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Embracing the Era of Low Carbon Economy

Speech Delivered at 34th Annual Conference of International Futures Association, Miami, Florida
Wang Guoliang, CFO of CNPC
March 12, 2009

Dear Chairman, friends, ladies and gentlemen,

I feel honored to be invited by the Futures Industry Association to attend the 34th Annual Conference and to be given the opportunity to make this speech. I would like to express my gratitude to the Chairman of the conference, Dr. Richard Sandor who kindly shares his knowledge and view with me in climate change, finance, energy and other field of his expertise. Today I am happy to share with you what CNPC has done in the area of energy efficiency, environmental protection and fuel production, as well as my views on world energy, the environment, and global economy.

Section One: Brief Introduction of CNPC

CNPC is the largest oil and gas producer and supplier in China. CNPC is also one of the world's major oilfield service providers and a globally reputable contractor in engineering construction. CNPC's businesses cover petroleum exploration & production, refining & marketing, natural gas & pipelines, oilfield services, engineering construction, petroleum equipment manufacturing, new energy development, capital management and financial services. We devote ourselves to boosting the Chinese economy with four principal missions: Development, Efficiency, Renewable and Cooperation.

Till now, CNPC's total asset has reached 1.8 trillion RMB, and a turnover of 1.27 trillion RMB, which allows CNPC to stand amongst one of the most profitable companies in the Asia-Pacific Region. CNPC ranked 24th in Fortune 500 and the 5th in the Top 50 Global Oil and Gas companies. In 2008, CNPC's production of crude oil reached 108 million tons, corresponding to 58% of the domestic production in China; Natural Gas production amounted to 61.7 billion cubic meters, which is 80% of the Chinese national total. We have maintained six consecutive years of business growth.

On 25th September 2008, the Tianjin Climate Exchange (TCX) was inaugurated by three shareholders: CNPC; Chicago Climate Exchange (CCX) and Tianjin Government. As a multinational organization, corporate social responsibility (CSR) has always been a key element to our overall strategy. We are determined to face Energy Crisis and Climate Change. For this reason, CNPC hopes to tackle challenges like energy efficiency, energy and pollution through its financial branch, such as TCX.

TCX enables CNPC and helps China to respond to climate exchange and global development coherently. The idea of Exchange of Emission Rights also attracts the attention from those experts in futures and options. It is a pleasure that I share my thoughts with you today, on this important topic, low carbon economy (LCE), as well as on the importance of the establishment of the Exchange for emission rights, and the commercial opportunities.

Section Two: Low Carbon Economy catalyzed by Energy, the Environment and Financial Crises

Nowadays, there are three crises, that we collectively face. They are energy crisis, environmental crisis and financial crisis.

Firstly: Energy Crisis

The fundamental reason of the current energy crisis is caused by growing and shifting energy requirements from economies around the world. This includes achieving energy security and independence, reduction of negative effects of fossil fuels combustion, as well as support stable economic growth rate and etc. According to the World Energy Association, it is anticipated that by 2030, the global demand of energy will be increased by another 50 percent comparing to today. To face this huge demand, the current energy structures that rely mainly on fossil fuels will no longer be feasible.

In the past decades, geo- political issues triggered several energy crises, and resulted in fluctuations of the energy supply, hence the volatility of oil and gas prices. The consequent conflicts in the Middle East and the recent Russia-Ukraine dispute all remind us one critical point, that is, energy security is vital in many countries, and nations cannot rely entirely on the international energy market.

The International Energy Association (IEA), in its publication "World Energy Outlook", pointed out that among the world's major economies, China is the fastest growing consumer of energy. By 2030, this world's most populated nation is expected to increase its annual demand of primary energy to 2.5 billion tons from 1.2 billion tons of standard coal today.

If there is no effective action implemented at once, it is then not hard to foresee the difficulty that China will face energy security and energy independence. 

