Natural Gas: Make or Break National Policy Issue

Natural gas policy decisions in the next 30 years could make or break nations. They will be critical in the long-term health of the economy, a country’s geopolitical partners, and its energy security. Many developed countries are focused on moving as fast as they can toward renewable-energy sources and ignoring the risks of making this humongous bet on relatively unproven technology. Developing countries aren’t likely to move rapidly toward renewable sources, and will likely take advantage of the plentiful, low-cost natural gas that will be available for the foreseeable future. Progress toward having substantially more renewable-energy sources might be better achieved and faster if natural gas were the essential partner in every country’s energy strategy. Natural gas could be the great enabler: It could enable renewables to be developed more effectively; it could enable energy security for countries making the transition away from coal; it could enable a robust and resilient national economy in the next fifty years; and it could enable faster progress toward reducing climate-change emissions.

RECENT SIGNALS OF CHANGE

The new availability of low-cost natural gas has dramatically altered the economics of energy production and the strategies for combating global carbon emissions around the world.

Gas is turning into a better opportunity than oil for many producers. The technology of shale oil production continues to advance steadily in spite of or perhaps because of low hydrocarbon prices. Over the last five years, production well productivity has risen more than 400%, 40% in the last year. US exports of natural gas have just exceeded US gas imports for the first time in 60 years with most of the export increases going to Mexico and Canada. From 2000 to 2015, the percentage of total energy production of natural gas in Shell, Eni, Total, ExxonMobil, ConocoPhillips, and Chevron went up significantly. Only in BP did it go down slightly. In Shell, Eni, and Total the share of natural gas is almost 50 percent.
New environmental risks from natural gas operations are coming to light. Recent figures indicate that around a third of the annual methane emissions in the United States can be traced to the natural gas industry. While methane doesn’t remain in the atmosphere as long as carbon dioxide (12 years compared to 500 years), it is about 25 times more potent as a cause of global warming. The Environmental Defense Fund, an American NGO that often works with industry, estimates 2-2.5% of the gas flowing trough the supply chain leaks out.
Global oil supply has steadily risen—almost 20 percent—since the year 2000 to over 95 million b/d in 2016, with non-OPEC producers leading the charge, competing strongly with OPEC producers for market share. In 1995, proven oil reserves (i.e., oil discovered and economic to produce) in the world were 120 trillion cubic meters. In 2015, proven oil reserves were 187 trn cubic meters.

Shipping of natural gas is rapidly becoming global, not local.

A single global market for natural gas is emerging. Natural gas is starting to be bought and sold around the world just like oil and petrochemicals. Behind this revolution is improved technology for moving gas as a liquid, flexible contracts, and new global capacity for sending and receiving LNG shipments. The share of gas moving by sea reached 40 percent of total trades in 2015 and according to the IEA will account for a bigger share of trading than pipelines by 2040. Thirty-nine countries now import LNG compared to 17 ten years ago.
Qatar is the world’s largest supplier of LNG with a market share of nearly one-third. In 2016, Qatar shipped 77.2 million metric tons (mmt) for 30.0 percent share and Australia shipped 44.3 mmt for a 17.2 percent share. Australia is expected to overtake Qatar based on current development plans in 2019 with at least 80 mmt. Ironically, Adelaide, Australia, suffered recent power blackouts during a nationwide heat wave because lack of investment in the country’s natural-gas infrastructure. The next big exporters were Malaysia, Nigeria, Indonesia, Algeria, Russia, Trinidad, and Oman.
The world’s seas are becoming more efficient in moving natural gas. The major Panama Canal expansion, opened in June 2016, more than doubles the canal’s capacity and includes a third lane to accommodate ships large enough to carry 14,000 TEU. A key market of the future for the canal could be LNG carrier traffic. Also, Russia’s US$27 billion Yamal LNG project within the Arctic Circle will begin operation in 2017. This remarkable project will use West-designed and Far East-built ice-class LNG tankers to enable year-round export shipments from northwest Siberia to European and Asian markets. The LNG tankers are intended for navigation both westbound and eastbound along the Northern Sea Route (NSR), the Arctic seaway along Russia’s coast linking the Atlantic and Pacific. The Russian company, Novatek, has a 50.1% interest in Yamal LNG; China National Petroleum Corporation and France’s Total Group both have a 20% holding; and the Chinese state-owned Silk Road Fund has a 9.1% interest.

China and India are reshaping their energy supply and demand mix and their foreign trade in energy commodities. China is proceeding faster than India.

In 2000 China and India didn’t have any LNG imports. In 2016 they are the third and fourth largest importers after Japan and South Korea. The United States and China are currently negotiating a trade deal that could involve US LNG shipments to China.
China Petroleum & Chemical, or Sinopec, is attempting to double domestic natural gas production in the next five years by rapidly expanding natural gas production from shale reserves in order to reduce coal usage in the country and reduce China’s need for imported liquefied natural gas. Many investors around the world were counting on sending natural gas to China.
Asia accounts for two thirds of the world’s coal demand, but that demand may be falling and sooner than everyone’s base-case scenarios show. In China in 2016, coal consumption fell 4.7 percent. This was the third year in a row of declining use. Coal currently supplies about 70 percent of China’s electricity, but the Chinese government is focused on cutting coal’s use, and succeeding. Coal-fired plant capacity in China is still being added—in November 2016, China’s National Energy Administration announced it is raising coal-fired power capacity as much as 20 percent by 2020, from 900 gigawatts in 2015 to as much as 1,100 gigawatts by 2020—but capacity utilization of coal plants has fallen steadily in China from around 60 percent in 2010 to around 50 percent in 2016. It appears coal will only provide 55 percent of China’s electricity mix in 2020.
Coal makes up 61 percent of India’s power-generating capacity, but India has announced it doesn’t need any new coal-fired power stations in the next decade beyond what it is currently building. Capacity utilization of coal plants has fallen steadily in India from over 75 percent in 2010 to less than 60 percent in 2016. Even with the rapid economic growth of the last decade, about 40 percent of India’s coal-fired power plants are now idle because of weaknesses in the distribution system and because government planners overestimated the growth in demand.

US electricity generation from natural gas now exceeds that from coal.

In 2016, natural gas’s share of US electricity generation at 33 percent exceeded coal’s share at 32 percent for the first time. Coal’s share has steadily fallen from a high of over 55 percent in the mid-1980s, while natural gas’ share has steadily risen from about 10 percent then. Nuclear remains steady at 19 percent, while renewables, not counting hydro, have risen from zero in the mid-1980s to 8 percent in 2016.
The Tennessee Valley Authority historically has been a major user of coal plants, but that has changed radically since 2007 because of environmental agreements to reduce coal emissions, the lower prices of natural gas, and increased production from nuclear. In 2007, over 55 percent of TVA’s energy mix was coal; in 2017 a little over 20 percent of the mix will be coal. Since 2011, TVA has shut down 24 coal-fired units out of 59 in its network.

LNG supplies are changing some countries’ dependence on pipeline gas that comes from other countries, that runs through unfriendly countries, or both. Poland’s new LNG import terminal reduces its reliance on gas from Russia.

In developed countries, wind and solar renewables are beginning to change radically the energy supply mix.

In 2015 5.5 percent of the world’s electricity came from wind and solar. Hydropower, wind, and solar together produced 9.4 percent of the electricity. The International Energy Agency said in July 2017 that for the first time the amount of renewable capacity commissioned in 2016 almost matched that for other sources of power generation, such as coal and natural gas. In some countries, solar photovoltaics are cheaper than coal and gas.
An interesting example of where wind and solar renewables are becoming a significant energy source is Texas, the center of the US oil and gas industry. In 2001, renewables (wind, solar, and hydro) accounted for 2% of Texas energy; in 2016 they will accounted for 16%. One night this past winter, nearly 50% of the power flowing into the Texas grid came from wind turbines in the state. Federal subsidies for Texas renewables have been a big factor, but equally big have been the falling costs of solar and wind technology.

The electricity system around the world is fundamentally changing because of the orchestrated growth in the use of renewables largely with subsidies. The costs of these subsidies were modest when the renewables contribution to overall energy supply was marginal, but that’s changing. Since 2008, public subsidies for renewables have been $800 billion. In 2014, the IEA estimated that decarbonizing the global electricity grid will require $20 trillion in investment in the next 20 years, and that still leaves much to be done. A new economic system for electricity is required, but the ecosystem of energy and the economy is too complex for anyone to know what that should be and how to make the changeover efficiently. Source: The Economist, “A world turned upside down,” February 25, 2017, pp. 18-20. Other risks of investing in renewables include the new technology uncertainty and costs, and the many, many land-use, energy, and environmental regulations in place that are just as big hurdles for renewables as they are for the other energy supply investments.

