bloomberg data, June 15, 2012).
6. “Key world energy statistics,” International Energy Agency, www.iea.org, 2011 statistics. China accounted for 51 percent of total world hard coal production in 2010.