The Emerging Role of China in the Global Oil and Gas Industry

By Peter J. Robertson, Vice Chairman
ChevronTexaco Corporation

Chinese Petroleum and Gas Conference, Oct. 13, 2004

Beijing, China

I'd like to open my remarks today by acknowledging what could be one of the greatest economic expansions in history - the story of China's extraordinary economic growth:

  • a near 10 percent growth in GDP in 2004;
  • a 40 percent year-over-year surge in exports;
  • an emerging "middle class" that's now over 20 percent of the total population - which is critical to both the rise in personal consumption and a healthy economy;

To support this, China now accounts for one-third of the world's growth in oil demand.

Few people - and certainly no one in this room - need to be told again the story of China's amazing growth. And yet the scope of it alone demands acknowledgment.

China is said to be emerging as a global power in energy. That's no surprise to ChevronTexaco, which has long been a true believer in China, its people and its economy.

And when I say "long," I mean long - at least by Western standards:

  • Our kerosene signs appeared on Shanghai's Great White Way almost 100 years ago.
  • Junks, camels and pony carts delivered our products.
  • Our Caltex colors have for many years flown over Indonesia, Thailand, Korea, Singapore, India, Malaysia and the Philippines as well as China.

In this, our 125th year, we are active in 27 Asian nations, and our work here accounts for more than 20 percent of our global oil and gas production. We have over 7,000 Caltex service stations and three major refineries in Asia. One in five of our employees works in this region.

None of this is meant to be a commercial for ChevronTexaco - only to indicate our experience with and our faith in China and Asia.

We have been fortunate to have positive and long-lasting relationships with partners here in China and in the rest of Asia, and we look forward to building more of these relationships that, over the long term, are the key to doing good business.

We are approaching an era of unprecedented opportunity in what is often called the coming "Asian Century" - an era in which economic globalization, the rapid growth of heavily energy-dependent industries and the increasing capabilities of the region's population have created favorable conditions for Asian economies in general and China in particular.

There is no doubt the potential benefits of increased openness are great and China already is reaping the benefits of this openness along with economic modernization and reform.

With annual economic growth rates over nine percent, China's economy is leading what many observers call the greatest industrial revolution in 300 years.

Serious forecasters predict China's economy will double the size of Germany's within five or six years, and overtake Japan as the world's second-largest economy by 2020.

And that scale of economic expansion can forever change the lives of people. That millions of Chinese are crossing the $5,000 (U.S.) yearly income mark signals a liftoff for a wholly Asian consumer economy.

Demand for consumer goods has soared.

Economies across the region have boomed:

  • National tax accounts are swelling.
  • National debt is being reduced.
  • National budgets are being balanced, many for the first time ever.

This broad-based market-driven boom is being felt most keenly by those people who are now participating in their countries' economies for the first time. People are being lifted out of extreme poverty - what many believe will be the defining challenge of the 21st century.

Let's not forget that economic growth and widespread economic participation is the world's best anti-poverty agent. It is also the best and most dependable engine for even greater and more lasting economic growth, stable national governments, and regional peace and security.

What will be the keys to China's success going forward?

I believe the first among them is affordable energy, a fundamental component of economic growth.

And to fuel its continuing economic growth, China needs to ensure a stable and secure supply of affordable energy.

But to obtain this supply, China will have to compete with the world's other large energy users: the European Union, North America, Japan and others. The attraction of being the "world's largest market" alone will not be enough.

In the last few years, China has shown itself to be a formidable player in this global energy security game. But I suggest that to succeed in the long term, China will have to have a two-prong strategy.

First, China will have to invest large amounts of its own capital resources in energy projects, both within China and around the world.

Second, China will have to facilitate international investment in the country by providing economic access to its own internal projects and markets.

Both of these avenues will be necessary to ensure that the lack of sufficient and affordable energy does not become a bottleneck, squeezing an already tightly wound economic growth engine.

Let me explain.

World oil demand will grow in 2004 by 2.5 million barrels per day, or 3.1 percent. More than one third of the increase — 900,000 barrels per day — will come from China alone.

Asia will account for 40 percent of the growth in world oil demand between now and the year 2025.

Many energy and economic experts worry that China's economy could be affected adversely by energy supply disruptions.

How does China prevent energy from becoming a bottleneck? And how does China most efficiently, securely and dependably meet its growing demand?

China has its own significant domestic energy resources. China is among the world's top 25 oil producers. But it will, without doubt, continue to be a growing net importer.

In natural gas, for example, China has plans for accelerated development of indigenous resources, but a significant portion of the plan will require a world-scale liquefied natural gas (LNG) import capability.