Secondly: Environmental Crisis

As early as in 1896, the Nobel Prize winner Arrhenius predicted that the utilization of fossil fuels would increase the concentration of Carbon Dioxide in the atmosphere, and cause global warming. Under the current trend, the Green House Gas (GHG) emissions will be doubled in 2050 comparing to prior industrial revolution era, therefore bring serious problems to the world climate and economy.

Global warming is a great threat to the lives on our planet and has already caused damage in many parts of the world. If the temperature of the surface of the Earth continues to arise in the current speed, till 2050, the global temperature will be risen by 2 to 4 degrees of Celsius and brings a number of sub-effects, for instance the inundation of low-lying islands due to rising sea levels, increased frequency of severe storms, and the retreat of glaciers and icecaps. The green house gives rise to abnormal climate change like droughts and, which will create millions of climate refugees. Some scientists believe climate change is accelerating and is on the brink of a point of no return. As such, to combat the challenge is urgent. Most of the countries have realized the importance of the issue and the signing of the Kyoto Protocol is a positive sign of our determination.

Thirdly: Financial Crisis

Since the outbreak of the sub-prime mortgage crisis in the US, it has spread out around the rest of the world. Any places that have need of commercial credit and consumer confidence could not stand alone in the turmoil. Crude oil, natural gas, metals and other bulk commodities are experiencing catastrophic price decline, the liquidity of the credit market is frozen, and many sectors and industries in the world economy are significantly damaged.

In the past decades, many rounds of US economic boom were backed by an engine of a great innovation, such as information technology revolution, real estate finance innovation, etc. The outbreak of the financial crisis has arrested this round of the US economy growth, at the same time it also stalled its growth engine, i.e. the real estate industry. Economic growth fueled by easy consumer credits is therefore no longer sustainable. 

As such, in the post sub-prime crisis era, the US, the EU, China and the rest of the world seek to find new economic growth engines, in order to maintain and overtake the current levels of economic development. Here in the US, President Obama's Green Policies have won a lot of applause. In China, we have also noted the spread of the concepts such as Green GDP and Sustainable Growth. Out of the ruins of the world financial crisis, a brand new economic order ought to be born. It will change the fundamental aspects of our production and consumption.

The above-mentioned three crises correlate with each other and are dragging the world economy as well as our living standards down. There is one solution though that solves the troubles, and that is "Low Carbon Economy (LCE)".

Section Three: Challenges and Opportunities in the Era of Low Carbon Economy in China

A Low Carbon Economy or Low Fossil Fuel Economy is a popular term that refers to an economic structure that has a minimal output of Greenhouse Gas, and low pollution produced. Low Carbon Economy offers a different path of economic growth, and requires different management and technology expertise that most often are lacking in China. These are the challenging of the transformation into the Low Carbon Economy. At the same time, Low Carbon Economy provides China with a great opportunity to catch up and to leapfrog. If the obstacles are overcome, China could become a leader in transforming itself into a Low Carbon Economy, fighting climate change and at the same time promoting economic and social progress. This great transformation shall confer China a more important role in the world's economy.

There are the following sectors that China will face challenges,

Firstly, Policy and Regulation

To achieve energy saving and emission reduction, there must be an overall driving force, and that is initiated by the government. The Chinese government has become the driving force by setting up energy saving and emission reduction targets, and is building up the management and monitoring mechanism to ensure that targets are reached. 

In order to drive change effectively, we must strengthen our emphasis on energy saving and emission reduction, and place equal importance of these goals as the goal of GDP growth, and set measures to punish emitters who have failed to meet these targets. Moreover, we must provide means and ways to quantify energy savings and emission reductions, to establish the relevant measurement, audit, and survey mechanisms, in order to be clear on the economic and environmental benefits of achieving targets. 

