 Okay, we're back. We're live. And we're here kind of on a telephonic basis with Will Pack. Will Pack is a research analyst for E-Princk. And he's standing in for Lou Pooley-Reese today on our Energy in America show because Lou is in Shanghai. And this all relates to China. Hi, on our show is China's Search for Blue Skies. Welcome to the show, Will. Thank you very much. Thanks for having me. Yeah, so tell me what you do at E-Princk because that's very exciting and I'm envious of your job. Thanks. Well, you know, it's a lot of reading. Every once in a while we write something. I'm a senior policy research analyst at E-Princk, which, you know, is just a way to say it. And the papers and occasionally we put on a workshop, which I'm involved in. We have some in DC. We might be branching out to other places where we try to get some industry professionals in the room with the lawmakers and the banks or the folks if we can get some motion on some of these issues that we kind of sticky. That's what I've been doing for the past two years and changing at E-Princk now. Sounds like fun. So you've recently collaborated with Lou on a paper involving the use of LNG in China. And that all has to do with trying to clean up China's air because China has used coal for a long time. And I was telling you before the show that I took a trip in 2008 on the Yangtze River. And aside from our cruise boat, you know, most of the boats on the river were coal barges, the huge amount of coal coming down from the upper reaches of the Yangtze. So tell me how that has improved over the past few years under Xi Jinping. Well, I will say not very much, but hopefully, you know, coal is down. It's about 14% in the energy mix right now. And there we're placing a gas with the sub-leather-con coal switching. So they're moving to right now they are about 7.5% of the energy mix. And that is where it was when we were wrapping up this research and for 2017, most recent data we got. And they're hoping to get to 13.3% by 2020, which is looking maybe unlikely at this point. But that's how they're going to try to shift away from high emissions coal and move toward low emissions gas. Is there any bridge, you know, with clean coal? Because we've had a fellow named Manny Menendez who used to be the business director for Honolulu County, Indian County. And he's engaged in an effort to make coal clean in China. And he's been developing processing plants for that purpose. Is there, in the continuum you described, that is between coal in its dirty form and LNG, which is way cleaner, is there any effort being addressed to making clean coal these days? Well, there's certainly looking into clean coal. I mean, China has a lot of access to coal and coming up with an inexpensive way of making it also lower emissions would be really great. Right now it's in the category of alternative energies like, you know, wind and solar where it's not a big part of the mix. It's expensive to implement right now. Those carbon capture facilities for clean coal could be obviously much more expensive than just burning coal regularly. And it's hard to compete with pipeline natural gas, which is coming in, you know, from Central Asia and maybe in the future, Russia. And it doesn't, from our research, you know, it was a big, big mistake. I'll say we did not. But the majority of this paper, which also I should mention, I co-wrote with an intern that we had at the time from Mongolia, whose name is Pat O'Jarrell, has seated the majority of the research for this project. But we're focused on China's, you know, national policy to try to increase the amount of gas. You know, mandated guidelines for how they're going to switch out that coal specifically with gas. So they're focused on that as opposed to clean coal. Okay. Well, let's you talk about your paper. And your paper is the center of the show. The paper is, I guess it's got the same title as the initiative itself, The Blue Skies, China's Search for Blue Skies. So we have your slides. Why don't we go through them? And if you will call out the number of the slide, we'll show it on the screen. All right. So we can start at two, since number one is just a title live there. So I understand what's going on in China. It's kind of important to see it jump through. You know, China kind of suffered because they started with a really centralized, you know, climate system. They tried to separate it out a little bit and centralized again and ended up with this kind of mess. So at the top is the Communist Party of China, right, which dictates all of its goals, like, you know, environmental ambitions for social and health considerations that we just discussed. And they say that's the state council. That council controls several huge agencies that all participate in national energy governance. So ASC controls the big three national oil gas companies, oil and corporations, Sonopec and the China National Offshore Oil Corporation. And so those three is 96% of Chinese domestic gas production, as well as about the same percentage of their LNG import. So the NDRC, the National Development Reform Commission, says a powerful agency in charge of national economic planning and policies related to natural gas all fall under their purview. They issue the country's five-year plan, which where they lay out these guidelines for what's going to happen in the next five years in terms of energy switching and things like that. So that's important for this topic. And as well, they do a lot of other big things, like, you know, they manage all natural gas utilization, except prices, the proof of disruption and operation of LNG terminals, which is, you know, very major in this topic. And they control the NEA, the sub-agency, and it does industrial