China’s Surprising Oil Demand Indicators

Oil consumption in the country is rising, despite economic woes.

While the China’s economic outlook is down, demand for oil is up. And the source of that demand is at least partly consumer-related.

Jason Cheng, a Kerogen Capital co-founder and managing partner, shared insights into the rising oil demand in Asia, saying there’s concern about China’s economic growth and its impact on oil and gas production. One of the things that Cheng said surprised him in 2015 was that oil demand has continued to grow in China, notwithstanding the economy, and that much of the growth in car consumption was in SUVs. “[In] the consumer-driven oil products like gasoline…jet fuels account for about 90 percent of that increase [in demand]. A few years ago it was about 30 percent.”

Also driving the increase in demand: car sales and people utilizing vehicles they already own more. A group of analysts at Jefferies say using falling car sales to infer oil demand in China is the wrong way to go about it. Car registrations are a better metric of vehicles on the road, and those have been rising.

Unlike in North America, the discovery of vast shale reserves in the west of China isn’t necessarily a cause for excitement just yet, Cheng said during his keynote interview at the Energy Game Change event. Most of the country’s shale plays are in remote, mountainous areas lacking access to water resources, and there are questions over the geology and commerciality of pipelines. “[There’s] the cost of that, given that China probably needs to be socialized by the government in order to make that work,” he says. “Gas prices also need to be deregulated. There’s quite a lot of hurdles before that [opportunity] can really grow.”

According to data from Preqin, there were four private equity-backed oil and gas deals in China in 2014 totaling about $4.14B, with that number dropping to one deal in 2015. In all of the Asia-Pacific region there were 16 PE-backed oil and gas deals in 2014 totaling about $7B, and six deals in 2015 totaling about $2.97B. In other words, PE activity in the Asia-Pacific region and China were not immune to the impact of low oil and gas prices that faced North America and other parts of the world.

Stay tuned to Privcap for a full report of the Energy Game Change Conference.