China’s thirst: A few 'crude' notes from Shanghai

The Oilholic finds himself in Shanghai, the financial capital of China. Home to some 24 million people, this bustling metropolis, and what makes it tick, explains away the country’s consumption pattern of hydrocarbons, colossal state-owned oil & gas companies and a progressive lurch forward in the world of finance.

China uses more energy per GDP unit than any other country in the world, and factored in that equation is Shanghai which burns more hydrocarbons that any other major Chinese metropolitan area. While savouring the glitzy lights of the Shanghai waterfront, should the haze and weather permit, most visitors either fail to notice or attach importance to oil tankers frequently passing up and down the Huangpu River (see above left, in the darkness below the Oriental Pearl TV & Radio Tower).

China is the world’s largest net importer of crude oil, and its financial gateway is also its gateway for imported crude to be processed and moved. The city’s Pudong district alone has 240,000 barrels per day (bpd) of refining capacity. According to a distillates market commentator, plans are being spearheaded by Sinopec to take old creaking facilities offline and replace them with a new cleaner low carbon refinery with a whopping 400,000 bpd processing capacity at Caojing Industrial Park, some 50 km south of downtown Shanghai.

The capacity would have to be whopping, catering to Shanghai's Yangshang Port which overtook Rotterdam in 2004 to become the world’s busiest container port by volume and cargoes. Of the city's two main airports – Pudong International – is the world’s third-biggest mover of air cargo. Then with an area of 6,340.5 sq km, Shanghai is the world’s largest city and China’s most populous. 

Its growing, and growing fast. In 2001, the Oilholic remembered watching a BBC report on the city’s construction drive. Much of it was focussed on Pudong’s financial district which resembled something of an urban metallic mess. As yours truly came out of the Lujiazui Metro Station on Friday afternoon to see for himself, the said urban mess has in fact progressed to a sprawling skyscrapered representation of Chinese economic prowess in less than a decade.

Furthermore, yet more skyscrapers keep springing up. A trader correctly pointed out that the Oilholic has arrived to witness the party a bit late. Guilty as charged, more so as flat macroeconomic data has taken some (but not all) of the fizz out of late. Nonetheless, the inexorable eastward movement of importers’ petrodollars is manifestly apparent, more so as Chinese imports (and refining capacity) rises, while US imports decline and conditions for OECD refiners remain challenging.

To provide some context, Wood McKenzie notes that by 2020, US crude oil imports would have fallen below 7 million bpd thanks to shale and lower demand, while China’s would have risen above 9 million bpd. Bearing the wider market dynamic in mind, Chinese regulators are trying to bolster Shanghai’s clout in the wider commodities and financial markets.

For instance, three reliable financial sector sources expressed confidence that the domestic market regulator will introduce options trading over the fourth quarter of this year. A spokesperson for Shanghai’s International Energy Exchange says it will commence the trading of crude oil futures this year. It must also be noted that Shanghai’s commodities exchanges are backed-up by those in Dalian and Zhengzhou.

As for corporate deal flow, propped up by state-owned enterprises, it’s a case of more said the better. A Reuters report suggests spending by state-controlled oil & gas majors is likely to rise over the coming months, led by Sinopec and PetroChina, as the industry recovers from a government probe into industry graft allegations.

Some market commentators here in Shanghai are forecasting an overall annualised jump of over 45% in the total value of mergers and acquisitions (M&A) by Chinese companies, with oil & gas majors leading the way. It can’t be said for sure whether that’s a fair assessment or an overoptimistic take by local commentators, but it is in line with empirical evidence from elsewhere. 

For instance, Mergermarket recently noted that China was, perhaps unsurprisingly, the biggest market for M&A deals in the region, with deals worth US$128.4 billion over the first half of the year. Recent studies by EY, PwC and Deloitte have also noted the Chinese clout in terms energy sector M&A deals.

There’s potential for foreign direct investment as well. For instance, a stake, possibly as high as 30%, is up for grabs at Sinopec Sales, the company’s retail and marketing unit, which could be worth Yuan 100 billion (£10.04 billion, $16.29 billion) in terms of market valuation. It has attracted 37 bidders, including international participants and joint consortiums, according to local media.

Rather unusually, Sinopec Chairman Fu Chengyu also told media outlets that new stakeholders could be offered seats on its board. As with everything in China, it’s not done till it’s done. However, should such a level of holistic reform at regulatory and corporate levels go through to fruition, this blogger can see two major Asian commodities and financial markets – i.e. Hong Kong and Singapore – really feeling the heat.

Yet, there are stumbling blocks in Shanghai’s march forward. Red tape is a big one, for everything is described by spokespeople as “imminent” but with no verifiable timeline for execution or a firm date. While one can sense the positive intent for reforms, that alone won’t lead to end-delivery.

Another is pollution in the city, which is making residents restless about new refinery capacity, and rightly so. Shanghai’s horrendous traffic jams pose another problem though a fantastic metro, mass rail transit systems and not to mention the world’s first commercial magnetic levitation railway line do make residents and visitors’ lives a significantly easier.

Finally, the biggest stumbling block is the Yuan, which isn’t a fully convertible currency. The Oilholic thinks it’s probably why Shanghai's Free Trade Area (FTA), due to celebrate the first anniversary of its establishment this month, has largely turned out to be a dud so far. The 28.78 sq km zone in where else but Pudong was supposedly modelled on a mini Hong Kong.