Nuclear energy plants are progressing in many parts of the world, but not in the United States and Germany. Electricity from US nuclear plants at about 1.5 mega-watt hours per year is expected to decline very slowly over the next 25 years as reactors close and aren’t replaced. Toshiba’s subsidiary, Westinghouse, recently declared bankruptcy over escalating costs involving billions of dollars to finish two nuclear power plants in South Carolina and Georgia. Both plants might not be completed.

The International Energy Agency (IEA) report on CO2 Emissions from Fuel Combustion highlighted that the growth in global CO2 emissions was slowing down. In 2014, the IEA indicated the global CO2 emissions were 32.4 gigatons of carbon dioxide (GtCO2), an increase of 0.8 percent over 2013 levels. The growth in 2013 over 2012 levels was 1.7 percent, while the average annual growth rate since 2000 has been 2.4 percent. Work by the Intergovernmental Panel on Climate Change (IPCC) shows that holding warming to 2°C typically requires global annual emissions to peak sharply around 2020, fall steeply by 50% before 2040, and be close to net zero towards the end of the century. The EIA’s International Energy Outlook 2016 reference case has global energy-related CO2 emissions growing about 1 percent/year from 2012 to 2040, but will CO2 emissions peak much sooner than anyone expected?

Governments around the world are already adopting major plans to transition to renewable energy in spite of major uncertainties about the costs and plausibility of those plans. In a June 2017 paper in the Proceedings of the National Academy of Sciences, 21 energy researchers rejected in no uncertain terms Stanford Professor Mark Jacobson’s 2015 study that made a case for 100 percent renewable energy by 2050. They wrote Jacobson’s plan “can, at best, be described as a poorly executed exploration of an interesting hypothesis. The study’s numerous shortcomings and errors render it unreliable as a guide about the likely cost, technical reliability, or feasibility of a 100 percent wind, solar, and hydroelectric power system.” In other words, it was crap. The problem is that governments around the world— Germany, California, and Portland, Oregon—are already implementing extensive plans to transition to renewable energy. Germany’s goal is 80 percent renewable by 2050; California is trying to set a goal of 60 percent by 2030; Portland wants to be using 100 percent clean power by 2035.

Even if oil demand peaks in the foreseeable future and the world achieves a net-zero emissions state, oil and natural gas will continue to be key energy sources. Shell’s scenario group in May 2016 highlighted that for the future global population of 10 billion people to have a decent quality of life, the global energy needs would have to double by the end of the century. Oil and natural gas would have to remain important energy sources for the next forty years, until solar, wind, and nuclear sources can assume the burden of meeting the global economy’s needs. If the net-zero emissions state is reached, let’s say by the end of the century, the share of oil and gas in the overall energy mix will have fallen from 57 percent to around 15 percent, while the non-fossil-fuel share would be just under 80 percent.

ORACLE MUSINGS ABOUT ENERGY, ECONOMIC, AND SECURITY OUTCOMES

Depending on what natural gas policy decisions are made, world economic, political, security, and environmental outcomes in the next twenty years could be very different.

For the next 20 years the demand for natural gas is likely to explode.

Natural gas production could grow even more than base case scenarios because of technology innovation, rapid development of LNG shipping infrastructure, new government restrictions around the world on use of coal in power generation, and high costs of clean coal technology.
Technology innovation will likely continue to lower the costs of shale gas development. China and Argentina could see rapid expansion in their natural gas productions.
Global shipments of LNG will expand rapidly as more infrastructure for receiving LNG is built in countries around the world. Since most of the shipments will be headed toward Asia, issues around the security of shipping lanes in Asian waters will develop.
Russia leverage will both increase and decrease because of natural gas. Many traditional buyers of Russia’s gas will strive to reduce their dependence on Russian piped gas by investing in LNG. At the same time, Russia will be able to serve the new LNG markets.

Future of coal: Global coal demand could begin to fall soon.

The momentum to substitute natural gas for coal in electricity generation will likely accelerate.
Coal use will likely continue to decline in the United States. It’s uncertain how Trump administration policies could affect that decline, but in general the trend won’t likely reverse.
The biggest changes in coal usage could be in China and India. If natural gas prices remain low, coal demand will most likely keep falling. In fact, China and India could struggle to keep up with the forces driving those declines.
Clean coal technologies will likely struggle to become commercial. Consequently, in a couple of years, new coal plants may never be built again in a large industrial economy.

The biggest economic winners of using more natural gas could be the rapidly growing Asian economies, particularly China.

Natural gas supplies could help meet the extensive energy growth needs throughout Asia, and enable Asian countries to move faster away from coal.
China companies will likely continue to be industrial leaders in all commodities, including oil, gas, and coal. The Chinese companies will continue to be the biggest, invest the most money, and generally be aggressive to capture the most market share.
China could bet big on natural gas for its economy. It could expedite LNG receiving facilities and new natural gas burning power plants.
China’s changing policies toward improving the country’s air quality and energy supply in the next ten years could have the greatest impact on global CO2 emissions and the world’s goal of reaching a net zero CO2 emissions state as soon as possible.
China will likely ride the wave of coal use reduction and assume a much large leadership role on environmental issues in international forums, like the IPCC.
In many respects, India’s accomplishments will be greater, but they will follow China’s.

National energy plans in developed economies may not fit with reality.

Germany and California and others focused on making a complete transition to renewable sources as fast as possible could struggle with their goals. Physical and financial barriers could be too large to reach 50 percent of power from renewable sources. Disruptions in power services could increase. The goals will likely stay in place, but the old energy systems could remain critical.
Nuclear power could gain more advocates and expand, but not likely unless major problems with renewables appear.

Renewable power could expand more rapidly than projected in rapidly developing economies.

For many countries, in ten years more than 50 percent of new power capacity will be from renewables sources. Major investments in infrastructure for using more renewable technologies will be made.
Chinese corporations will likely continue to invest heavily toward becoming global leaders in renewable-energy technologies, like solar electricity generation and electric cars.
If net CO2 emissions per year start falling, societies could struggle to maintain their commitments toward renewables.

The battles over the development and use of fossil fuels could become even more intense.

Greenhouse gas emissions will likely continue to accumulate in the atmosphere and ocean for the foreseeable future. CO2 emissions from gas will continue to grow because of the growth in natural gas production.
NGO’s will likely continue to object to natural gas and oil development and production activities and the companies that conduct them.
Gas companies are unlikely ever to be viewed as good world citizens.
Large private oil and gas companies could experience more protests wherever they operate.
Russian and Chinese companies will likely be singled out more and more by NGOs.

New economic system for electricity will emerge over the next 15 years: But no one can predict the dynamics of that system because there are too many uncertainties in technology, geopolitics, human behavior, climate change, energy supply sources, energy demand, and economics. The wide range of possible outcomes include:

A very unreliable electricity delivery system, with major disruptions, could develop in major industrial economies, particularly those with the biggest commitments toward renewables.
On the other hand, an integrated system of diverse power sources with higher electricity prices could develop that is much more efficient and robust than current systems.

Peak Coal Demand? Followed by Peak CO2 Emissions?

ORACLE’S RESPONSE

Global coal demand could peak much sooner than what the major reference scenarios of the US Energy Information Administration and International Energy Agency currently show. China’s and India’s changed outlooks for coal demand would be the biggest factor in demand peaking sooner, driven by China’s clean air concerns, falling energy intensity of economic growth in China and India, and rapidly expanding supplies of natural gas around the world. If that’s the case, it’s plausible CO2 emissions could also peak in the next 10 years. Increased momentum will develop for the policies that contributed to reaching this tipping point. A new economic system for electricity will emerge in the next 15 years, but no one can predict what the dynamics of that system will be because of the uncertainties. China and India could emerge as the global leaders on energy and the environment if they’re able to achieve economic success without the energy intensity required by OECD countries.

RECENT SIGNALS OF CHANGE

Demand for electricity in Asia is surprising stagnant and this is affecting coal demand. Apparently, the falling energy intensity of economic growth wasn’t taken into account very well.

