They say, "What happens in Vegas, stays in Vegas," but not so in China. Affairs in the Middle Kingdom have huge global influence – at least the mundane affairs of economic activity, primary energy use and environmental impact (in that order of causation). After a dozen boom years, the impact of small changes in China's gargantuan condition triggers repercussion around the world, not the least for major oil and gas exporters like Canada.
Here's what's going on: China's economy is decelerating, which implies caution (but not alarm) for oil markets; but its energy diet is becoming leaner, which rings a positive tone for future natural gas use. A Chinese transition to more natural gas, much more than the International Energy Agency (IEA) is forecasting, reinforces the importance of Canada's West Coast liquefied natural gas (LNG) prospects.
China's annual GDP growth has cooled off from its historically supercharged 10 per cent or more, down to an annualized 7.5 per cent for the second quarter of this year. Other metrics suggest loss of economic momentum; its exports are down 3.1 per cent year-over-year; domestic wages are increasing; manufacturing is weakening; and credit is crunching. Despite these negative indicators, growth in overall absolute energy consumption – barrels of oil, tons of coal, cubic feet of gas, and so on – is still robust and rising. That's because China's total energy use – now 20-per-cent greater than that of the United States – is compounding off of a much larger base of consumption. In other words, it doesn't take as much economic growth on a per-cent basis to draw on greater amounts of energy in an absolute sense.
Recently released data in the BP Statistical Review of World Energy 2013 tabulates China's energy use. Figure 1 shows consumption broken down by each primary source, normalized for energy content, collectively represented in terms of millions of barrels of oil equivalent (BOE) per day.
Total Chinese energy consumption remains on a ballistic trajectory. Continuing expansion of middle class wealth among 1.3 billion people should continue to drive top line growth of about 3 per cent per year. And although we can expect both GDP growth and the pull for energy as a function of wealth creation to moderate over the next decade, China's energy consumption is on a course to exceed 75 MMBOE/d by 2025. For comparison, that level is almost double the current energy consumption of Europe.
From a societal perspective, the Chinese sub-trends supporting their total energy diet don't look healthy, notably an unsustainable call on coal for power generation, paired against an insignificant diversification into cleaner alternatives. Shovelling megatons of coal into the economy is not surprising in hindsight, because it is the only primary energy source that is scalable enough to bring reliable and consistent electricity to hundreds of millions of people over a short period of time.
Investment into renewable energy in China has been widely trumpeted as being massive; indeed, at $65-billion (U.S.) in 2012 it has been the largest effort and expenditure in the world. However, the data show that relative to coal, the still insignificant amount of solar and wind in the national diet is neither putting the environment in good light nor blowing the country in the right direction. Coal is still overwhelmingly dominant.
Yet the data show that China, like all other industrializing countries preceding it, is in fact on the verge of a "break point," or a major energy transition. The biggest change to China's energy use over the next two decades will be a significant ramp-up in the use of natural gas. Detectable changes in the most recent BP Statistical data, combined with policy statements coming out of China's leadership, are supportive of a significant acceleration in natural gas usage between now and 2025.
Throughout the history of energy there is a recognizable pattern in developing economies, a progression of energy transitions that leads societies from the simplicity of living off the land, to the intensity of commuting to an office, labouring on a factory floor and powering up a modern lifestyle with a high standard of living.
Electricity is the first thing that a developing country seeks. Damming up rivers for hydro power is where it starts, assuming water flows through the land. Next is a shift to coal, because it's cheap and can be scaled up quickly. Citizens start to buy cars as the powered-up society gets wealthier, so oil begins to creep into the energy diet at an accelerated pace.
Wealth begets wealth as the economy grows, which begets more energy consumption. The use of coal and oil grows rapidly, while hydroelectric power approaches the limits of the nation's watersheds. Oil use continues to grow, because none of the other sources are compelling enough (yet) to turn the wheels of mobility that everyone wants.
Then the people come to a sudden realization: Their energy use is making a big mess. The smoggy air can't be inhaled and the water becomes too dirty to drink. This is a classic trigger for a "break point," a material shift in primary sources. China's well-publicized pollution problems earlier this year are contributing factors for change.
In response to a stressed environment, attention turns to using cleaner-burning natural gas, emissions-free nuclear power and renewable energy sources like wind and solar. But nukes are very expensive, slow to build and fraught with radiation phobia. Renewable energy sources lack scale and can't deliver consistently in rain or shine, day or night, especially to large populations. Although nukes and renewables will continue to grow their share of the mix, natural gas is the only scalable, clean-burning energy system that can diversify the supply side over the next two decades.
This pattern of energy system diversification – from water power to a full array of primary sources – can be seen in the majority of countries that have industrialized over the past 100 years. By the time top-line consumption moderates, natural gas typically settles in at 15 per cent to 20 per cent of a fully-developed country's energy mix. Yet that's potentially a huge number for China; by 2025 the country will probably be consuming one-and-a-half times as much primary energy as today (the equivalent of 76 MMBOE/day), which means that natural gas consumption could reach 55 to 60 billion cubic feet a day, close to what the U.S. consumes today. Other forecasting agencies are not as bullish, yet there is plenty of precedent for rapid shifts to natural gas when the call for diversification comes; South Korea, Japan and many European countries are good examples.
Forget the math. When you look at China's consumption profile there are two things you can bet on without going to Vegas: That coal growth is unsustainable and natural gas is the only scalable alternative. It's a good bet for future suppliers of LNG like Canada.