BP plc (NYSE: BP) has been through a couple of tough years as collapsing energy commodity prices eroded the company’s bottom line. A component of the fall in energy prices was aweakening Chinese economy. China’s economy is instrumental to commodity prices as it is the most populous country in theworld and consumes the majority of many of the world’sraw materials.
China accounted for a large percentage of global energy demand growth this millenniumas its seemingly insatiable appetite for raw materials drove up the price of many commodities, including energy commodities, into a super cycle. There was sentiment that this growth trajectory would continue in perpetuity as the country's population moved from a rural to an urban lifestyle. People living ina rural environment consume few raw materials compared to those living an urbanexistence. Cities, with their infrastructure and transportation requirements,create demand for raw materials and energy. This fundamental shift was a driverfor increased energy demand, but when China's economic growth engine cooled,it had a major impact on many commodities,including energy commodities such as oil, gasoline and natural gas.
A few factors contributed to the price collapse of many energy commodities,but China’s slowing growth was a component. In 2010,the country’s energy demand growth was 11%. Looking forward, the InternationalEnergy Agency expects China's oil consumption growth will rise by about 2.6% annually through 2040.
The Impact on BP
BPis involved in many facets of the energy sector including oil, gasoline and natural gas. In 2015, BP posted a net loss of $6.5 billion, the biggest in atleast 30 years. The company attributed the loss to lower energy prices. The company has also acknowledged China's impact. “China really matters for energy,” stated BP's Chief Economist Spencer Dale to analysts and investors in a webcast. Beyond just lower energy prices, China's economic slowdown could impact BP's overall business as the company does a great deal of business with the country.
BP has billions of dollars invested in China in business lines, including petrochemicals manufacturing and marketing, aviation fuel supply, oil productand lubricant retailing, LNG terminal and pipelines, and chemical technology licensing. At the end of 2015, even as energy prices collapsed, BP announced that it was stepping up its business in China.
In mid-2015, estimates put BP's investments in China at around $4.5 billion, but this was before more billion-dollar deals were announced at the end of the year. The deals BP inked with China at the end of 2015 included helping the country decrease its use of coal for generating electricity and increase its use of natural gas. China has set a strict goal to reduce emissions and improve air quality, and this means that it has to reduce its use of coal and turn to cleaner energy sources. Natural gas is an alternative. BP has a framework agreement, and it is partnering with state-owned China National Petroleum Corp. to expand shale gas opportunities in China’s Sichuan Basin. The company also agreed to supply 1 million tons of liquefied natural gas (LNG) per year over 20 years to Huadian, China’s largest gas-fired power generator. According to BP,the LNG portion of the deal alone is worth up to $10 billion.
While China’s slowing energy demand will have a fundamental impact on BP’s earnings, there is the potential that new deals will bring morebusiness to the petroleum giant. There is also some concern. If these deals fall through or don’t live up to their potential due toChina’s slowing economy, it could spell disaster for BP’s future.