International corporations overestimated China's hunger for natural resources. So some of them now face losses, writes DW columnist Frank Sieren.
Even in China's case, linear graphs which show consumption going from the bottom left to the upper right do not work. Canadian and Australian corporations have pumped billions into exploiting gas reserves in the hope that China would buy them up. These hopes were not unfounded, since China is the biggest importer of crude oil in the world and the second-biggest consumer after the US. The natural gas market had looked very promising in recent years, with double-digit growth. Moreover, there is plenty of it and it is a cleaner and cheaper alternative to crude oil.
However, now it is becoming clear that Western companies got their hopes up wrongly. China needs less natural gas than was calculated and this could lead to huge losses. Although China's economy looks set to grow by 7 percent this year, gas use has stagnated. Imports of liquefied natural gas (LNG) have sunk by 3.5 percent compared to last year when there was still growth of 10 percent. Even in China, production has been drastically restricted. This grew by 11.5 percent in 2013 but only by 6.9 percent the following year. Furthermore, China can now extract about 10 billion cubic meters of natural gas itself.
Sinking demand, falling prices
Sinking demand has also led to falling prices. Whereas one million British thermal units (Btu) of natural gas still cost over $14 last fall, now the price is $8. According to estimates by Citi Research, in three years there could be 25 million tons too much on the market - more than China imports in a year. By 2025, this could mean that two thirds of the extracted gas goes unused. To put it differently, the "new normality" - the term being used to describe the end of China's turbo-charged growth - has also hit the natural resources sector. After years of double-digit growth, China's hunger is gradually coming under control.
This is not unusual, but reassuringly normal. Nevertheless, several unfavorable factors came together at the same time: First, China's current economic lull, which is connected to the restructuring of the economy so there could still be some hope that demand will rise.
Further, the fact that Arab states are keeping oil prices low means that China too is currently favoring oil over gas. The Saudis and their friends hope to render fracking, which the US is heavily engaged in, unprofitable. This relatively expensive method releases natural gas from the earth by using high water pressure.
Global industry has to adapt
Thirdly, Western sanctions against Russia have forced President Vladimir Putin to make cheap gas deals with China. Last year, a 38-million cubic meter deal that can cover about 20 percent of China's needs was signed. Further deals are under discussion. Beijing is also working with Russia to explore gas reserves in the Arctic. It alone has invested $12 billion into the Russo-French-Chinese Yamal project. The plant will have a capacity of 16,5 million tons of gas per year and is expected to be operating by 2017.
The development of the fossil fuel market represents the development of the overall Chinese economy. In several areas, the world market was able to rely on Chinese growth for many years. China was building more, driving more, eating more and consuming more than before - there was more demand than supply. However, now the government has put on the brakes and is restructuring the economy. Global industry will have to adapt. It's simply too clear how a combination of economic factors, political and geo-strategic decisions and China's restructuring can upset the linear path. Chinese companies also got their calculations wrong, by the way. The Australian Arrow Energy Pty Ltd, a joint venture between Royal Dutch Shell and PetroChina, lost just under a billion euros in the past year. Having invested 1.6 billion euros.
DW's Frank Sieren has lived in Beijing for 20 years.