Secondly, Technology

To enter into the era of LCE, it is necessary to have state-of-the-art technology and innovation in clean energy sector and energy saving sector. Unfortunately, most of the advanced technologies and the research facilities are at the hands of the developed countries who consider the transfer of such technology more as a source of profit than a solution for a common challenge that we all face. Without technology transfer, it is very difficult to implement change effectively in the developing countries. In the Boznan Conference of UNFCCC, the major industrialized countries and developing countries continue to hold differing views of technology transfer.

In fact the disagreement is even greater than before. As such, China should continue to actively import new technologies from abroad, and at the same time push hard on its own research and development, rather than dependent only on technology importation.

Thirdly, Capital

On the capital side, there are two objectives. One is to improve the financial attractiveness of the projects with energy saving and emission reduction benefits; the other is to increase the efficiency of capital allocation to the most attractive projects. 

The attractiveness of a project originates mostly from its financial returns. If energy saving and emission reduction benefits cannot translate into more profits for the project, the often higher cost of clean technology will then have a directly negative impact on the financial viability of the project. It is therefore necessary to turn the environmental benefits of energy savings and emission reductions into financial products that have monetary value that can be priced and traded to enhance the financial returns of the most environmentally beneficial projects. 

Moreover, as the average projects for energy saving and emission reduction tend to be small in scale and spread out in its locations, centralized planning should be difficult for enabling the efficient flow of funding. Therefore, the establishment of an exchange of emission rights or relevant certificates of energy saving are critical, by directing funding to the most profitable and environmentally beneficial projects.

Section Four:CNPC and Low Carbon Economy

Currently, most of the world major economies have incorporated energy saving and emission reduction into their national development strategy, and have set up ambitious targets. In the United Kingdom, the target is to cut Carbon Dioxide emission by 60 percent by 2050. Whereas in the US, President Obama would like to see the green house gas emission of the US reduced to its 1990 level by 2020, and a further 80 percent reduction by 2050. It is therefore reasonable to believe that the Low Carbon Economy is coming and is gathering momentum, and that enterprises relying on fossil fuels as the principle energy source may no longer be sustainable. 

CNPC is an important participant in the Chinese and the world's economy. However, we have realized that without resolute change in our businesses and redefinition of our core competitiveness, the strategic position of CNPC may be weakened and the market power of CNPC may be reduced. 

Thus, CNPC will need to build up a strategy to embrace the Low Carbon Economy, in order to adapt the requirement of the forthcoming new era. CNPC must extend its leadership from fossil fuels to clean energy and clean technology, and to become a diversified global enterprise of low carbon energy of the future. 

The path we have chosen is not guided by precedents in our history. It is destined to be difficult and challenging.  But, we firmly believe that we are embarking on a meaningful journey for the long-term survival and prosper of the human society. As such, we are firmly committed to the efforts we are making, the risks we are taking and the solutions we are exploring. We are taking concrete actions to expand, extend, and to create new competitive advantages, along the following three dimensions:

Dimension One: Redefining Energy

Most products and services of CNPC are concentrated in the areas of oil and gas. CNPC has positioned itself as an international integrated energy company directed by our strategies on resources, market and globalization.

CNPC believes the development of alternative and clean energies as a major solution to the energy crisis. We have already pursued successful projects in biomass, geothermal, solar power, wind power and other alternative routines. In the scheme of the development of New Energy in our Eleventh Five-Year Plan, CNPC plans to invest 10 billion RMB to build up its asset and capabilities in new energy. 

Moreover, CNPC understand that the cleanest and cheapest energy is not to use energy at all. Energy Efficiency will thus become an important part of the Low Carbon Economy. Therefore, in addition to implementing new technologies and energy efficiency programs, CNPC will also experimenting with new ideas such as energy saving credit exchanges to maintain our leadership.

Dimension Two: Use and Storage of Low Carbon Technology

CNPC is pushing hard to implement low carbon technology in its existing businesses, reducing green house gas and other pollutions. We are also actively pursuing the research and development of enabling technologies for our strategic transformation. 

