China is the one to watch for energy market predictions
The country is becoming more significant in the global oil markets - its future in energy is important for the industry
China is the world's second-largest economy, it is on its way to becoming the world's largest oil importer and it is the largest emitter of carbon dioxide (CO2). More than ever, what happens in China will be felt throughout energy markets in 2015. Here are some of the issues we'll be watching:
Will oil demand recover?
Chinese oil demand growth fell sharply in 2014 and has been a major contributor to the oil price's steep decline. The oil market had grown accustomed to Chinese oil demand rising at about 5% per year, but the country's economic restructuring has slowed growth and hit oil demand harder than most had expected. The International Energy Agency reckons demand grew by just 2.5% in 2014. Does the lower rate of growth represent a new normal for Chinese crude demand, or will it return to levels seen during the boom years? For now, all signs point to lower economic growth in 2015, which will likely mean more moderate oil demand growth.
Climate change encore
China signed a landmark climate deal with the US in 2014, pledging to hit peak emissions 'around 2030' while increasing the share of renewables in its energy mix to around 20%. A debate has raged since over whether this deal was empty talk or if it signalled that Beijing is getting serious about its role in the climate fight? The focus of international climate diplomacy will shift to talks in Paris later in the year, where climate advocates hope a binding deal to cap CO2 emissions can be reached. China will be a central player in those talks. At home, Chinese policymakers will continue efforts to cut the country's reliance on coal. Bringing relief to China's smog-choked cities is the primary goal, but any steps that reduce coal consumption will also help the climate cause. 2015 will also likely see Beijing take more steps towards rolling out a national carbon trading market.
Shale gas breakthrough?
China's shale gas ambitions took a blow in 2014. The government slashed its 2020 output target to 30 billion cubic metres (cm) from earlier estimates of as much as 100 billion cm. Sinopec has started ramping up production from the country's first commercial shale gas project at the Fuling gasfield, but the industry has struggle to replicate that success elsewhere. High well costs, inhospitable terrain, water shortages and a raft of technological hurdles all need to be overcome before China sees significant shale production. The realisation that it will be years, if ever, before shale gas plays a major role in meeting surging demand could force China to look for more imports, potentially by signing a second deal with Russia. Still, 2015 should see record levels of investment flow into China's shale patch.
Has the corruption crackdown peaked?
President Xi Jinping's corruption crackdown sent shivers through the oil industry last year as he targeted the 'Petroleum Gang' faction within the Communist Party. The oil industry crackdown felled Zhou Yongkang, a former standing committee member that rose through the oil industry to the apex of Chinese power, Jiang Jiemin, who was head of China National Petroleum Corporation (CNPC) until 2013, and a slew of senior executives at the state oil company. The investigations made day-to-day business difficult for CNPC, effectively paralysing the company's decision making. Spending was reduced and the company was unusually quiet on the international M&A market as executives laid low, unsure of what lay ahead for the company. With Zhou Yongkang, the leader of the 'Petroleum Gang' expelled from the party, it appears the worst is over for CNPC, but Xi's corruption crackdown continues and the oil industry could see more heads roll.
Xi's reforms to continue
President Xi has also promised deep reforms for the country's economy and state-owned enterprises (SOE). 2014 saw yet another rise in the domestic natural gas price as the country continues to move closer to a market-based pricing mechanism that would bring domestic prices into line with international prices. Similar steps have been taken to bring prices at the fuel pump in line with international prices. A sustained period of low oil prices could provide an opportunity for policymakers to further ease its control over fuel prices in 2015. While reform to commodity prices has been quick, reform has been slower to come to state oil companies. Sinopec underwhelmed with the opening of its fuel selling business to private investors. In 2015, CNPC may spin off its pipeline business as part of its SOE reform efforts and Sinopec could sell off some of its refining assets. But so far the politically powerful state oil companies have resisted deeper reforms that would break their monopoly over the industry.