policy, which of course is the majority of their energy use. And they also handle the day-to-day activities of the National Energy Commission. So the NEA relies on the NRDC in policy implementation and working with the national oil companies. And National Energy Commission, which is right there, was originally created in 2010 as the highest energy-insulting body. And they formulate these large national energy strategies and guidance. And there's several really high-ranking government officials in the ranks there. So far we've covered three levels on your chart, number two. And in calling it Chinese governmental bureaucracy, but it sounds from the discussion here that it's not necessarily an irrational bureaucracy. It sounds like a bureaucracy that might actually work. Am I right? Well, sort of. In reality, we have several organizations all trying to control the national energy policies. And although there's some division of labor, like I was saying, the series is like centralizing and separating efforts kind of resulted in this chart. It's not a traditional organizational chart, right? There's a lot of crossover. So, you know, in the beginning, there was one ministry of fossil fuels. It was in 1993. And then that was dismantled in the separate industry seven years later into coal electricity petroleum. And then the State Energy Commission was created in the 1980s to centralize the sector again. And then the Ministry of Energy became a single unified agency. And that was dismantled. And there's many different agencies back for it. And this is what we ended up with here. So there's a lot going on, and that essentially makes the system for getting involved, for predicting what's going to happen in the Chinese government. Very difficult for an outsider, because not a lot of people understand. You have to really understand the history of this and the breakdown of who's in charge of what. It's not like, you know, you can say that the American system looks a little strangely at that world. You know, we have the Department of Energy. Department of Energy is big. There's a lot of things. And they have some agencies in there, but they all answer to, you know, negative energy. It's a little bit more straightforward. That's why we laid this out. But I ended up paying for it, because not a lot of papers we ran into explained that, but it made it kind of difficult to understand what was going on. Well, I suppose it's a chore to try to find out who you have to talk with if you're either trying to buy or sell or just get information from this schematic. There's a lot of agencies that, at least to the outsider, could be overlapping. Well, it's hardly inside too, right? The Communist Party has a tough time. You know, without a single super agency at the ministerial level covering all of this, it makes it difficult. So supposedly they counsel that, but they do a lot of... Okay, let's go back to that chart then. Now you have something at the bottom of it, the last rung, so to speak. Yeah, so that's all at the local level. That's where it finally breaks down to sort of the local bureaus that report on. Okay. Well, I mean, is it fair to say that this is kind of an experimental bureaucracy and that this is all very, you know, cutting edge in a sense? They haven't been considering LNG or alternative fuels very much in the past few years. Now they're trying to develop a schematic that would be, at least in their view, more efficient. Or is it merely a bureaucracy for its own sake as so many bureaucracies are? Well, I don't think it's a bureaucracy for its own sake. I think they suffer because they are kind of a communist system with capitalist tendencies, as much as possible. And communists have a larger government in mind and lots of, you know, sub-acities and that makes it difficult when they expand to contract over and over like that. You end up with a little more confusion. Okay. Let me go to slide three and see what that tells us. Yeah. So, slide three, in the paper we try to lay out a kind of history of gas and combustion. We talked about it a little bit at the beginning here. And as you can see, we got our first LNG import into China in 2006. So, until the early 2000s, gas has only less than 3% of the total energy mix in China. Right? So, it's beautiful. So, as you can see in this chart, there's an average growth rate. That's not bad there. There's about 14.7%. So, in the last most chart, right, the production is growing, but unfortunately, the consumption really takes off, right, because they start having state policies that are mandating the switchover to gas. So, they need to start importing, right? So, on the right-hand chart there, you can see there's a point there in 2016 where the percentage of pipeline natural gas, the percentage of LNG cross, and suddenly they're importing more gas because they need to make up that difference that you see in the left chart. In the past, China was very reliant on domestic production. They had a whole energy idea that they were going to produce all their energy in the country in that way whenever I went. This is something that we're pushing in America right now, right? So, I'm concerned from a national security perspective, but unfortunately, they couldn't match the demand for their domestic production. So, if I look at the red bar, is the imported gas? The red bar. The red bar is on the right side of the chart. What does that represent as against the blue bars? So, the red bar is the volume of natural gas, the energy. So, the lines of the percentage of the total consumption. So, it's volume versus percentage consumption there. And as you see, that red bar overtake equals in 2016, the volume that overtakes it, they're shifting more towards LNG because