CNPC actively participates in the Clean Development Mechanism (CDM) to tackle carbon emission and pollution. A subsidiary of CNPC, PetroChina Liaoyang Petrochemical Company, has registered with the CDM Executive Board the largest CDM project of China, a nitric oxide destruction project. The total number of Certified Emission Reduction (CER) produced is currently one tenth of the CERs from China. In 2007, CNPC together with State Forestry Administration of China and China Green Trust initiated "China Green Carbon Fund" to support forestation and to develop biomass power, hence contributing to carbon emission reduction.

CNPC has placed strong emphasis on pollution control and energy efficiency, with a three-year investment of 15.45 billion RMB targeted on environment protection projects. 66 Sulfur Dioxide (SO2) emission reduction projects have been completed, with annual reduction of 11,000 tons. 118 COD projects have been completed with annual reduction of 8100 tons. In the first two years of the Eleventh Five-Year Plan, 3.76 million tons of standard coals and 160 million cubic meters of water have been saved as a result.

CNPC utilized advanced technologies to protect our environment. In the project of PK Company in Kazakhstan, CNPC recovered the soil surface vegetation of over 5000 square meters, with advanced biotechnology. CNPC also invested 218 million RMB to build a protective forest for highways across the Tarim Desert in Xinjiang Autonomous Region, and was awarded "National Environmental Friendly Project".

CNPC is also engaging in the research and development of clean and alternative energies. CNPC together with the State Forestry Administration of China are jointly developing technologies in forestry based biomass power generation, have built a model facility for bio-fuel production from forest-based raw materials, and a biomass based bio-fuel model project. 

Dimension Three: Financial Innovation

In order to embrace the Era of Low Carbon Economy, CNPC has been undertaking innovative actions, beyond its existing products and services. The establishment of TCX is central to those efforts.

The Chinese government has set the target for energy efficiency, SOX and COD emissions. The purpose is to learn from the development history of developed countries, to break the pattern of "pollution first and cleanup later", and to truly achieve a "Circular Economy" as required by the Chinese central government. 

It is therefore an important milestone for CNPC to establish TCX. The establishment of a vibrant exchange of emission rights would create a much needed price signal for the environmental benefit of energy saving and emission reduction, and for the economic cost of not saving energy or reducing emissions. Such market-based pricing shall mobilize talents and capital flows towards our collective goals of saving energy and reducing pollutions. 

We hope that by our persistent and pioneering efforts, an economic ecosystem will be ultimately established, to provide the central and local governments with a powerful market-based mechanism. As an commercial enterprise that is majority-owned by the State and specifically designated by the Environmental Protection and the Finance Ministries, TCX is both committed and destined to become the vital bridge of capital, projects and technologies, integrating government policies and enterprise actions, for both state owned and privately owned companies alike. 

Over the great transformation of the Chinese economy towards a low carbon future, CNPC will take the role as an explorer and driver. This is driven by both our corporate social responsibility, and our own strategy to embrace and capitalize on our low carbon future.  Such clean, healthy and sustainable growth model is the only path for the bright future of China. CNPC shall take an important role to participate and bring that future into reality.

Section Five: Conclusion

We believe that it is both inevitable and necessary for us to embrace the emergence and dominance of the Low Carbon Economy. On the one hand, this is vital to our civilization and our prosperity. On the other hand, this is vital for CNPC to maintain and expand its leadership in the Chinese and world economy. 

CNPC has done extensive work with good results in the area of energy savings and emission reductions, to fulfill the targets set by the Chinese government as well as CNPC's social responsibilities. CNPC has also embarked on a multi-dimension program proactively to drive the transformation of the Chinese economy into a Low Carbon Economy. 

From these efforts and following this path, the future of CNPC will be transformed from a fossil fuel giant into a diversified green giant.

CNPC wish to implement our ambition of Low Carbon Economy with each one of you, as we believe the engagement of innovative financial instruments in the implementation of Low Carbon Economy is valuable and indispensible.

That's the end of my speech. Thank you for your attention. 

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