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Beijing's proposed 14th Five-Year Plan set to reshape commodities demand

Highlights

Domestic focus seen lifting petrochemicals demand

Natural gas expected to continue playing key role

State-run giants focus strategy on energy transition

Oil price deregulation could finally happen

Singapore — Beijing's proposed 14th Five-Year Plan (2021-2025) did not set an economic growth target but made clear that the path forward for China will be more domestically driven, will focus on technological innovations and on environmental sustainability, all of which will reshape China's commodities demand in the coming years.

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The proposed 14th FYP will be approved in March 2021 during the fourth session of the 13th National People's Congress, after which detailed targets are expected to be released. But based on a draft communique issued on Oct. 30, the beneficiaries are likely to be petrochemicals, gas and low-carbon fuel sectors.

An emphasis on domestic consumption is likely to boost demand for high value-added petrochemical products, a Beijing-based senior official with state-owned refining giant Sinopec said.

This trend is reflected in the investment strategies of most Chinese refiners, including the leading refiner Sinopec. The company is targeting petrochemical and new materials development as big sources of growth in the next five years, and has been raising capital spending in this segment. In 2020, it lifted spending by almost 21% year on year to Yuan 10.46 billion ($1.34 billion) in the first nine months of the year in its chemical business, despite cutting spending in upstream, refining and marketing.

Rising demand for petrochemicals will in turn boost demand for crude oil imports, even as demand for transportation fuels declines amid a transition to LNG, electric or even hydrogen-fueled vehicles. China currently relies on imports to meet 45% of its petrochemical demand.

According to S&P Global Platts Analytics, strong growth in demand for petrochemicals feedstock will push China's peak oil demand out to 2040. If petrochemical feed is excluded, China could hit peak oil demand by 2030, said Kang Wu, Platts Analytics' Head of Global Demand, Risk and Asia.

"However, this trajectory could change if China adopts a more aggressive strategy to promote EVs, hydrogen fuel cells and other renewable energy for transportation," Wu said.

Carbon reduction

The energy plan under the 14th FYP is expected to be ground breaking because it will be the first to kick-off China's 2060 zero-emissions targets, and the basis for more detailed plans on carbon reduction and energy transition in the coming years.

Beijing will be hard-pressed to find a balance between the need to continue driving economic growth, which means more energy consumption, and create a pathway that ensures growth in energy consumption can align with its low-carbon future.

Energy markets will be closely watching what this balance looks like and whether it tilts the scales in favor of certain fuels like nuclear, renewables, natural gas or hydrogen. A strong push for keeping natural gas as a transition fuel and using it to complement renewables, and building a future hydrogen/ammonia fuel supply chain will boost confidence for the gas sector.

The National Energy Administration is expected to announce energy efficiency and energy mix targets for the next five years after the draft plan is approved.

Gas companies, both local and global, will take cues from these wider energy objectives to plan the next phase of broad-based gas market liberalization, expansion of domestic gas trading hubs, derivatives market development in tandem with carbon and power trading, and investment in gas distribution infrastructure.

"Our expectation is that natural gas will still be a big part of China's next five-year plan, with a continuation of buildout in the residential and commercial centers along with burgeoning demand in the industrial end-use areas and buildout in the marine fuels," Jeff Moore, Manager, Asian LNG Analytics with Platts Analytics, said.

"Platts Analytics expects total Chinese natural gas demand to grow another 41% in the next five years, with continued growth in domestic production, pipeline imports and LNG," he said. "Chinese LNG imports are expected to grow another 26% in the next five years."

State-owned giants

In preparation for the transition, Chinese energy companies have been putting low carbon strategies into their 14th Five-Year plan.

The biggest oil and gas company PetroChina plans to invest about Yuan 10 billion annually in the next five years, focusing on integration between power and green energy -- gas, geothermal, wind and solar, while launching pilot projects in the hydrogen energy value chain, Wei Fang, the company's Assistant Secretary to the Broad & Head of Investor Relations, said Oct. 30.

CNOOC, the offshore upstream giant, plans to focus more on developing its offshore wind power farm. In 2019, it established CNOOC Renewable Energy Co., Ltd., which is committed to developing offshore wind power. Its first such project near the eastern Jiangsu Province is scheduled to fully come into on-grid production by end-2020, with its annual on-grid power generation expected to reach about 860 GWh.

"Given China's pledge to stop emitting more carbons annually beyond 2030 and the long-run target of achieving 'carbon neutrality' by 2060, it is essential for Chinese national oil companies to have a green energy strategy as soon as possible," Wu said. "The earlier they get involved in the process, the more they will be able to take advantage of their rich energy resources at hand to drive down the cost of transition."

Oil price direction

The 14th FYP laid emphasis on further developing market-oriented mechanisms and changing the government's role from one of controlling to servicing with improved taxation and financial regulations, supporting not only state-owned enterprises, but also private and foreign firms' contribution to the economy.

Beijing gradually began removing market barriers in the oil and gas sector during the 13th Five-Year period, resulting in more competition between the state-owned and private companies.

An emphasis on fair competition should also prompt Beijing to deregulate the country's oil product pricing mechanism, a Beijing-based policy observer said.

Deregulation and developing a market-oriented pricing mechanism has been target for the petroleum sector during the 13th Five-Year plan. However, due to the wide volatility in international crude, and a lack of a fair and reliable price benchmark to reflect supply and demand in the domestic market, the government stuck to a regulated pricing mechanism that has been in place since 2013.