How the U.S.-China Trade Spat is Jeopardizing Energy Sector Development

[Editor's Note: Frequent Money Morning contributor Dr. Kent Moors - the editor of the "Energy Advantage" advisory service - is an advisor to six of the world's Top 10 oil companies and a consultant to some of the world's largest oil-producing nations. He's also one of the best-connected global-energy experts on the planet.]

Usually, a government decision to subsidize clean energy alternatives would be applauded by others.

Not so when the government is Beijing, and Washington politicians halfway around the world are busy looking for votes.

This tiff could be filed away as just another tempest in a teapot... if it were not for the other important projects it could derail along the way. Those projects just happen to have a major impact for American natural gas technology and the companies likely to benefit from its foreign introduction.

If the two countries can get it together, it could mean profitable new opportunities for both.

The Heat Is Rising in U.S.-China Relations

First, China's support for its currency - the yuan - has been castigated inside the American beltway as an unfair trade subsidy.

Then, late last month, U.S. Sens. Charles Schumer, D-NY, and Jon Kyl, R-AZ, complained in a letter to Secretary of State Hillary Clinton that Chinese energy companies are continuing to aid Iran in its nuclear program by supplying Tehran with gasoline. The senators argue Beijing should be penalized for violating the U.S., E.U., and U.N. sanctions signed into law in July.

Over the weekend, the latest disagreement involving Chinese government subsidies to clean energy industries exploded into a full-scale disagreement.

Anybody who has been to Beijing or Shanghai recently can vouch for the need to do something about pollution. It is getting worse as the country continues to rely on low-grade coal for the bulk of its power generation.

What's at issue is official support for clean energy in the form of Chinese-produced wind turbines, solar energy products, energy-efficient vehicles, and what are termed "technologically advanced batteries."

The United Steelworkers (USW) union filed a complaint last month with the office of the U.S. Trade Representative, claiming that China was ignoring rules that prohibit excessive subsidies.
The trade office agreed to conduct an inquiry, generally the first step toward filing formal charges. Those charges, in turn, could end up being the basis for a World Trade Organization (WTO) case certain to divide Beijing and Washington even further.

The spat over the subsidies has already produced a very unusual reaction from a top Chinese official. Zhang Guobao, head of China's National Energy Administration and vice chair of the National Development and Reform Commission, is Beijing's most important spokesman on energy. It is very unusual for an official this high up to convene a hastily prepared session with the media to condemn U.S. actions in very stark terms.

But that is exactly what he did.

Zhang held a press conference on Saturday (Oct. 16th) and called Washington's decision to accept the USW filing a blatant attempt to "win votes," rather than to have a serious trade discussion.

U.S. officials respond that they are responsible for applying WTO and other trade regulations.
Beijing also is irate over what it sees as a particularly grating American duplicity. The Obama administration has itself proposed billions of dollars in subsidies to clean energy companies and has even placed provisions stating that only products made in the United States can be part of government-funded programs.

It remains to be seen whether the Chinese practices of providing land, low-interest loans (essentially soft loans, often with no genuine payback expectations), and raw materials from state-held stockpiles would comprise violations of WTO provisions.

But the increasing rancor over clean energy subsidies runs the risk of derailing some far more important bilateral initiatives.

One just happens to be a major initiative in unconventional gas production... and that one involves me.

New Opportunities in Shale Gas - If We Can Keep Our Cool

Last November brought the formation of a U.S.-China Shale Gas Resource Initiative. The accord calls for joint activity in applying American expertise and technology to the development of major shale gas deposits in China.

Since then, experts from Baker Hughes Inc. (NYSE: BHI), Occidental Petroleum Corp. (NYSE: OXY), and Anadarko Petroleum Corp. (NYSE: APC) have been over in China, identifying likely first locations for development. And last month, the U.S. Department State expanded the initiative to include a team advising on broader policy implications.

And that is where I came in.

In "China's Backdoor Push into Our Front Yard" (May 25th, 2010), I talked about China's interest in shale gas. Since then, Chesapeake Energy Corp. (NYSE:CHK) - the largest American independent natural gas producer and a leader in shale gas extraction - has fashioned a joint venture with China National Offshore Oil Corp. (CNOOC) (NYSE ADR: CEO), China's third-largest oil company, for the Eagle Ford shale play in Texas. Chesapeake seems intent on bringing Chinese investment into its extensive Marcellus Shale holdings in Pennsylvania.

Similarly, Chinese majors China Petroleum & Chemical Corp. (Sinopec) (NYSE ADR: SNP) and China National Petroleum Corp. (CNPC) have signaled their interest in other unconventional gas approaches, such as coal bed methane (by spending time in the Powder River Basin in northeastern Wyoming) and tight gas (with several trips to the Piceance Basin in Colorado).

The Chinese have less interest in acquiring a percentage of American shale gas production than in understanding the technology involved.

It is here that a major opportunity emerges for U.S. companies - both for operators and a wide range of service and support outfits, equipment manufacturers, and high-end technical providers.

The United States leads the world in shale gas production, technology, and operations. Beijing needs what we have and has been rather aboveboard in constructing ways to tap our know-how.

Both sides acknowledge the threat to the shale gas initiative created by the acrimony - the most recent example of which threatens to derail one energy opportunity because of disagreement over acceptable subsidies on another.

Action to Take: Keep an eye on U.S.-China relations. If the United States follows through with sanctions against China, or trade protectionism between the two countries escalates, the energy sector could be one of the first to suffer the consequences.

The likelihood, though, is that anti-China rhetoric in the United States will cool down after the midterm elections in November. Once it does, greater cooperation between China and U.S. gas companies will likely develop - leading to significant profit opportunities.

Consider subscribing toThe Energy Advantage, the advisory service run by Dr. Moors, to ensure that you benefit from any further developments.  At the very least, sign up for Moors' free newsletter: "The Oil & Energy Investor."

[Editor's Note: Dr. Kent Moors, a regular contributor to
Money Morning, is the editor of "The Oil & Energy Investor," a newsletter for individual investors. In a career that spans 31 years, Dr. Moors has been consulting the energy industry's biggest players, including six of the world's Top 10 oil companies and the leading natural gas producers throughout Russia, the Caspian Basin, the Persian Gulf and North Africa.

As the preceding story demonstrates, Dr. Moors' experiences - as well as the unrivaled industry access, contacts and insights he possesses - are the backbone of The Energy Advantage, an energy-sector advisory service that enables investors to capitalize on his contacts and his global-energy-sector insights. For more information on that service, please click here.]

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About the Author

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.

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