Asia accounts for two thirds of the world’s coal demand, but that demand may be falling and sooner than everyone’s base-case scenarios show. In China in 2016, coal consumption fell 4.7 percent. This was the third year in a row of declining use. Coal currently supplies about 70 percent of China’s electricity, but the Chinese government is focused on cutting coal’s use, and succeeding. Coal-fired plant capacity in China is still being added—in November 2016, China’s National Energy Administration announced it is raising coal-fired power capacity as much as 20 percent by 2020, from 900 gigawatts in 2015 to as much as 1,100 gigawatts by 2020—but capacity utilization of coal plants has fallen steadily in China from around 60 percent in 2010 to around 50 percent in 2016. It appears coal will only provide 55 percent of China’s electricity mix in 2020.
Primary energy demand in China declined in 2015, the first fall in 20 years. Despite recent years of little or no growth in demand for power in China, the government is forecasting growth of between 3.8 percent and 4.6 percent by 2020. China continues to dominate major industries that use a lot of electricity, but environmental problems from heavy manufacturing are influencing national government policies. China’s aluminum production accounts for more than 50 percent of world production. China’s production grew 60 percent from 2011 to 2016, reaching 31 million tons in 2016. Aluminum production is an energy-intensive process and China’s aluminum smelters receive 90 percent of their power from coal. In the world steel industry with global oversupply, China, the world’s number one steel producer, has been producing steel at a record pace.
Coal makes up 61 percent of India’s power-generating capacity, but India has announced it doesn’t need any new coal-fired power stations in the next decade beyond what it is currently building. Capacity utilization of coal plants has fallen steadily in India from over 75 percent in 2010 to less than 60 percent in 2016. Even with the rapid economic growth of the last decade, about 40 percent of India’s coal-fired power plants are now idle because of weaknesses in the distribution system and because government planners overestimated the growth in demand.

The coal reference case in US Energy Information Administration’s (EIA) International Energy Outlook 2016 has world coal consumption increasing from 2012 to 2040 at an average rate of 0.6 percent/year. Much of that increase is from India. What if China’s coal consumption is peaking now and not in 2025? And what if India’s large increase in demand for coal over the next 25 years doesn’t materialize?

Plenty of oil and gas is around and few limitations to producing more.

Global oil supply has steadily risen—almost 20 percent—since the year 2000 to over 95 million b/d in 2016, with non-OPEC producers leading the charge, competing strongly with OPEC producers for market share. In 1995, proven oil reserves (i.e., oil discovered and economic to produce) in the world were 120 trillion cubic meters. In 2015, proven oil reserves were 187 trn cubic meters.
Fueled by commodity prices, particularly oil exports, sovereign-wealth funds—financial vehicles owned by governments—doubled in size from 2007 to 2015 to $7.2 trillion. Since 2007, the number of sovereign funds increased by 44 percent to 79, many in Africa and Asia. Nearly 60 percent of sovereign wealth fund assets are related to energy exports. Many sovereign-wealth funds, including most likely several from the Middle-Eastern oil exporters, came to the aid of the Russian Direct Investment Fund when US and European sanctions restricted business between the Russian fund and Western companies.
Developing economies account for 43 percent of global GDP but 65 percent of crony wealth. Crony capitalism is where an individual’s wealth stems from a special relationship with the government. Since globalization took off in the 1990s, the wealth of billionaires in high-crony industries, like natural resources, real estate, construction, telecoms, and defense where there’s a lot of interaction with the state or are licensed by it, grew substantially in developing countries. Russia’s crony industries represents approximately 18 percent of Russia’s GDP.
The world’s seas are becoming more efficient in moving hydrocarbons. The major Panama Canal expansion, opened in June 2016, more than doubles the canal’s capacity and includes a third lane to accommodate ships large enough to carry 14,000 TEU. A key market of the future for the canal could be LNG carrier traffic. Also, Russia’s US$27 billion Yamal LNG project within the Arctic Circle will begin operation in 2017. This remarkable project will use West-designed and Far East-built ice-class LNG tankers to enable year-round export shipments from northwest Siberia to European and Asian markets. The LNG tankers are intended for navigation both westbound and eastbound along the Northern Sea Route (NSR), the Arctic seaway along Russia’s coast linking the Atlantic and Pacific. The Russian company, Novatek, has a 50.1% interest in Yamal LNG; China National Petroleum Corporation and France’s Total Group both have a 20% holding; and the Chinese state-owned Silk Road Fund has a 9.1% interest.
Gas is turning into a better opportunity than oil for producers. The technology of shale oil production is rapidly advancing despite current cost constraints. Over the last five years, production well productivity has risen more than 400%, 40% in the last year. US exports of natural gas have just exceeded US gas imports for the first time in 60 years with most of the export increases going to Mexico and Canada. From 2000 to 2015, the percentage of total energy production of natural gas in Shell, Eni, Total, ExxonMobil, ConocoPhillips, and Chevron went up significantly. Only in BP did it go down slightly. In Shell, Eni, and Total the share of natural gas is almost 50 percent.
However, new environmental risks from natural gas operations are coming to light. Recent figures indicate that around a third of the annual methane emissions in the United States can be traced to the natural gas industry. While methane doesn’t remain in the atmosphere as long as carbon dioxide (12 years compared to 500 years), it is about 25 times more potent as a cause of global warming. The Environmental Defense Fund, an American NGO that often works with industry, estimates 2-2.5% of the gas flowing trough the supply chain leaks out.

In developed countries, wind and solar renewables are contributing to the changing the energy supply mix. Will this momentum change with lower hydrocarbon prices? A key signal is that wind and solar renewables are becoming a significant energy source in Texas, the center of the US oil and gas industry. In 2001, renewables (wind, solar, and hydro) accounted for 2% of Texas energy; in 2016 they will account for 16%. One night this past winter, nearly 50% of the power flowing into the Texas grid came from wind turbines in the state. Federal subsidies for renewables have been a big factor, but equally big have been the falling costs of solar and wind technology.

With renewables expected to account for half of the growth in global energy supply over the next 20 years, the costs of the changeover will be huge. The electricity system around the world is fundamentally changing because of the orchestrated growth in the use of renewables largely with subsidies. The costs of these subsidies were modest when the renewables contribution to overall energy supply was marginal, but that’s changing. Since 2008, public subsidies for renewables have been $800 billion. In 2014, the IEA estimated that decarbonizing the global electricity grid will require $20 trillion in investment in the next 20 years, and that still leaves much to be done. A new economic system for electricity is required, but the ecosystem of energy and the economy is too complex for anyone to know what that should be and how to make the changeover efficiently. Source: The Economist, “A world turned upside down,” February 25, 2017, pp. 18-20.

US electricity generation from coal shrank from its peak in 2008 at slightly more than 2 billion megawatt-hours to about 1.3 billion mega-watt hours in 2016.

In 2016, natural gas’s share of US electricity generation at 33 percent exceeded coal’s share at 32 percent for the first time. Coal’s share has steadily fallen from a high of over 55 percent in the mid-1980s, while natural gas’ share has steadily risen from about 10 percent then. Nuclear remains steady at 19 percent, while renewables, not counting hydro, have risen from zero in the mid-1980s to 8 percent in 2016.
The Tennessee Valley Authority historically has been a major user of coal plants, but that has changed radically since 2007 because of environmental agreements to reduce coal emissions, the lower prices of natural gas, and increased production from nuclear. In 2007, over 55 percent of TVA’s energy mix was coal; in 2017 a little over 20 percent of the mix will be coal. Since 2011, TVA has shut down 24 coal-fired units out of 59 in its network.

Clean coal technologies are not economic yet, and maybe never will be. Southern Co. also announced in February 2017 that the first of its kind “clean coal” power plant is almost complete, but that it won’t be economic to operate the plant competing against natural gas power plants using today’s low gas prices. The new coal plant that will be able to burn coal and capture the carbon-dioxide output has taken 7 years to complete and cost $7.1 billion to build. If Southern had built a natural-gas power plant of comparable size, it would have cost about $700 million to build—one-tenth the cost of the clean coal plant.

Given all the changes and uncertainties, the world’s oil expert forecasters can’t agree on whether oil demand growth will peak in the next 30 years or not. Just another indication of how uncertain is the energy picture around the world and the global economy. A major issue that is perhaps already affecting investment decisions in oil companies is the affects of new technologies for fuel efficiency and electric cars and of future carbon rules on oil consumption in the future. The Wall Street Journal published on May 22, 2017 the results of an informal survey of big oil companies and the International Energy Agency on when they expect global demand for oil to peak. BP and Exxon Mobil don’t foresee a peak in the near future, while BP thought it would peak in the 2040s, Royal Dutch Shell 2025-2030 (so soon!), Statoil 2030, Total as soon as 2040, and the IEA after 2040. In May 2016, Shell’s scenario group published a plausible scenario of the world meeting international climate goals and achieving a net-zero emissions state. Shell described a number of key developments over the next 50 years that could lead to net-zero emissions, including significant investments in solar, wind, and nuclear sources, carbon capture and storage technologies, many country de-carbonization strategies, and a global carbon pricing system—whether through carbon trading, carbon taxes, or mandated carbon-emission standards.

China is rapidly reshaping its energy supply and demand mix and its foreign trade in energy commodities.