there's a limitation in those pipelines, right? They can't get so much through the pipe. In fact, actually, those pipelines are actually underutilized for different reasons, you know, they're turning to other countries and that's a real opportunity to the U.S., right? Because we have a large resource in our country, and as I'm sure my colleague who spoke here earlier, pointed that out from my break, our natural gas production continues to rise and we have way more than we need. So, in fact, the U.S. needs to find new customers for this gas. Because if we don't, we're going to start to lose oil production, right? We might have discussed this, but that's because the oil and gas are produced jointly and the officials only allow you to flare off so much gas. So, the alternative is the lower production so you can find somewhere and put the gas. So, we're now supporting large volume gas in Mexico, which I think we've talked about in the past by pipeline. We have so much, we also have to liquefy it, ship it, and China could be a good customer for it. How much of this gas in China is from the U.S. right now? It's not a large amount. So, we're in a process of trying to ship more that direction. But remember, they've only been buying LNG in large volumes relatively recently. So, we've been traditionally shipping more to Japan and places like that. So, this is essentially a recent ripple. It doesn't seem recent because we're talking two-ish years here that's happening. But the LNG market is slow to react because of the prevalence of medium to long-term contract. Okay, why don't we go to slide four and see what that tells us? Yeah, sure. So, here we have the Chinese economic growth versus the energy consumption. So, this is trying to show, right, the absence of state policy, natural gas consumption in China would have had modest growth or would have been, you know, constricted because, you know, you can see that the left-hand chart, the economic growth is slightly going down and so is the energy consumption growth. But on the right-hand chart, you can see that that is not affecting what the natural gas consumption growth percentage does. In fact, it's continuing to be positive and, in some cases, go up. And this is, you know, because of these state policies, it's not reacting to the economy there. The state is overriding that natural free market instinct to go up the cheapest. Which is the red and which is the blue? What does the red signify? What does the blue signify? On the left-hand chart, the blue line is the percentage of economic growth of the country and we're charting that again just the energy consumption growth percentage. So, that's across all the energy. Energy consumption growth is still above zero, but it's not very high and as you can see tapering down there. On the right-hand chart, if you look at natural gas consumption specifically, that's going up and up and it's because of these statewide policies and, you know, it's because of the policies. You know, you'd think that'd be a closer correlation. I mean, I always thought that if you have abundant and cheap energy, you're going to get growth. One follows the other as night from day and love and marriage. Right. Well, that works for something. And this is, you know, this is in the past why coal cracked the economic growth, right? And the economy in China grew along with their industrial production, right? And so because of that industry needed energy, coal was cheap. And so the coal amounts, you know, were still continuing to consume coal in large amounts. So, the issue with natural gas is you're limited by the amount of pipes you have. We only have a couple of pipelines coming in, mostly from Central Asia right now. And the LNG market is not as liquid as the oil market and other crude markets and other markets, just because it's really difficult to, and it's a lumpy situation when you're getting into building a receiving terminal and an export terminal and setting up these, you know, they're working on it and there's been some really interesting tech that come out recently that's going to make things move faster and improve the stock market. And of course, the Japanese are very interested in a bigger stock market for natural gas. But it has worked in progress. Does that mean that as we go forward, these two lines are going to be more consistent? In other words, when we finish the big investment in the infrastructure, the gas infrastructure, that those two lines will be closer, closer correlated? As the ability to import more natural gas increases, the consumption growth should also increase. Naturally, that natural gas consumption line percentage will continue to go up, hopefully. And in a further grow, that's what will happen. Okay, let's go to number five and see what that tells us. All right, great. So this is a little bit more what we were talking about earlier as well. So this is the composition of energy consumption. This is what we call the energy mix, right? So you can see that blue line is cold. There's still a lot of blue on the right-hand side of the shark, right, where we're getting closer to today. But natural gas is that orange sliver that gets bigger, but there's still room to improvement. Of course, this shark we took from the National Bureau of Statistics of China, and they have not been very recently. So I'm sure once that comes out, you'll be able to see that that orange bar will continue to get larger, but not as fast as you think. You know, considering there has been this large government may watch push to decrease that blue bar and replace it with the orange for the natural gas. The issue is, you know, coal and oil are still very cheap, very plentiful. And like I was saying, their energy policy has