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US To Lose Out To China In Energy Race

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By John Richardson on 23-Jun-2014

By John Richardson

TreeHuggerARE you either a “tree hugger” or a “climate science denier”? If you fall into one of these two categories, you will be one of the dwindling minority of people who support a multi-faceted approach to US energy policy, according to a US petrochemicals industry source.

“The tree huggers are those who are against ever-greater use of hydrocarbon energy reserves per se, whether its US coal or our abundant natural gas. They are instead in favour of renewables,” the source added.

“And anyone who backs the coal industry as another option, along with natural gas, is accused of denying the science that backs up claims that climate change is man-made. The ‘logic’ here is that carbon dioxide (CO2) emissions from coal-fired power stations are some 50% higher than those from gas-fired stations.”

He worries that the debate about energy is so politicised in the US that “we are in danger of putting all our eggs in one basket. What happens if shale gas and oil reserves are less than many people think, or that the economics of further gas extraction don’t work out as some people predict?

“The energy debate shouldn’t be about politics, but instead should be based on what makes most sense over the long term, including alternatives in case the shale gas-boom doesn’t last.”

His words, spoken in early May, seem particularly prescient following the 96% write down of estimates of commercially recoverable oil from the Monterey shale-oil formation in California, which happened in late May.

“The Monterey Shale is now estimated to hold 600 million barrels of recoverable oil, down from a 2012 projection of 13.7 billion barrels, said John Staub, a liquid fuels analyst for the EIA [the US’s Energy Information Administration),” wrote Seeking Alpha,  in this article.

China, meanwhile, is calmly pressing on with a multi-pronged energy approach.

John Mathews, a professor at Macquarie University in Sydney, points out that:

  • By 2010, China was adding more power-generating capacity in hydro, nuclear and ‘new’ renewables than in conventional thermal power stations.
  • In 2013, China invested Rmb372bn ($59bn) in new generating capacity. Of this, only 25% was invested in coal-fired stations, whereas 40% was invested in renewables.
  • China’s National Development and Reform Commission estimates that electric power capacity will total 1.6 terawatts by 2020. Of this total, almost a third (500 gigawatts) will be generated from renewable sources – hydro, wind and solar.

But, of course, good old hydrocarbons are going to play a much bigger role in China’s energy mix than renewables.

Progress on shale gas in China, as an essential part of   a healthy energy mix, is more rapid than some sceptics had thought.

But much more importantly, we think, is China’s growing economic and therefore geopolitical strength.

As we discussed last week, as China reduces its foreign reserves from $4 trillion to $1 trillion, mainly through cutting its holdings of US Treasuries, it will have oodles  of cash to buy more overseas oil and gas reserves.

And provided that China is successful in economic rebalancing – and we remain optimistic that this will be the case – its domestic demand for energy will continue to soar.

This will mean more deals like the one that was announced in late May between Russia and China.

Russia is to supply China with 38 billion cubic metres of gas per annum for 30 years at a total cost estimated at $400bn.  China has paid as little as $9.90 per million British thermal units (MMBtu) for the gas, which compares with prices in some Asian markets that can be as high as $18/MMBtu.

Growing economic and therefore geopolitical muscle will enable China to continue to pretty much dictate its own terms in price negotiations for hydrocarbon supplies.

What’s the conclusion here?

Coordinated and sensible government policy is essential for a successful energy policy – as the US itself demonstrated in the first half of the 20th century.