If you missed our interview with Dr. Ulf Richter (Episode 7 of The Global Energy Leaders Podcast), here is a transcription below.
Ryan Ray: Thank you so much for being on the show today. How's it going over in China, which is 4 p.m. your time, 2 a.m. my time? It's a weird time zone difference here, but how's it going in the afternoon where you're at?
Dr. Richter: Thank you very much, and it's my pleasure to be with you today. Yeah, it's actually quite nice. We have a bit less pollution today. You may have heard there's quite a bit of problems in major cities. I'm based in Shanghai. I can see the sun is shining and, yes, it's a nice day.
Ryan Ray: The first question I really want to get into, to set the stage for what we're going to talk about today with China, is someone from Germany, what drew them to China and what brought you into the country?
Dr. Richter: China, today, is, of course, not only a major producer but also a major market. Many German firms have a major presence in the Chinese market, in particular Volkswagen, Daimler, Mercedes, and other firms. I've always been interested in and also already when I was a student I was encouraged to visit China. Today China is the major market for many German firms, ahead of the United States and Shanghai in particular is the major city where you can find German people. We have a major presence here. The German Chamber of Commerce here in China, in Shanghai, is probably even more important than the American Chamber of Commerce and so it's a very interesting place to be today.
Also, the Germans…let's put it this way. I had the German consul last year giving a speech in my lecture and one thing that struck me that he said was that if you take the European-Chinese trade relationship, which is arguably the second most important after the European-U.S. American trade relationship, according to his numbers or to his knowledge, 60% of this relationship is actually based on trade between Germany and China alone, so it's a very important relationship and, in general, we believe it to be growing very consistently in the near future because the German products or the German economy is quite complementary to the Chinese one. On top of this, Germany has a very good reputation inside of China. There was a country ranking last year in China and Germany came out number one ahead of any other country.
Ryan Ray: Let's delve into that just a little bit more. Explain for the audience what is the dynamics inside of China as far as the energy companies. Are they state-owned? Are they privately owned? Is there a mix? How does that work, compared to in the U.S., which is privately owned companies that run the energy sector?
Dr. Richter: If we look at the energy sector, most companies continue to be state-owned, but it's an interesting dynamic that is going on in the recent past. Many companies were historically speaking almost state bureaucracies, provincial, state level, provincial level, city level, but more recently in China there has been a trend for privatization, but it's not a privatization as we know it in the West. A city may sell its electricity company, power company. It is more a partial privatization or liberalization of the market. That includes the power sector, includes the energy sector, where the government here in China, on different levels, is, let's say, experimenting with private economy.
Many companies today, they may, and this is pretty much true across the country, they are partially state-owned and they're partially privately run. They very often still have a lot of bureaucratic structures from the historical state bureaucracy, but they've become very aggressive in their internationalization, in their also acquisition overseas, and in their venturing out, as we call it here, so it's a transition period. We do not know, and I don't think the Chinese themselves know, how much they will transition in the end, but the argument is that China continues to be an emerging market that is changing very fast, where you find many, many sectors are experimenting with different forms of governance, of ownership structures, and of ways how to control and regulate businesses or industries. The energy sector is one of the primary sectors where you can find that.
Ryan Ray: I was talking to someone from South Africa the other day, and one of the things they mentioned was that in South Africa they have privately owned energy companies and then the government, obviously, is in charge of the environmental agency. As China goes through this energy transition, how are they balancing when the state owns the power company and the state owns the environmental company? How are those conflicts being resolved?
Dr. Richter: That's a very good question. Some friends of mine, they actually own an environmental company. They offer…traditionally, they would run a water treatment plant and now they are expanding into other areas of treatment. What's interesting about this company or this sector, it's not the energy sector per se, but what I found very interesting is that they obviously can only get contracts by having extremely good relationships with the local government. At the same time, the local government does want to give contracts to private companies in order to encourage…they do believe in many cases they may be better run and may also be able to use better technologies.
On the other side, you do continue to see that, of course, the big players, they have much more resources. They have easier access to financing, both from government but also private banks or semi-private banks, so they're in a very interesting competition now. I think the government itself is observing how the private sector competes with the government sector.
What one can see, and which is a big discussion in China, is that, and you may have heard that there's a big fight against corruption at the moment. The typical argument is that in government-owned, state-run companies, they often find more cases for corruption, often also because the incentive structures are different, because it's very hard to pay high salaries and to motivate people in these companies, so they have all kinds of motivations to find other ways to make money. In private companies, they are more Western style. They have structures more like us as we know it in the U.S. or in Europe, where they can also motivate people through models that allow them not to enter into these logics.