usually been focused on being at the domestic reserves and production. There's a lot of import, so between that and the relatively low price of coal. And moving in the right direction, and I suppose, you know, you see a trend here on from 2009 or so where it is clearly moving, coal is moving down and other energy sources are moving up. Let's go to number six and see what that tells us. Yeah, so this is a shot that Lou had me send over and he's currently at the LNG 2019 in Shanghai where this is a hotly discussed topic. He wanted me to just make the point that this is a large conference in Shanghai with a lot of American representatives as well as, you know, gas promise there and from Russia and pipeline gas China. And they're all discussing this issue and how they're going to replace that coal in China. So Lou had me send it over to make that point that it's a serious commitment. Well, if you look at the U.S. versus gas prom, there's a bit of a competition there, isn't there? And the gas prom would like to have a larger share of the market and so would we. So am I right to suggest that we are competing with the Russians in terms of trying to get into China and that we have a kind of a rub going on with Trump's tariffs that might affect the results of that competition, no? Well, I don't think Trump is going to touch anything energy-related. I think, you know, he's smart about what that would do to our resource and China's not moving on anything about natural gas either. But I do agree that Russia is personally trying to tap into this bear goes by market. And so in fact, you know, currently the pipeline natural gas in China is coming mostly from Turkmen, 80, 90 percent of all their pipeline gas. Pipeline is easier than in liquefied natural gas. You just put in the pipe and it goes on the pipe. You don't have to deal with the regasrication and the compression to make it liquefied. And so they get about 30 BCF annually. However, the power of Siberia was supposed to come online at the end of this year, December 2019. And that goes to the eastern side of both Russia and China, right, so from Russia to China. And that could really, you know, change the ratio depending on whether or not we are able to step up our export capacity. So another project that's been discussed for a long time with little actions of the power of Siberia too is going to come through the western borders of Russia and China. We don't have an expected amount of completion of that though. It doesn't look like anything is moving fast. So the majority of the gas coming into China is from Central Asia. There's five main pipelines running between them. And the other Central Asian countries which are now exploring to China are Kazakhstan, Uzbekistan, Myanmar. These are the competition for sure. And I think that if the U.S. needs to keep pushing out as much of our gas as possible and keep on those geopolitical implications of this, it's not amazing about the beauty of the North American shale revolution and the ability that we have to tap into our resources and increase our technically recoverable assets. This may require more nuance to the question, but the question arises in my mind as to whether a pipeline, you get a better return on investment from a pipeline than you do from all this transportation and processing in tankers and regasification at the destination. Which one is cheaper? Which one is more efficient? Which one gives you a better ROI? I mean, both of them have large infrastructure costs as we've seen in America. It's hard to get pipelines going through even in our own country. But we are currently exporting large amounts of gas to Mexico because we have the pipeline. It's definitely cheaper. You get more ROI if you have a pipeline and you're pushing gas through it. You're right. It takes an enormous amount of money as well as energy and lawyers and contracts to get gas on a tanker. But we don't have a pipeline to China or Russia over that matter and it's not looking like that's going to happen anytime soon. So we have to... And keep in mind where our resource is. We're producing a lot of our natural gas, the Permian Basin in Texas, and the Baku North Dakota. So getting that gas to market means putting out a ship. And we have our pipelines that get it to the ship, but we're forced to... And we would much prefer not having to send tankers through the Panama Canal, which is a sort of natural choke point, that sort of thing, but we don't have that option. And Russia does have that option to China, so it's going to be a strong competition. Yeah, so we have to be very efficient. We have to put the money in and hope we have a long, useful life of all the equipment and processing. Okay, let's go to the last slide we can take today. Well, let's see what we can make of that. Oh, that's a photograph. I'm showing high, isn't it? Yeah, that was the last one we were looking at. No, that is... That's the further that Lewis sent that I was discussing earlier. Yeah. And, yes, he wanted me to send that over and he's over there right now trying to see how these deals are being made and emphasize that it is a important concern of the Chinese government for hosting this. Well, I hope we can talk to you and Lou about it again. It sounds very interesting and one thing is clear. It's an initiative which is presently in play and the U.S. has to keep its eye on the ball. I guess that's the ball on the radio tower there in the picture, that ball. Yeah, that's right, yeah. And by the way, I think I saw a new on the tower. There he is right at the top of the tower. Anyway, regards to him and I hope we meet again and I hope we can do an update on this topic again and again in the future. Thank you so much, Will. Great. I love hot to you.