US coal exports to China have recently shrunk to almost nothing. They were almost 6 million short tons in 2011, 10 million tons in 2013, and less than 1 million in 2016. Out of seven West Coast export terminals proposed in the past five years, none has opened.
In January 2017, Mongolia announced a new deal to sell coal to China. With Chinese coal production falling rapidly because of China-government environmental concerns, the deal effectively transfers China’s pollution to Mongolia. Trucks carrying coal are backed up for nearly 40 miles at Mongolia’s southern border with China. Observers call it the world’s largest traffic jam.
North Korea’s economy is heavily dependent on China’s purchase of North Korean coal and China’s supply of oil. China is essentially the only importer of North Korean coal. New UN sanctions toward North Korea because of nuclear-weapons development activities have limited North Korean coal exports to China. China has recently supported those sanctions.
China Petroleum & Chemical, or Sinopec, is attempting to double domestic natural gas production in the next five years by rapidly expanding natural gas production from shale reserves in order to reduce coal usage in the country and reduce China’s need for imported liquefied natural gas. Many investors around the world were counting on sending natural gas to China.

Nuclear energy plants are progressing in many parts of the world, but not in the United States and Germany. Electricity from US nuclear plants at about 1.5 mega-watt hours per year is expected to decline very slowly over the next 25 years. Toshiba’s subsidiary, Westinghouse, recently declared bankruptcy over escalating costs involving billions of dollars to finish Southern Co.’s Vogtle Electric Generating Plant, the first new nuclear plant in the United States in three decades.

CO2 emissions aren’t the only environmental issue of coal. An immediate problem—in developing countries in particular—is particulate emissions. China’s government is actively tackling smog created by burning coal. New instructions were issued in February 2017. These may have a greater impact than previous instructions that are sometimes ignored by local authorities. The concentration of fine particles, or PM2.5, in Beijing’s air—about 65 micrograms per cubic meter in 2016—still exceeds the World Health Organization’s recommended limit of 25 micrograms per cubic meter. Beijing’s fine particulate level is getting better—it was over 100 micrograms per cubic meter in 2013, but still more than double the recommended limit.

ORACLE MUSINGS ABOUT THE FUTURE OF COAL AND CO2 EMISSIONS

Global Energy Mix. For the next 20 years, the range of uncertainty on the energy sources used in the world will remain extremely wide. The use of nuclear, the government restrictions on hydrocarbons, the technology innovations in renewables, natural gas development, and clean carbon, etc. all remain uncertain. Still it’s very plausible:

Nuclear power will gain more advocates and expand.
Oil demand will remain high because consumers in both developing and developed countries will continue to prefer internal-combustion-engine cars and trucks over alternative-fueled vehicles.
Renewable power will expand more rapidly than projected in non-OECD countries. For many countries, in ten years more than 50 percent of new power capacity will be from renewables sources. Major investments in infrastructure for using more renewable technologies will be made.

While the demand for oil will increase for the next 20 years, the demand for natural gas is going to explode.

Natural gas production could grow even more than base case scenarios because of technology innovation, a raft of new government restrictions around the world on use of coal in power generation, and high costs of clean coal technology.
Technology innovation will likely continue to lower the costs of shale gas development. China and Argentina will see rapid expansion in their natural gas productions.
The two big hurdles for companies developing the new oil and gas reserves will be the large capital required to explore, develop, and produce oil and gas in hard to reach places, and the liability risk to companies from oil spills and contributing to global warming.

Future of coal: Global coal demand could begin to fall soon.

The momentum to substitute natural gas for coal in electricity generation will likely accelerate.
Coal use will continue to decline in the United States. It’s uncertain how Trump administration policies could affect that decline, but in general the trend won’t likely reverse.
The biggest changes in coal usage will be in China and India. As long as natural gas prices remain low, coal demand will most likely keep falling significantly. In fact, China and India will struggle to keep up with the forces driving those declines.
Clean coal technologies will struggle to become commercial. Few new coal plants will be built, but retrofitting old facilities with expensive clean coal capabilities is not likely going to happen.

CO2 tipping-point. Global annual CO2 emissions may be peaking and could start to fall, perhaps even sharply, from 2020 to 2030. Momentum will increase to continue the policies that led to more efficient energy usage in the economy, the expansion of nuclear, the substitution of natural gas for coal in electricity generation, etc.

China’s Leadership on Energy and the Environment

China’s changing policies toward improving the country’s air quality and energy supply in the next ten years will have the greatest impact on global CO2 emissions and the world’s goal of reaching a net zero CO2 emissions state as soon as possible.
China will ride the wave of coal use reduction and expand its commitments toward global environmental goals. China will assume a much large leadership role on environmental issues in international forums, like the IPCC.
Chinese corporations will continue to invest heavily toward becoming global leaders in renewable-energy technologies, like solar electricity generation and electric cars.
China companies will be the industrial leaders around the world in all commodities, including oil, gas, and coal. The Chinese companies will be the biggest, invest the most money, and generally be aggressive to capture the most market share.
The Chinese government will likely support Chinese companies moving abroad with various means of support to help them penetrate foreign markets and avoid trade and tariff costs.
In general, transparency of commercial transactions between governments and commodity producers will go down worldwide; corruption levels could increase.
In many respects, India’s accomplishments will be greater, but they will follow China’s.

The battles over the development and use of fossil fuels could become even more intense.

Greenhouse gas emissions will continue to accumulate in the atmosphere and ocean for the foreseeable future. CO2 emissions from gas will continue to grow because of the growth in natural gas production.
NGO’s will continue to object to natural gas and oil development and production activities and the companies that conduct them.
Gas companies will never be viewed as good world citizens.
Large private oil and gas companies could experience more protests wherever they operate.
Russian and Chinese companies will be singled out more and more by NGOs.
Many western governments will find themselves simultaneously penalizing and sanctioning Russian and Chinese companies involved in oil and gas operations.

Major disruptions in energy supply could occur.
No one can predict what the costs of energy and environmental protection will be. The range of possible outcomes is very wide.
If CO2 emissions peak, societies will likely place a higher priority on lower costs and more robust economies than on less chance of significant climate change and higher costs.

Energy Industry and the Governments that Depend on It

A restructuring of the global energy industry is underway.
Renewable energy will be at the center of the industry, but fossil fuels will still be essential for the global economy.
The players will change quite a bit, and power will shift to developing-country producers, both state-owned and private ones.
Sovereign-wealth funds will continue to accumulate wealth and power.

Question to Oracle: Will Streaming Video Change the World?

RESPONSE

Yes. The internet has already changed how people conduct their lives. Now new video over the internet and smart phones will change those lives even more. Google’s YouTube viewers watch more than 1 billion hours a day of video. The large internet players are rapidly penetrating video/TV markets with streaming video, and live video over the internet is already being seen by hundreds of millions of users. In as little as five years, high-resolution video from space satellites could reveal much more about globe events and people. All this new information about the world will stimulate social, political, and economic change. New norms and rules for monitoring everyone’s public activities will develop. National governments everywhere will seek to control the specificity of live video. Public servants and senior corporate officials should expect the public will have access to video of their work activities. Streaming video of the world will become a very large market, and a new generation of technology companies and services will likely be born.

RECENT SIGNALS OF CHANGE:

Imagery satellites are being launched with global video capabilities.

The Alphabet imaging-satellite subsidiary, Terra Bella, recently acquired in early 2017 by Planet Labs is building and launching a constellation of satellites that can capture the first-ever commercial high-resolution video of Earth from a satellite.

Dramatic rise of video that’s being watched over the internet

Google’s YouTube’s viewers watch more than 1 billion hours a day. Total video watched on the internet rose from 5 billion hours per day in 2010 to 15 billion hours per day in 2016, while broadcast and cable television hours were level or slightly declining over the same period at around 22 billion hours per day. 400 hours of new content video is being uploaded to YouTube every minute, or 65 years of video per day. Source: The Wall Street Journal, February 28, 2017, p. B1.
In the United States, all age groups except those over 50 years old are watching less broadcast and cable TV every year. For all age groups, TV watching shrank almost ten percent from 2010 to 2016. Source: The Economist, October 29, 2016, p. 56.
Alphabet’s YouTube service is launching a new web TV streaming package of over 40 broadcast and cable channels for $35 per month. That is the same price as AT&T’s cheapest bundle. But Alphabet didn’t have to pay $49 billion to buy DirectTV like AT&T did—Alphabet’s margins must be significantly better than AT&T’s.
Headline of Wall Street Journal columnist, Christopher Mims, on February 8, 2017: “How Millennials Are Turning Snapchat Into the New TV.” Snapchat video clips are never longer than 10 seconds, but they can be strung together into “stories” that can be several minutes. Sims suggests that for Snapchat users watching these stories is a lean-back experience like watching TV. Snapchat in February reported its users view 10 billion videos (not longer than 10 seconds) a day.

Live video over the internet is capturing hundreds of millions of users.

