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  To strike favourable deals in China, global energy companies should consider broader deals involving capabilities and resources across the entire energy value chain.
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BCG report: Global energy companies should consider broader China deals

Even though foreign participation will be critical to China's meeting its monumental energy challenges, the usual project-oriented approach of global energy companies may not be the best approach, according to “Unlocking China's Energy Potential,” a new report from The Boston Consulting Group (BCG).

Rather, energy companies should consider to engaging with China in a more comprehensive, big-picture way — lending capabilities, resources and knowledge on a scale that helps China solve its biggest issue: energy self-sufficiency, according to the report.

“To continue to grow, China may not only increase imports crude oil, refined products, petrochemicals, coal and natural gas, and, at the same time, improve production capacity, but it must also improve energy affordability and efficiency and protect the environment,” said brad vantassel, a vice president and director at bcg's Houston office and a co-author of the report.

“Accordingly, the government will be less and less likely to approve project participation by foreign energy companies that doesn't advance solutions to these big challenges. But, the government may arrange for superior terms for companies whose participation is comprehensive, reflects their ability to invest in extensive capital projects, helps improve domestic exploration and production, and contributes to the development of unconventional energy resources, such as tar sands and other frontier resources,” he said.

China's Energy Challenges are Monumental

The report brings to life the proportions of China's energy issues:

* To sustain economic growth and handle income disparity challenges, the government controls domestic prices of energy (and other staples), a situation that makes the energy business extremely difficult, especially when world market prices are high.

* Tight regulatory controls on foreign energy investments contribute to a lack of foreign direct investment in energy that could threaten economic growth.

* The country has been forced to import quantities of oil and natural gas — the prices aren't always advantageous, and the supply isn't always reliable.

* Attempts by China's national oil companies to acquire international reserves and enter joint ventures have been met with mixed success.

China Will be Open to Deals with Foreign Companies that are Comprehensive

“China may be willing to grant special economic terms that create win-win situations for investments from foreign companies that truly help the country maintain a reliable supply of domestic crude oil and refined products,” said Jim Hemerling, a senior vice president and director at BCG's Shanghai office, and a co-author of the report.

The report points to a joint venture that one oil major entered into that included technology and expertise transfer that helped China improve refinery operations. In return, the government made price allowances for the respective oil major.

The report predicts that subsequent joint ventures and investments that are beneficial for both China and the global energy companies will be those that help China develop its substantial unconventional reserves (which are 16 times greater than its traditional reserves) and thus reduce crude and product imports and bolster supply.

“We see many examples of these mutually beneficial, comprehensive ventures in non-energy industries, such as cement and airplane manufacture. It's up to global energy companies to be creative and committed enough to propose more of them in their own sector. If they do, they'll be helping themselves, China and the global economy,” said Hemerling.
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