On top of that, one thing that one needs to know in order to understand China is that almost every institution, and particularly a state-run institution, that includes companies, universities, etc., they have parallel structures. They have structures based on the party system, so they have a party secretary that will control that the decision-making process is aligned with the political objectives of the country or the region, the city, etc. That's most of the time not necessarily a problem, but it does create sometimes some side effects, because you obviously have to make these people happy, and that can mean different things in different situations, yes.
Ryan Ray: One of the things we're seeing globally over the past few years is the dynamics in energy have shifted drastically. With the oil glut we're currently looking at, you see that OPEC has gotten itself into a little bit of a quandary and I think there's a lot of predictions out there that are pretty accurate that we're seeing probably the early stages of the demise of OPEC. The U.S. has struggled to rebound from this oil glut. How is that affecting China with all these transitions going on and the low crude oil prices?
Dr. Richter: Yeah, that's a very good question. First of all, one comment on the general situation here. China has been liberalizing the energy market to a certain extent, so a lot of companies have received licenses to, for instance, import crude oil, to import gas, which previously was basically controlled by three to four major, very large, well-known companies, including Sinopec, CNPC, CNOOC, Sinochem.
China is experimenting also in the energy sector with liberalization and now, coming to your question, why is this important, because one argument is that when looking at the oversupply, one of the reasons why we're not at $30 a barrel but around 50 at the moment is because China has been buying huge amounts of crude oil, in particular, in order to build up its strategic reserves from originally 30 days, and that was a decision made, I think, in 2008 or so. I would have to look that up, but the point is they've been building large reservoirs and now they're coming close to 90 days, which was the target, so to be equal to the United States. Basically, they've been buying all the oversupply across the globe.
On the other hand, the state-owned companies, China itself does produce quite a bit of oil. They've been making huge losses because their calculations themselves have been based on a high oil price, much higher. CNOOC, for instance, did post a loss of $7.5 billion, which is pretty massive, in its last corporate report. It's different processes that are happening here in China at the same time.
On top of that, the government is emphasizing and also encouraging industry to invest into renewable energy, and China is already the largest producer of hydro energy, and also is massively investing into wind power and solar power, and it's now the biggest producer of solar panels, and also in terms of installed capacity, overpassed Germany last year. There's different…the general trend is of course China is continuous building its cities and its economy. They have to shift from oil. They have to shift from coal, which was a strategic choice back in the days in order to have cheap energy to develop China, and now the big question is, how can they transition into a lower-carbon economy while at the same time guarantee energy security, which was basically the reason why they chose coal as the major source of energy to industrialize China?
Ryan Ray: You mentioned the transition there. One of the things you see globally going on are these initiatives from government agencies to get their rural areas powered. You talked about renewables. You see the microgrids coming on and renewables taking hold in some of these rural areas where it's not really economical to build out a normal infrastructure system out there. How is China handling that problem with some of its rural development areas and getting energy to those far-out areas outside of the metropolitan areas?
Dr. Richter: Arguably, China today is the most experienced builder of power plants. They've been building power plants all across the country, many of them, of course, coal-based. They've also been installing a lot of solar capacity as well as wind. I think Xinjiang province is the leading province in terms of installed wind power capacity in China. Interestingly, some of the problems that now arise are very similar to the ones that we have observed in Germany, that the energy production in Germany when it comes to wind power is in the north but the major industry is often in the center and in the south of the country. One of the major problems that China is also dealing with is not necessarily energy production but energy conservation.
Moreover, the same could be said about hydro power. China has a lot of rivers and does produce a lot of hydro energy, hydro power, but the cities of course, most of the population, 50% of the population is in the coastal cities, so there has to…a lot more can be done in terms of energy conservation. That's a big topic in China.
For the rural areas, most of them have been emphasizing conventional energy in the past, but now the government is also thinking and experimenting with schemes similar, as in California and Germany and the UK, with different … China is also rather a regional … has a lot of different regional economies and different regions may try out different schemes in order to see what might be best.
While this is happening, of course one thing that can be said, that in many parts of China you still see a very underdeveloped region or area given that the way how China has been developed was first some of the major cities had been built, like Shanghai and Beijing. Later, some of the second-tier cities. Now we're going to the third and fourth tier cities, so it's very clear state policy driven and less decentralized in its approach as it has been, for instance, in Germany.
Ryan Ray: You mentioned earlier that the pollution looked like it was light today, jokingly. I remember when the Olympics were in China a few years ago there was talk of all the smog and the pollution. We have that here in the States and you have it in any big, urbanized area. What is the state of the energy sector and how are they battling this, at least perception, in the West that they're not really aggressive on environmental issues?