In January 2016 GoPro teamed with Twitter-owned Periscope to allow users to broadcast live from their GoPro devices connected to iPhones. Users have the ability to switch instantly between the GoPro and the iPhone’s video camera—i.e., each user can do two-camera live action shots.
Live video is the current big battleground for Facebook, Snapchat, Twitter/Periscope, YouTube, and many smaller startups. China has 200 live-streaming platforms. In September 2016, ii-Media Research predicted there would be over 300 million viewers of live streaming in China, or about half of China’s internet users, by the end of 2016. Source: “Cash Flows in China Live Streams,” The Wall Street Journal, 9/28/16, p. B6. Until recently TV and cable broadcasters exclusively broadcast live video. Live new media video is totally disrupting the traditional media industry.
In December 2016 China issued new regulations requiring foreigners to submit a formal application with the Ministry of Culture before they can post live-streaming videos from their smartphones and websites.
In November 2016 The Wall Street Journal reported Amazon has been talking to major sports organizations like the National Basketball Association, Major League Baseball, and the National Football League about providing streaming live sports.

Smart phones are becoming the future platform for almost everything.

Four of the top five smart phone vendors in China in 2016 were Chinese. The top three companies (Oppo, Huawei, and Vivo) grew significantly in 2016 compared to 2015, with Oppo’s and Huawei’s shipments almost reaching 80 million units. Apple was No. 4 in the market and its shipments shrank in 2016 compared to 2015. No. 5 Xiaomi’s shipments also shrank. Source: The Wall Street Journal, March 18, 2017, p. B3.
Samsung’s new Galaxy S8 smartphone that will be on retail shelves in late April 2017 will have a larger and better screen than all its major competitors and can also serve as a desktop computer.

Advertisers are rushing to online, digital ads, creating major opportunities for those platforms able to attract the most users’ time. Online, digital ad spending is beginning to approach TV ad spending.

Digital ad spending is rapidly catching up and could soon be greater than TV ad spending. Global ad spending in 2017 is expected to be ~ $180 billion (33 percent of the total) in digital, online media and ~$220 billion (40 percent of the total) for TV. This compares to global ad spending in 2010 of ~$66 billion (16 percent of total) for digital, online media and ~$181 billion (or 44 percent of total) for TV ad spending.
An article in The Wall Street Journal on February 1, 2017 titled “Facebook’s Steep Wager on Online Video Has to Pay Off” noted Facebook’s revenue in 2016 is expected to increase 46 percent from the year before, but that this growth is going to “come down meaningfully” in 2017. The article indicated Facebook is betting on video, including Facebook Live, to play a much bigger role in the future. CEO Zuckerberg has apparently said he envisions the company becoming a “video-first” company.
The advertising world is struggling with this major shift from traditional advertising platforms, such as print and TV, to digital. In early March 2017, the world’s largest advertising firm, WPP PLC, reported its slowest quarter of growth since 2012 of only 2% this year. Magna Global, the adbuying agency owned by Interpublic Group of Cos project global ad expenditures will grow 3.6 percent in 2017 compared to a higher 5.7 percent growth in 2016.

Large internet video players are paying more and more for unique, high-quality content

The tech companies with streaming capabilities like Netflix, Amazon, and Hulu are developing strong content production capabilities. Source: The Economist, August 20, 2016.
In early March 2017, Facebook was reported interested in funding or contracting for original TV-like programming. The focus wasn’t on live content. This pivot in paying probably large amounts of money for content is a big change for the company.
Online businesses are buying traditional media assets. In December 2015, Alibaba Group, China’s e-commerce giant, bought the South China Morning Post and all other media assets from the SCMP Group. Alibaba’s digital strength will enable the 112-year-old newspaper to become a global media entity covering China for readers around the world. While the Hearst Corporation’s Cosmopolitan magazine just announced it is teaming up with Snapchat to launch the Cosmo “channel” on Snapchat’s “Discover” newsstand.

All major corporations now have major digital media presences.

For most corporations, new digital media has become an important new channel of corporate communications, marketing, and selling the company’s products and services to millions of customers and potential customers. For many corporations—particularly new, high-tech ones—it’s the primary channel. A new book published in 2016, “Super-Consumers,” by Eddie Yoon of Cambridge University describes the importance and influence of the group representing ten percent of consumers that accounts for 30-70 percent of sales and almost 100 percent of “customer insights.” This high-passion group is defined by both its sales size and its attitude to the product. Facebook and Google are focused on developing strong relationships with their super-fans.

PLAUSIBLE DEVELOPMENTS WE COULD SEE IN THE FUTURE

High-quality video content will likely engage billions of smart phone users in the next ten years and likely shape world behavior.

Streaming video will make the world smaller.

People around the world will have substantially greater access to video of local, national, and global events and places through their smart phones.
The volume of live video generated by smart phones will continue to increase rapidly.
Live video from space satellites with the resolution to distinguish a person from a car could be available in as little as five years.
The demand for high-quality video content to engage billions of smart phone users will grow.
The need for tools to curate video content quickly will increase.

Live streaming video will be a very large market

Live high-quality content like sports could be particularly valuable.
Breaking news and live coverage of global events could become very valuable.
New live video apps focused on global events like armed conflicts, natural disasters, seasonal migrations, etc. will grow.
New sporting events that use large geographic areas and can be covered live could develop: ocean sailing, cross-country races, county hide-and-go-seek competitions, etc.

Increased video information of individuals and the activities of commercial and government organizations around the world will be available

Surveillance and monitoring of everyone in public will increase.
Demand for full coverage of work activities of elected officials and employees of government organizations, particularly of police, fire, emergency response, and maybe even schools will increase.
There could be growing demand for information about the lives of senior executives to be made publicly available.

New regulations and tools:

Governments at all levels will likely develop policies for the capturing and dissemination of video of people, companies, and government organizations.
New restrictions on how video information can be accessed, transmitted, and used will likely vary significantly around the world from tighter restrictions to fewer restrictions.
Authoritarian governments could go to extremes to limit access to the new video, particularly video emanating from foreign sources.
Public opinion will likely vary significantly within each country, and from country to country, on how open and transparent the internet should be and what personal information, particularly about government officials and senior corporate executives, should be private and what protections should be provided.
Online media companies that search for, gather, store, or transmit personal data could implement new policies to protect an individual’s personal information on video and minimize the ability of third parties to use video information with individuals that can be identified in them.
New tools and technologies for protecting an individual’s video information online or identifying an individual online may develop.

Business Winners

With their current global market positions in social media and internet services, US firms could benefit significantly from the growth of streaming video.
A new breed of firms—the next Snapchat—will emerge focused on video experiences.
Traditional news organizations will need to figure out a way to provide unique high-quality live video or better analysis of breaking events to remain in business.
Global social-media campaigns using video may influence governments to discriminate against multinationals they can’t control because of their national origin (e.g., Chinese companies in the United States) more than they do today. Could China treat German companies different from US companies?
International operations of Chinese and Russian multinationals involved in capturing, disseminating, and storing streaming video will likely be monitored, controlled closely, and possibly severely limited by governments.
Most advertising monies will likely be spent in online advertising and the most important consumer groups will be spending the majority of their time online. If they already haven’t, companies that sell consumer products or services will need to focus on digital marketing and the use of the internet.
The massive amounts of video data about events and responses could enable people or organizations to become more effective in predicting or purposely triggering desired surge responses.

Corporate affairs

New media campaigns may become much more effective.
New public affairs capabilities—reaction time (time to get in front of an issue), crisis management, managing the information flow, use of new media tools, participation of more employees in social media responses, monitoring of employees’ social media and online activity, use of live video will likely be required
New corporate policies about employee behavior outside the workplace or online may be needed, even if only to reaffirm no restriction.
New corporate policies may be required for executives’ social media postings.

Are the Chinese government and Chinese Multinationals in Cahoots?

ORACLE’S RESPONSE

Absolutely. It’s China’s system. Every Chinese stakeholder—government agency, Chinese company, and Chinese citizen—contributes in the global struggle that is not a game. The government plays a central role in shaping every stakeholder’s long-term goals, in setting economic and industrial priorities, in nurturing and protecting domestic companies, in creating opportunities for Chinese companies to become industry world leaders, and in shaping a world order that favors the Chinese. The keys of the strategy are for the Chinese government to enlist each stakeholder in the effort, create an unlevel domestic playing field so competitive that the Chinese companies that emerge are potential global leaders when they go abroad, and provide strong direct and indirect support to Chinese organizations competing in strategic industries.

Since a critical feature of global industrial markets is how rapidly situations can change, researchers, companies, and investors around the world are in an unrelenting struggle to learn and adapt rapidly. If they don’t, they won’t succeed. The Chinese government/industry system enables the country to stay focused on long-term goals, while actively supporting various parts of the system to prevail in the strategic markets that are constantly changing interactively complex, non-linear, and chaotic. The Chinese multinationals contribute by taking risks in the foreign markets and using the Chinese government’s offered support. This decentralized approach for competing in many complex markets is not unlike the US Army’s doctrine for planning and executing operations against insurgencies in the Middle East and Africa.