The FTA found promises of attracting a wider range businesses and looser custom intervention easy to deliver along with swanky logistics and construction work. However, a full convertible Yuan and a market-based interest rate mechanism have proved to be anything but deliverable.

While the authorities have permitted companies in the FTA open “special accounts” facilitating cross-border capital flows, transactions between these and overseas accounts can hardly be described as “free transfers” in a British or American business sense. It’s also difficult to envisage how the creation of 8 spot trading platforms for commodities ranging from iron ore to cotton would work in the FTA, as is being planned, without a convertible currency.

All in all, and to be quite honest, FTA fans expecting a fully convertible Yuan were perhaps being overoptimistic. The Chinese will find their currency pathway at their convenience and in their own time. Nonetheless, crude reality is that the Chinese juggernaut will roll on, and in the context of the commodities market, dominate the discourse for some time yet.

That’s all for the moment from China folks as its time to bid a sad goodbye to Shanghai! It was great being here to get a first hand feel of the Chinese oil & gas sphere rather than commentating on it from the comfort of a desk in London. Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2014. Photo 1: Shanghai Huangpu River Waterfront. Photo 2: Pudong Financial District. Photo 3: Flag of the Peoples Republic of China. Photo 4: East Nanjing Road. Photo 5: Traffic Jam, Shanghai, China © Gaurav Sharma, September, 2014.

That need for speed: Meet Shanghai’s Maglev

After years of wanting to, months of planning, waiting, visa applications and what have you, the Oilholic has finally made it to China, via Shanghai’s sprawling Pudong International Airport.

Before even entering the city limits, you get a sense of expansiveness, development, progress and a country in overdrive, despite Chinese economic data being less than flattering of late. It’s all capped by a general desire for getting things done, something that’s epitomised by one project in particular – the Shanghai Maglev Train, acknowledged as the world’s first commercially operated magnetic levitation line.

The Americans, Brits, Germans, Swiss and Japanese, have all flirted with magnetic levitation. Birmingham and Berlin even had low-speed pilot maglev trains before being abandoned owing to costs and other permutations. That’s where China is different – they wanted it done, wanted to spend towards that need for speed and the end result is splendid.

The Oilholic got from Pudong International to Longyang Road Metro Station, close to Shanghai’s financial district some 30.5km from the airport, in 8 minutes and 10 seconds at a speed of 301km/hr (see right), according to the speed indicator in one’s carriage.

Had yours truly travelled earlier in the afternoon, when the Maglev does 431 km/hr, it would have taken 7 minutes, a Guinness Book World Record land speed for public transit carriage. A non-commercial scientifically monitored journey on November 12, 2003 saw the maglev hit 501km/hr. Now beat that!

The need for this speed does not require the ‘crude’ stuff, but it doesn’t come cheap either. It’s almost certainly why the Brits and Germans abandoned projects after initial efforts. That sort of thing however doesn’t hold the Chinese back. This high-speed thrill ride cost US$1.33 billion to build entering commercial service in January 2004.

While yours truly was indeed enjoying the thrill ride, one got an acute sense that there were more thrill seekers onboard than regular commuters. There’s a reason for that; unlike the Oilholic, not everyone likes to get off an airplane head straight to the financial district!

So you still have to get on the Shanghai Metro at Longyang Road to go further, which you could have done earlier in any case since the metro line actually goes to Pudong International Airport. The tickets are pricey by local standards going at RMB85 (US$13.80, £8.50) for a return ticket and day-metro pass, RMB80 for a return and RMB50 for a single-journey. While this blogger, felt it was worth his while for the experience, the roughly 30% average carriage occupancy rate suggests that average Shanghai dwellers don’t in the main.

Nonetheless, that’s not something to knock the Maglev down with. You’ll get a similar occupancy dynamic if you compared the Heathrow Express and the cheaper option of taking the London Underground’s Piccadilly Line from the airport. Except, that in the case of Shanghai Maglev, it’s not an express – it’s a super-cool super-express. Having used mass transit and public transport systems from 67 airports (and counting) and many rail/seaport hubs, the Oilholic can safely say nothing beats this experience; not even the TGV or Shinkansen.

The initial train set was built by a joint venture of Siemens and ThyssenKrupp. Since then, under a limited technology transfer deal, the first Chinese built four-car train has also gone into service. 

Nonetheless, the Shanghai Maglev remains a demonstration project. Costs and other factors have delayed expansion beyond Shanghai. Most analysts and local media commentators here reckon the Pudong- Longyang Road Maglev Line will probably be it for the foreseeable future if not forever. If the Chinese reckon the Maglev is turning out to be difficult in terms of feasibility and affordability then there sure as hell isn’t much of chance for the rest of us.

If that’s the case, this blogger is privileged to have ridden on the “fastest ground transport toll in the present world” to quote the Guinness Book. And whatever the economics, it’s a pretty slick train ride into town.

Righty, enough of gawking and admiring a mass transit system that’s unlikely to take-off in Europe and time to get down to the dynamics of the oil & gas market. That's all for the moment from Shanghai folks! Keep reading, keep it ‘crude’!

To follow The Oilholic on Twitter click here.
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To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2014. Photo 1 (click on images to enlarge) : Shanghai Maglev Train. Photo 2: Carriage interior at 301km/hr speed. Photo 3: Shanghai Maglev's Guinness Book Record Certificate. Photo 4: Shanghai Maglev Train arrives at Longyang Road Metro Station. Photo 5: Illustration of magnetic levitation technology at SMT museum, Shanghai, China © Gaurav Sharma, September 2014.