Coping with China’s energy reign

China has poured in $300 billion out of $500 billion of overseas direct capital investment to secure offshore energy resources. China took up about 20 percent of the global mergers and acquisitions deals on oil and gas. What’s the deal behind China’s global takeover of energy resources?

First of all, China’s resource production cannot catch up with the staggering growth in demand due to its rapid industrial and economic expansion. Oil consumption has jumped 7.2 percent per year on average from 2000 to 2012. About 58 percent of China’s oil supply comes from imports. The share is estimated to be as high as 72 percent by 2035. That’s why it desperately needs to secure its own stable supply base overseas.

Second, China inevitably has to comply with the global trend and seek alternative renewable energy resources following tougher global regulations and constraint on carbon dioxide gas emissions. China is notorious for poor air quality because 70 percent of its energy supply, or 75 percent of its electricity, is powered by fossil fuels. It plans to increase its share of gas - which currently takes up 4 percent of energy consumption - to 10 percent by 2025, while reducing the share of fossil fuels in producing power to 50 percent.

Third, China has been awed and motivated by the energy revolution in the United States through shale development. The United States has surpassed Russia to become the world’s natural gas producer by hitting the jackpot in shale development. It is expected to replace Saudi Arabia as the world’s largest oil producer around 2020 and become completely self-sufficient in energy resources by 2035. Therefore, energy sufficiency will likely lessen America’s political commitment and military attention in the oil-rich Middle East, and China is readying itself to take up the geopolitical energy security role as the largest buyer of Persian Gulf oil after the United States reduces imports from the region.

Fourth, China needs to secure stable transportation routes and diversify supply lines to ensure uninterrupted oil and gas flow. Its economic viability depends on a stable energy pipeline as 80 percent of its energy resources will depend on imports until 2030. Pirates and the U.S. Navy dominate the 900-kilomter-long (559-mile-long) Strait of Malacca where Chinese oil carriers must pass through with containers from the Middle East and Africa.

As a result, China is pursuing a trans-boundary pipeline across Russia, East Asia and Myanmar, and paying diplomatic attention to West Africa.

Fifth, China is cementing and building grounds in order to ascend as the dominant player in the global energy market over the long haul. International oil companies have been hit by the American shale field boom, toughened global climate control and environmental regulations. In the meantime, Chinese onshore oil companies running on wealth of state funds and local demand, which takes up 30 percent of global energy consumption, are gobbling up the global energy market.

South Korea must be better prepared for the evolution in global energy and capital environment due to China’s newfound role and involvement. First, business opportunities would increase for Chinese state energy companies and related businesses that have become large stakeholders and investors in overseas gas and oil fields. Therefore, Korean companies must prepare for the potential reduction in orders and deals in energy, offshore plants, steel, and facility industry, resources industry and shipping.

Second, Korean companies should brace for the situation where Chinese companies with greater competitiveness in the petrochemical industry would outperform in winning overseas contracts with their role as the world’s major energy consumer and supplier. Third, the Korean industry must pay keen attention to China’s growing clout in global energy affairs. China is now a major power in oil consumption and production. Korea must be ready to address increased political and economic rivalry between China and the United States in the global energy market.

Translation by the Korea JoongAng Daily staff.

*The author, a visiting professor at KAIST College of Business, served as chairman of the board at the Korea Exchange and as president of Daewoo Shipbuilding & Maritime Engineering.

by Hong In-kie