With this coordinated system, in the next ten years Chinese multinationals could replace American multinationals as the face of global capitalism.

RECENT SIGNALS OF CHANGE

Recent signals of this integrated Chinese government and multinational system and their overseas potential include the following:

Private (non-state) Chinese multinationals grow up in a crony-capitalistic system that shapes their organization, business practices, and foreign growth objectives. They ultimately owe an allegiance to China. Increasingly, their key shareholders are state-owned organizations.

In a recently published book, China’s Crony Capitalism: The Dynamics of Regime Decay, the author Minxin Pei, a professor of government at Claremont McKenna College in California, describes how the state decentralized the rights of control over state property to local officials, but left the rights of ownership murky. According to the author, the Chinese state holds the residual property rights of maybe half of the new worth of the China economy. This has led to a system of corruption at every level of the government/economy, an absence of a system of checks and balances, and the motivation of political officials to keep the system in place. In a crony capitalist system it’s awfully difficult for any private Chinese corporation to grow without local politician support; successful corporate leaders learn how to thrive in this environment. All Chinese corporations must grow up playing with a different set of rules than what western corporations grow up playing with.

A Washington Post article on December 30, 2016, entitled “China’s $9 billion effort to beat the U.S. in genetic testing,” described China’s effort to become a world leader in the use of genomics and an example of a Chinese’s company’s advanced DNA technology being used to help an American child in Boston. The article noted China is “battling for dominance in innovation and science that is more likely to determine the economy of the future” and believes “[genetic testing] technology could prove as transformational as the Internet.”
In the past year ending in September 2016, two state-owned investment funds have become top-10 shareholders in 39 percent of listed companies in China, according to UBS Group AG, which analyzed the shareholdings. (Interestingly, in Japan the situation is similar: According to The Wall Street Journal about 30 percent of all the companies in Japan’s three main equity indexes now have Japan’s central bank as one of their top ten shareholders. Six years ago, the Bank of Japan’s equity presence was “trivial.”)
A recent study by Fitch Ratings, Moody’s, and Standard & Poor’s showed state-owned Chinese enterprises received more generous lending terms from banks than private firms, largely because of the perception that the state will stand behind the state-owned enterprises.
An analysis by Wind Info in November 2016 indicated almost 14 percent of listed, nonfinancial companies’ profits are attributable to Chinese government support. And that’s up from 5 percent six years ago.
Private Chinese firms often have government shareholders, and approximately 11 percent of their profits come from the state.
Priority sectors, even if they’re doing well, get government support. Subsidies to China’s car manufacturers have grown 50 percent since 2010. Approximately 19 percent of Geely’s gross profits over the past five years are government subsidies and grants.

China’s domestic markets are complex, very messy affairs and Chinese business models are evolving in response to the dynamic conditions. The complex relationships with government organizations are changing and manufacturers are relying less on foreign inputs in domestic-manufactured products. China’s economy is shifting from a labor-intensive manufacturing to higher-tech industries and services.

President Xi wants to put politics (federal dictates) back in command, but progress against corruption and local deviation from federal policy has been slow. Market forces, local governments, and corruption often wield more power over corporate actions.
Chinese manufacturers are buying more raw materials and components from domestic suppliers rather than from abroad. The portion of foreign inputs in China’s exports has fallen from over 40 percent in 1995 to less than 20 percent in 2015. The annual value of China’s high-tech and new-tech imports has been slowly falling since 2013.
In 2015 services generated 50 percent of China’s GDP, up from approximately 40 percent in 2000; while industry generated a little over 40 percent of GDP in 2015, down from about 45 percent in 2000. Official unemployment rates have been notably steady at around 4 percent for many years, but those figures don’t reflect reality because they exclude migrants from rural areas.
China’s domestic demand for high-tech products has grown so rapidly that in some markets new products are being developed and introduced first in the world in China. For example, China is leading the adoption of virtual reality. Chinese companies will be able to leverage initial customer sales and experiences to become the market leaders in the G-20 countries they first enter.

The Communist Party is continuing to assert strict control over the political/economic/social system.

Hangzhou’s local government is piloting a “social credit” system the Communist Party wants to roll out nationwide by 2020. The aim of the national social credit system is to “allow the trustworthy to roam everywhere under heaven while making it hard for the discredited to take a single step.” The plan for the system is to compile digital records of citizens’ social and financial behaviors to calculate a personal rating that will determine what services they are entitled to, and what blacklists they go on. A person can incur black marks for infractions such as fare cheating, jaywalking, and violating family-planning rules.
China continues to limit the ability of Chinese affiliates of the Big Four accounting firms (Deloitte, PwC, EY, and KPMG) to share documents about Chinese companies publicly traded on US stock exchanges with the US Securities and Exchange Commission.
China is implementing new rules for nonprofits in the country. The types of activities that the nonprofits can participate in are prescribed—not everything is allowed—and foreign nonprofits that are allowed to operate will be tightly monitored and controlled.

Despite being the world’s second largest economy, China still dictates the participation of foreign-owned corporations in China to best serve Chinese consumer needs, transfer knowhow and capabilities to Chinese companies, and stimulate local companies to become world-class leaders.

After rejecting battery-operated cars—in favor of hybrids and fuel-cell vehicles—China is forcing Toyota into electric/battery cars. China is the world’s largest car market and new regulations will penalize car manufacturers that produce an insufficient number of electric, plug-in hybrid, and fuel-cell models. By 2018, such cars must account for 8 percent of the maker’s production, and the percentage will rise from there. (Sounds like totalitarian California.) It doesn’t look like Toyota will meet the deadline.
Didi Chuxing’s acquisition of Uber’s China business will essentially preserve China’s ride-hailing market for Chinese companies. Uber probably discovered this is the outcome the Chinese government wanted to happen.

In 2016, China made pledges to create a level playing field for foreign and domestic investors. But will it? China has a long list of industries in which foreign investment in the country is either restricted or off-limits and where Chinese companies are provided direct support. Time will tell if this one-sided policy will change.

After two decades Beijing is now considering whether to let Goldman Sachs and J.P. Morgan Chase operate investment banks in China on their own. Other foreign banks would soon follow. But the opportunity may no longer be that attractive. The closed market allowed China banks to develop large balance sheets, develop close relationships with corporate Chinese clients, and become formidable competitors. Chinese banks had a 10 percent share of investment banking revenue in Asia, excluding Japan and Australia, in 2006; in 2016 that share has increased to 61 percent of a much larger market. Although US banks have invested heavily in the region, their share has declined from 43 percent in 2006 to just 14 percent in 2016.
Interestingly, China has become a more attractive place to seek legal action for companies that accumulate patents for litigation and licensing purposes. Canadian patent-licensing firm, WiLAN Inc. filed a lawsuit against Sony Corp. recently in Nanjing, alleging that the Japanese company’s smartphones violated WiLAN’s wireless-communication-technology patent. The Chinese government has been strengthening its patent laws and China’s courts have developed rapidly over the years, driven largely by Beijing’s objective to promote homegrown technologies and protect the increasing number of patents Chinese companies own. In China, lawsuits are less time consuming and costly than in the United States—the normal venue for such suits. Germany is another favorite international venue for these suits.
International companies will be open to the new opportunities being developed by the Chinese. General Electric Co. recently announced it wishes to develop new sales in industrial equipment in developing countries by piggybacking China’s push to open more markets to Chinese companies, particularly President Xi Jinping’s initiative, “One Belt, One Road,” focused on roads, ports, and other infrastructure in some 65 countries.

It’s tough for Chinese companies to expand abroad. For the most part, China’s large high-tech companies currently have only small overseas presences. Part of the reason for not being more successful is Chinese companies have tried to enter developing-economy markets first before expanding into developed-economy markets.

For high-tech markets, emerging market demand simply isn’t there yet. As an example, app developer Cheetah Mobile has over 600 million monthly active users, 79 percent of them overseas-mostly in India and Indonesia. But its overseas sales still account for a small portion of its overall sales.
Huawei has been an exception. Led by its founder, Ren Zhengfei, China’s Huawei Technologies has expanded rapidly in the global market for telecom gear and smart phones, and despite market barriers in key markets like the United States, Huawei’s revenue doubled to $60 billion in the last five years. Mr. Ren laid out an intense management philosophy when he founded the company in 1987 and Huawei employees’ dedication to the company today stands out among Chinese companies.

Leading China-market competitors are using different strategies. The Chinese government is a factor in many strategies.