Dr. Richter: Yeah, thank you for the question. I think it's a very crucial question. China signed, together with the U.S., the Paris Accords, the Paris Agreement last year in order to develop measures to aggressively tackle the problem of climate change and how to de-carbonize the economy. China has actually been quite vocal and quite active about it, but it's always a trade-off here, how much development do you want, how much technology upgrade can you afford, how much can you move away from cheap coal towards more expensive sources of energy. At the same time, the demand of the more and more getting richer population here in China for a clean environment is getting…the population is getting more vocal, and in particular on social media this has become a really, really important topic.
For the Chinese government, this is a very complex problem to attack, and the big discussion is…one aspect, what many people argue, but which would also require huge changes in investments, is the move from cheap coal to gas. Now, gas would need a very different LNG and all kinds of other types of, let's say, installations. The whole industry has to be changed, so that's one of the big discussions.
The other discussion is, you may know, that China now has very emphasizes a lot electrical vehicles, smart cities, and so on. There's a lot of policy-making around this and subsidies, incentives for investment into that. On the same side, there's, of course, vested interests of the existing industries. China is looking very actively at Europe, for instance, at the CO2 trading schemes and how that has been implemented and the learnings from it. Not everything worked out. I would argue the pressure is there, but given the size of the population and the numerous cities, the challenges are also quite much bigger than anything we know in the West.
Now, on the other hand, it's quite clear living here that the Chinese have to become much smarter than we have been in the past in our economies and they have to do the energy transition much faster than we've done so. Given that I'm German, in Germany we basically made a point that energy transition, to a very large extent, is a political compromise between the different stakeholders in a country and it has to be agreed upon by many different parties, and then the necessary investments have to be made.
I do think that China is coming very close to that point, because, of course, the decision-makers in particular, they can see very clearly, and this is a very recent phenomenon, that if you grow too fast the effects might be very detrimental in the long term. You can already see now that cancer rates go up and that diseases in general, so the population is really affected by the deteriorating quality of the air here in China. Of course, this is not just a Chinese problem, because given the size of the population and the size of the economy, this is going to be a global problem if it cannot be tackled any time soon, yes.
Ryan Ray: I've only got two more questions for you and I'll let you get out of here. One you've already alluded to, but I wanted to ask it just a little bit more precisely. You mentioned earlier that China has been stockpiling oil. Have they been stockpiling natural gas?
Dr. Richter: No, they have not stockpiling it, but they've been drilling and discovering. There's a lot of shale gas also in China, and also some of the major drilling companies have become very, very successful in finding it, but just knowing that it's there doesn't mean you can actually get it into the economy and replace coal. You do have to build power plants that are based on gas, and pipelines, etc., so there's a lot of investments that have to come after that. That's, I think, the major problem, but most of the energy experts are quite clear that this is probably in the short term the best way to get away from or to de-carbonize the economy, yes.
Ryan Ray: Okay, so one final question for you. If we were to talk five years, ten years down the road, what is the energy industry in China going to look like?
Dr. Richter: There's a lot of investments into … continues to be into renewables. There's a lot of investments also into what I believe is very important, into electrical vehicles, into mobility solutions that get away from the traditional gasoline-based vehicles.
On the other side, China has already been shutting down many of the heavy industries, like coal plants and steel plants. Not coal plants, steel plants and coal power plants, that have been the most polluting ones. There is also a requirement now that foreign companies, so pretty much everyone from Toyota to GM to Volkswagen and so on, that they have to very soon be 100% based on electrical vehicles.
That isn't yet the solution, because if electrical power comes from coal, that really doesn't de-carbonize that much, but the push into that direction is very clear. I do very strongly believe that the Chinese government is pushing very hard towards that direction. However, there might be still a lot of vested interest of car companies that may not be able to invest into new technologies that may halt that kind of process, but I would argue yeah, it's coming. It's coming very strongly, yes.
Ryan Ray: Thank you so much for coming on today. You're so well-known in the industry, and it's an honor to talk to you. You're always doing presentations and going to conferences, and obviously you have your teaching job. Is there anything that you want to plug or promote so that the audience can be aware of what you have going on or where to connect with you at?
Dr. Richter: Yes, thank you for this opportunity. First of all, I invite everyone to Shanghai. If you ever come to Shanghai, please come visit me here at Tongji University. I'm very happy to host you. Second, I do give speeches around the world. If you ever have the opportunity and meet me, please come up to me and let me know, and feel free to contact me. I'm very interested in innovative solutions from around the world that can be applied here and elsewhere, so feel free to contact me anytime, and thank you very much for this opportunity.
Ryan Ray: It was good speaking to you and we hope to have you on again in the future to talk more about what's going on in China. Thank you again.
Dr. Richter: Thank you very much.
- Disclaimer: This episode of the Global Energy Leaders podcast was transcribed by Rev.com. The transcript may contain errors or omissions.