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A New Global Energy Center

by | published July 23rd, 2010

Nestled in the far northwest of China, Xinjiang is the country’s largest province and the primary domestic source for oil and gas. It is sparsely populated and as big as Western Europe. The name literally means “New Frontier.”

And recent decisions in Beijing are going to make that even more the case in the energy sector.

Production of oil and gas has gone on there for some time, constituting more than 60% of the regional economy. Xinjiang is China’s dominant domestic source of natural gas, and the now completed West-East Gas Pipeline brings fuel directly into Shanghai and the energy-hungry Pacific coast.

However, as important as the production is to the Chinese economy, there is another aspect to the province that is even more significant – its location.

Xinjiang borders eight countries – including Russia, Kazakhstan, India, and Pakistan. It has an operational oil pipeline coming from Kazakhstan and another now bringing gas from Turkmenistan. These two Central Asian former Soviet republics are currently targets of much international interest. Kazakhstan is the world’s new major oil producer, while Turkmenistan has enormous gas reserves.

Both countries would prefer to be moving volume to the European market, but geography dictates trade in that direction is determined by throughput across Russia. So moving volume east – to China – also serves a political purpose.

But Beijing is also playing Moscow because Russia figures prominently in developments. Xinjiang has a new pipeline carrying Russian oil under construction, with a Russian gas line likely to follow shortly.

All of this, of course, is required by internal needs. That Chinese industrial development requires increasing consignments of oil and gas is hardly news. During the worldwide financial crisis, it was the demand spike from that country that largely sustained global oil demand base levels.

Now the Chinese northwest is about to become an oil, gas, and petrochemical giant…

A 10-Year Energy Development Program

China National Petroleum Corp. (CNPC, available only through thinly traded CNPC Hong Kong Ltd.; OTC:CNPXF) plans to embark on a 10-year development program to elevate Xinjiang into a leading world energy center.

It intends to establish the province as a driving force in the further expansion of the nation’s energy base and do so across the board.

Xinjiang is expected to be the country’s most significant base in oil and gas production, refining, petrochemical and other chemical manufacturing, oil storage, and engineering and technology services.

Combining an already leading position in domestic oil and gas production with its newly acquired strategic role in deliveries from Central Asia and Russia, the province will have an impact on pricing for both raw material and finished products throughout Asia and, via Singapore trading (where the Chinese have a rising influence), internationally.

CNPC estimates that Xinjiang oil and gas production should reach 370 million barrels of oil equivalent annually by 2015, rise to 440 million by 2020, and remain at that level for 20 years. Refining, oil storage, and petrochemical production are expected to increase at least by the same rates.

The local drilling alone will allow the Chinese to develop a national oil reserve and additional strategic stockpiles. But the foreign oil and gas flowing into the province by pipeline will expand all of these categories.

CNPC and their bosses in Beijing are serious about all of this.

The company has spent more than $45 billion – though that’s considered little more than a down payment on what is to come – and established 11 subsidiaries in the province, covering everything from upstream drilling through transport to downstream refining and processing. The expanding petrochemical production will augment a wide range of other industries producing everything from automobiles and electronics to heavy machinery. That translates into the energy center fueling wider industrial expansion.

There is also a spillover effect underway in other forms of energy.

A number of domestic state-run behemoths, such as China Huaneng Group and China Guodian Group (two of the top electricity generators in the country), are rapidly expanding in the province. In addition, new technology and alternative energy providers are following suit. These include providers with technologies likely to be trendsetters, such as China Xinjiang SunOasis Co. (solar energy applications and research) and wind energy leaders China Longyuan Power Group Corp. and Xinjiang Goldwind Science & Technology Co.

These companies are listed on the Hang Seng Exchange in Hong Kong, though they are not currently available abroad. But this will soon change.

As expansion becomes necessary, expect to see depositary receipts become available on these companies in Western stock market trading, along with possible IPOs following close behind.

Yet the Xinjiang revolution is not limited to spin-off companies or niche plays.

Developing such an oil and gas center will provide a broad-based range of investment opportunities. As it determines the pricing of oil and gas flows, it will also drive developments elsewhere in the global energy market.

So stay tuned…

Kent

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