General Motors started selling Chinese-built Buick’s in the United States in late spring 2016. The Buick Envision is built by Shanghai GM, a joint venture with SAIC Motor Corp, but was designed by GM in Michigan. The Envision is one of Buick’s top sellers in China. Made-in-China cars aren’t expected to become a big part of overall US car sales because manufacturers historically have found it more profitable to build cars where they are sold. But with China’s car factory capacity now at 40 million cars per year, it may be much more practical (and profitable) to simply build all cars in China.
Market access/cybersecurity problems produce foreign corporate allies. Microsoft and Chinese company Huawei Technologies just announced their joint support of the EastWest Institute, a nonprofit focused on encouraging open discussions of cyber security issues and new information technology products. Microsoft is facing the antitrust heat from Chinese regulators while Huawei can’t compete for US telecommunications-equipment opportunities because of US government concerns over cyberspying.
In September 2016, Nvidia Corp. of Santa Clara, CA, and Chinese internet firm, Baidu Inc. announced a partnership to develop a self-driving car. Baidu is already testing self-driving cars in China and recently received approval from California regulators to test its self-driving cars there.
In October 2016, Jack Ma of Alibaba and Steven Spielberg of Amblin Partners formed a partnership, Holding Ltd., to help Amblin distribute its movies in China and enable Alibaba to become a bigger part of Hollywood’s production and distribution ecosystem.
The number of acquisitions by Chinese companies is taking off. The acquiring company may pay a premium, but it can develop a strong market share quickly. But acquisitions are subject to many government agencies’ approvals.
- The Dalian Wanda Group acquired Legendary Entertainment in January 2016 and has pending deals to take over Dick Clark Productions and Carmike Cinemas Inc. to become the largest movie exhibitor in the United States. It already is the largest exhibitor in the world. While the media industry is closed to foreign companies in China, the movie industry in the United States is not closed to Chinese companies. Senate Minority Leader-elect Charles E. Schumer (D-N.Y.) said China’s investments in U.S. industries, including film, deserve a more critical look from Washington regulators. China’s protectionist policies, he said, have put American companies at a significant disadvantage in the world’s most populous country, even as Chinese companies like Dalian Wanda Group reap the benefits of the U.S.’ open market. “I am concerned that these acquisitions reflect the strategic goals of China’s government and may not be receiving sufficient review.”
- The Chinese conglomerate, HNA Group, that has China’s biggest privately held airline, hotels, supermarkets, etc. has agreed to spend $20 billion this year to buy 25 percent of Hilton Worldwide, the aircraft-leasing arm of CIT Group, the US computer-logistics company Ingram Micro, and the Radisson and Country Inns & Suites chains—some of these deals are pending.
- A key feature of many Chinese investments in foreign markets is the quid-pro-quo to have an offsetting benefit in China. The HNA Group bought the Hilton stake from the US private equity firm Blackstone Group LP. Is it coincidental that Blackstone Chief Executive Stephen Schwarzman made a $100 million donation in 2013 from his personal fortune to fund a scholarship program modeled after the Rhodes Scholarship to bring 200 mainly US students to China every year?

China’s government is quick to protect Chinese corporate interests when foreign governments or regulators take positions against those interests. China recently responded to suggestions in the United States (including Trump) and European Union that they—the US and EU—will take actions to punish those that benefit from Chinese subsidies and discourage Chinese companies from dumping.

The number of trade remedy cases against China by G-20 members has been steadily rising since 2010. In 2016, trade with China became a hot political issue in the presidential campaign.

The China government continues to support state-owned companies in becoming national champions in global industrial markets, even if those companies remain inefficient and showing signs of getting worse. In September 2016, China’s two largest steelmakers, Baosteel Group and Wuhan Iron & Steel Group, or Wisco, announced their plans to merge. If the government adds a couple more mills to the merger, the new company will become the world’s largest producer, topping Luxembourg-based ArcelorMittal SA. The government expects the new firm to trim excess production capacity and compete in international markets.
The Chinese government links international policies and economic opportunities in its foreign relations. Australia’s Liberal government announced in October 2016 that it wouldn’t be conducting freedom-of-navigation patrols in the international waters of the South China Sea, effectively ceding control of the Sea to China. Sixty percent of Australian trade moves through the Sea. Chinese companies are investing in Australia, while China is the biggest buyer of Australian commodities.

Chinese takeover deals (44 each) in Germany in 2016 so far are worth more than $11.3 billion. That’s more than the previous 14 years combined. Germany’s openness to Chinese investment is changing; German government officials are trying to limit the acquisitions, reviewing proposed acquisitions more closely, and saying no to some. After Germany withdrew its approval on security grounds for a $736 million purchase of German chipmaker Aixtron SE by China’s Fujian Grand Chip Investment Fund LP. Chinese government officials immediately complained about Germany’s protectionist tendencies. German officials then complained about investment reciprocity in China, in effect saying, “We’ve always been open to foreign investment, but you haven’t been.”
The UK government approved a contract for Huawei to supply equipment for Britain’s telecoms infrastructure. But recently, the new Prime Minister, Theresa May, delayed approval of a nuclear power plant to be part-funded by Chinese investment. Xinhua, China’s official news agency, immediately commented that ditching the nuclear plant would create repercussions for Britain and British companies elsewhere.

A Global Times—a Chinese state-run publication— editorial predicted China will punish American companies if Trump follows through with his pledge to get tough with “cheating China. It said, “China will take a tit-for-tat approach . . . A batch of Boeing orders will be replaced by Airbus. US auto and iPhone sales in China will suffer a setback, and US soybean and maize imports will be halted.”
The EU is debating whether to grant China “market economy status,” which would potentially make it harder for the EU to protect its industries from what it deems unfair trade practices by Beijing. China’s government will likely threaten retaliation if the EU doesn’t grant market-economy status to China.

PLAUSIBLE DEVELOPMENTS WE MIGHT SEE IN THE FUTURE

The system of cooperation and collaboration between Chinese government agencies and Chinese multinationals will evolve as the number of expansion strategies get used and tested in the dynamic overseas markets, China’s economy matures, and the global order and China’s role in it changes. Global markets will operate less openly. G-20 countries will build up their trade-restriction policies. We can expect to see many of the following outcomes.

Globalization

Global trade could continue to grow in the next ten years, stimulated by the wide-ranging activities of Chinese multinationals.
By 2030 maybe 40 percent of the Fortune 500 will be based in emerging markets, compared to 26 percent in 2015.
There could be a massive shift in control of global markets from West to East.
On the other hand, globalization trends could stall if Western countries impose major trade barriers and severely restrict the activities of unfriendly-nation multinationals on security grounds.

Over the next ten years the Chinese government will continue focusing on strength and perpetuation of the Communist Party regime. Still plausible, but maybe less likely is for the government to focus largely on protecting the country’s territorial integrity and enhancing the wellbeing of the Chinese population.

The Chinese government will be trying to increase its surveillance and control of its citizens. Perhaps the Chinese government will gain access to DNA data of its citizens for its social-credit system. The Washington Post article about China’s investment to beat the US in genetic testing noted the “vast warehouses of genetic information” that will be created.

China’s priority going forward will likely be to continue protecting domestic industries and Chinese multinationals and not to overhauling the Chinese system to make it more market oriented.

The Chinese government will also continue to maintain a level of authority over every Chinese corporation—state-owned or not—and every move by a Chinese corporation in a foreign market will provide the Chinese government an additional presence overseas.

China government’s active role overseas will continue. The system will provide results.

China’s government will actively encourage Chinese multinationals to compete in the largest markets in the world, particularly strategic ones, and become global market leaders.
The government will encourage Chinese companies to try and dominate commodity supply chains to protect China’s future access to commodity resources, like the United States has protected the world’s access to Middle Eastern oil.
At the same time, the China government will actively combat protectionist measures imposed against Chinese corporations.
China will continue to use domestic-market subsidies, access to low-cost financing from state-owned banks, etc., and new strategic initiatives like President Xi’s “One Belt, One Road” to help Chinese companies become global leaders.

Chinese Multinationals Going International

Over the next ten years the number of investments by Chinese firms will increase steadily in all the G-20 major economies and stimulate increased global trade from which everyone will benefit.
Leveraging their protected market positions in China against foreign competition, Chinese multinationals will blitzkrieg the United States and European countries to develop market share rapidly.
Chinese commodity producers will lead the way. As the demand for commodities begin to grow again and as prices increase in the next two years, Chinese commodity producers and product manufacturers will expand rapidly into G-20 countries. They will buy existing producers and distribution companies, taking advantage of their weakened financial states because of the commodities slump.
Chinese companies will operate in any country as long as their staff is reasonably safe and they get paid—North Korea, Russia, South Sudan, Venezuela, the United States, Iran, and Congo—no problem. American and European firms will continue to be limited by national laws, international sanction, and business standards for activities such as environmental management.

