Chinese Energy Sector Plays: Oil and Gas Good, Coal Not So Good

We all know of China's "insatiable" energy demand. Let's put some meat on to this investment theme. In last Thursday's South China Morning Post, we read a useful overview of China's energy needs as formulated by China's National Reform and Development Commission [NDRC].

When compared to 2005, the NDRC wants to:

• raise oil output to 193 million tonnes (+6.6% vs 2005's 181 million tonnes), and
• raise natural gas production to 92 million tonnes (+86.6% vs 2005"s 49.3 million tonnes).

These objectives represent (from 2005 to 2010) compound annual growth rates of output of:

• oil: 1.3%, and
• gas: 13.2.

How to make money off this
Oil: the two major oil producers are PetroChina (PTR) and Sinopec Corp (SNP), both quoted in Hong Kong.

Gas: look at groups like Panva Gas and Xinao Gas, also quoted in Hong Kong. It seems to me that, going by the growth targets discussed above, gas shares might have more upside than oil shares:

• first, China's oil self-sufficiency has fallen to 53%. This suggests that China's oil majors will have to do more overseas extraction, and that normally spells less profits on account of higher costs, profit - sharing agreements with foreign partners, and the like, and
• secondly, due to environmental concerns (see below), the NDRC wants to increase the share of cleaner burning gas to total energy consumption by 89% - from 2005's share of 2.8% to 5.3% by 2010. That is a huge jump in gas consumption!

Power distributors: the NDRC wants to reduce the amount of electricity lost over its distribution networks cut to 7% by 2010 - down marginally from 2005's 7.2%. So the two monopoly power distributors have to invest huge fortunes in improving their infrastructures. The two distributors are: State Power Grid Co., and Southern Power Grid Co. Both will be listed, so keep an eye out for these guys and buy them: China needs power! Yes, upgrading will cost money. But then, more and more power has to be distributed, right?

Power Generators: there are five that you should scrutinize: China Huanang, China Datang, China Huadian, China Guodian, and China Power. Most of these are quoted in Hong Kong.

Coal is dangerous
What you definitely do NOT want to get into is stocks involved in the coal sector! China has the world's third largest coal reserves, and these gave China an energy self-sufficiency rate o 92% in 2005. But with pollution now becoming a political issue, the NDRC wants to cut the contribution of coal to the entire energy consumption mix by 4%, to 66% by 2010 - down marginally from its current contribution of 69%. So not only will the NDRC want less coal consumption, but coal burners also will have to clean up their acts, thank heavens, and this will cost a great deal of money.