By the year 2020, China plans to build 50,000 kilometers of gas pipelines and a large-scale LNG import infrastructure - part of its plan to increase gas' share of energy consumption fivefold.

In addition, some consideration has been given to potential gas pipelines from Russia and Kazakhstan to China.

China is also building capacity to import more crude oil from Kazakhstan.

The Kazakh-China crude oil pipeline is now being built and will be completed by December 2005.

ChevronTexaco is the largest producer and was the first international oil company to invest in Kazakhstan, and we have obvious and demonstrated faith in its production capacity and delivery capability.

An additional Russia-China gas pipeline is also now being considered.

These are important developments for China.

And China can take advantage of these developments to progress, but there are barriers that threaten China's progress. And even though international corporations - and even other governments - can help, support and offer incentives, removing these barriers will depend largely on China itself.

China must lead the way:

  • by continuing to liberalize and open up its economy and building economic joint ventures;
  • and by continuing its evolution toward a generally more open and free economy.

In addition to attempts to secure adequate external energy supplies, there are internal reforms that are required.

And so, in the spirit of friendship and partnership, I humbly offer the following constructive suggestions for China to enable the continuation of its revolutionary economic growth.

I believe China should follow the guidance of the Asian Development Bank, which in a recent report suggested that China "move away from restrictive investment regimes...to create an enabling business and investment climate."

This opening of markets can be accomplished by reducing trade barriers, currency devaluation, deregulating prices and opening the Chinese marketplace to global competition.

China is already moving in a positive direction by investing in energy ventures abroad and participating in international joint ventures.

This rapid build-up in activity has been very impressive to your global competitors, and we look forward to participating with Chinese oil and gas companies in some of these international ventures.

But here in China, there is still a challenge to attract the scale and scope of international investment needed to fully develop its energy sector.

We are in a business that by its nature requires very large investments which are recovered over a very long period of time. So, the investment climate today is critical. But so, too, is the level of confidence in a positive climate continuing over the long term, because the contracts that we negotiate, execute and live by are by their nature long-term commitments.

The principle of sanctity of contracts is one that underpins our business and has been a hallmark of Chinese business for centuries.

Confidence in this particular characteristic is, and will continue to be, central to the success of the energy business in China, the United States and all other countries where we contemplate major investments.

In addition to our extremely successful partnerships with CNOOC in the Gulf of Bohai and the South China Sea, our company is extremely pleased to be embarking on some new long-term projects with Chinese partners, particularly in the area of bringing natural gas to China in the form of LNG. The investments required at the production end of the LNG value chain and those required at the receiving end, not to mention the shipping itself, are extremely high - many billions of dollars at each stage.

We are pleased to be pursuing a new joint venture with a Chinese oil company in the Middle East.

In all these ventures, our long-term partnership skills are going to be immediately put to the test. I know that our Chinese partners and we are up to this great challenge.

China must understand its special role in the global energy market as both a major supplier and consumer, with the potential to be something even more important: a global leader.

I say this today as an executive of a large international oil and gas company that sees as its job using our best technology to efficiently and cleanly extract energy from difficult-to-reach places, supplying that energy to the world, empowering economic growth, which in turn raises the standard of living for people around the globe.

We also view the efficient use of energy as a central success factor for all the peoples of our planet. With this in mind, internally we have been monitoring and managing our own use of energy for over a decade. We are now almost 25 percent more energy-efficient in our operations than we were 10 years ago.

China has the potential to become a global leader in energy in two ways:

  • on the supply side, by attracting global investment, and by continuing to invest in energy projects domestically and as a partner in international joint ventures;
  • on the demand side, by understanding the central role of efficiency - by making appropriate investments in efficiency, by following energy use best practices and by designing new infrastructure with the management of energy use in mind.

We can have it both ways.

We can have the economic growth and increasing standard of living empowered by reasonably priced energy if we recognize the significant role of and need for efficiency and make the appropriate plans and investments.

As we all recognize, China has the potential to assume a substantial leadership position in global energy.

They say Alan Greenspan sneezes and the financial markets get a cold.

In global energy, China has the potential to be in that role. They will say, China sneezes and the world gets a cold.

China already has a critical and growing role in the global oil and gas industry:

China accounts for huge and growing amounts of global energy demand growth for instance.

China is increasingly involved in both oil and gas production.

But China can only fulfill this potential by taking steps now, and I have outlined some suggested or potential steps to encourage growth, interconnection and interdependence, and cooperation.

And China already knows the way.

Updated: October 2004