The partnerships between the Chinese government and Chinese multinationals will rapidly gain more experience in penetrating foreign markets and will likely become more effective in entering and competing in developed-country markets. The Chinese companies with their government sponsors will eventually dominate in many of those markets.

Chinese multinationals could replace American multinationals as the face of global capitalism. Chinese multinationals in the next ten years could become the global leaders—displacing the US and European ones—in many industries. Given recent signals of change, plausible outcomes range from a dynamic global trade realm with Chinese multinationals acting as leaders to an ugly global business environment where governments act to support national champions and restrict the opportunities available to foreign competitors.

G-20 multinationals will partner or merge with Chinese multinationals as opportunities arise. Some interesting East-West combinations could result.
Chinese companies will challenge and surprise many in a number of global markets. For example, US, German, Japanese, and South Korean firms dominate the global car and truck manufacturing industry. That could quickly change with one or two acquisitions or the emergence of a new type of car manufacturing organization (like Tesla) in China.

The United States and European Governments

The number of proposed deals involving Chinese multinationals that must be approved will increase dramatically in both the United States and in Europe. Individually each deal appears rational and is hard to dispute under the country’s commerce laws, but collectively they suggest structural shifts might occur if they all are allowed to go through.
The explosion in number of proposed deals could overwhelm the G-20 government bureaucracies and market regulators. Governments may struggle to review and evaluate the deals in a consistent manner.
G-20 countries will dedicate more authority and resources to government offices to manage the growth of Chinese multinationals in their countries. Given the Chinese companies’ inevitable ties to Chinese government officials, security concerns and unfair government subsidies will be most often cited.
European Union markets will be particularly vulnerable to Chinese competitors because European competitors are already not dominant in many industries. EU authorities might encourage large foreign investment from Chinese companies or fight it, or do both. Given nationalism trends in the EU, Chinese companies may not be welcome; but given the unemployment problems, outside investment will be very welcome.

The aggressiveness of the Chinese companies and the Chinese government’s uncooperative approach in helping Chinese companies compete globally will likely spark large anti-trade sentiments in North America and the EU, create major political and security issues for G-20 governments, and force a variety of penalty and protectionist policies to be implemented.

The business climate in G-20 countries in general will become more nationalistic.

Business practices in the next ten years and the business leaders we follow will often be Chinese, and the business culture and competitive practices in G-20 countries will evolve. Just like there’s a Silicon Valley model based on the emergence of the online companies, there will be an East-West model that reflects the cultural, economic, and business norms of China.
Crony capitalism will remain strong.

Chinese Multinationals: New World Leaders

FORESIGHT

For the last 30 years, the world’s economy has been stimulated by China’s domestic economic growth. In the next 10 years, that stimulus will be Chinese multinationals’ extensive activities to build foreign empires. Chinese corporations protected from international competition in China’s domestic markets are now rapidly penetrating foreign markets. Since the Chinese government maintains a level of authority over every Chinese corporation—state-owned or not, every move by a Chinese corporation in a foreign market provides the Chinese government an additional presence overseas. One plausible outcome over the next ten years is that the number of investments by Chinese firms will increase steadily in all the G-20 major economies and stimulate increased global trade from which everyone will benefit. On the other hand, the aggressiveness of the Chinese companies could spark large anti-trade sentiments, create major political and security issues for G-20 governments, and force a variety of protectionist policies to be implemented. In any event, business practices in the next ten years and the business leaders we follow could be defined by Chinese multinationals and their successes.

RECENT SIGNALS OF CHANGE

The key to anticipating possible developments in the future is to focus on recent signals of change—big, disruptive, out of the ordinary changes—in the world.

A new phenomenon in the world is the rapid growth of emerging-market multinationals, particularly from China. Cross-border production, investment, and innovation by multinational corporations have been key drivers in the world’s economic growth since 1990. According to the World Investment Report 2015 by UNCTAD, multinational affiliate sales as a share of world GDP more than doubled from 1990, increasing from 25 percent in 1990 to 50 percent in 2014. At the same time, emerging-market economies are now counterparts on more than half of global trade flows, and the share of Fortune 500 companies based in emerging markets has increased from 5 percent in 1980-2000 to 26 percent in 2015. In some industries, Chinese multinationals are growing while the traditional leaders from the United States and Europe languish. For example, in the telecom-equipment industry, Huawei had 2015 revenue of $58.8 billion, while Cisco ($48.7 billion in 2016) and Ericsson ($27.9 b) created a strategic tie-up, while Nokia ($13.8 b) and Alcatel-Lucent ($15.7 b) merged.

China’s economic boom has stimulated the world’s economy for the last 30 years, but that stimulus is changing quickly.

US exports to China quickly rose from $19.2 billion in 2001 to $69.7 billion 2008. With services added, the United States exported $169.2 billion worth of goods and services to China in 2014.
Direct foreign investment into China reached nearly $300 billion in direct investment in 2013, but has since leveled off. But Chinese manufacturers are buying more raw materials and components from domestic suppliers, and this maturation is spreading to higher-tech products as well. The portion of foreign inputs in China’s exports has fallen steadily from a high of over 40 percent in 1996 to 20 percent in 2015.
At the same time, investment outflows from China have been rapidly expanding; they were approximately $75 billion in 2013, nearly $200 billion in 2015, and probably will be much larger in 2016.
Interestingly, China’s dependence on the US market is shrinking as it builds its presence in more foreign markets. Chinese exports to the United States as percentage of China’s economy fell from above 7 percent in 2006 to 3.72 percent in 2015.
Still China’s gross exports to the United States are up. Since the rate of US imports as a percent of GDP hasn’t changed much over the years, the exports from other countries (like Japan) to the United States are down.

China is promising to reduce the restrictions on foreign investment and the activities of foreign companies in China. China has a long list of industries in which foreign investment in the country is either restricted or off-limits and where Chinese companies are provided direct support. Time will tell.

After two decades Beijing is now considering whether to let Goldman Sachs and J.P. Morgan Chase operate investment banks in China on their own. Other foreign banks would soon follow. But the opportunity may no longer be that attractive. The closed market allowed China banks to develop large balance sheets, develop close relationships with corporate Chinese clients, and become formidable competitors. Chinese banks had a 10 percent share of investment banking revenue in Asia, excluding Japan and Australia, in 2006; in 2016 that share has increased to 61 percent of a much larger market. Although US banks have invested heavily in the region, their share has declined from 43 percent in 2006 to just 14 percent in 2016.
The China government continues to support state-owned companies in becoming national champions in global industrial markets, even if those companies remain inefficient and showing signs of getting worse. In September 2016, China’s two largest steelmakers, Baosteel Group and Wuhan Iron & Steel Group, or Wisco, announced their plans to merge. If the government adds a couple more mills to the merger, the new company will become the world’s largest producer, topping Luxembourg-based ArcelorMittal SA. The government expects the new firm to trim excess production capacity and compete in international markets.

In a recently published book, China’s Crony Capitalism: The Dynamics of Regime Decay, by Minxin Pei, a professor of government at Claremont McKenna College in California, describes how the state decentralized the rights of control over state property to local officials, but left the rights of ownership murky. According to the author, the Chinese state holds the residual property rights of maybe half of the new worth of the China economy. This has led to a system of corruption at every level of the government/economy, an absence of a system of checks and balances, and the motivation of political officials to keep the system in place. In a crony capitalist system it’s awfully difficult for any private Chinese corporation to grow without local politician support; successful corporate leaders learn how to thrive in this environment. All Chinese corporations must grow up playing with a different set of rules than what western corporations grow up playing with.
Starting in September 2016, The Wall Street Journal has been reporting on China Zhongwang Holdings Ltd.’s stockpile of one million metric tons of aluminum, worth about $2 billion and representing about 6 percent of the world’s total inventory, that is stored in a remote desert location of Mexico. Zhongwang Holdings could be trying to evade US tariffs imposed by the US Department of Commerce on Chinese aluminum products by routing the products through other countries like Mexico to disguise its origins or do a little product modifying to change the country-origin status.
The Wall Street Journal reported in October 2016 that the Dalian Wanda Group and its chairman Wang Jianlin, which acquired Legendary Entertainment in January 2016 and has pending deals to take over Dick Clark Productions and Carmike Cinemas Inc. to become the largest movie exhibitor in the United States, “have close ties to China’s government and Communist Party.”

That’s not to say that China’s domestic market isn’t fiercely competitive. It is very competitive, and the strong competitors that emerge from it could become formidable competitors globally.

Didi Chuxing beat Uber Technologies in China to add to Didi’s dominance in China’s ride-hailing market. This is the first country market in which Uber was beat.
China’s domestic demand for high-tech products has grown so rapidly that in some markets new products are being developed and introduced first in the world in China. For example, China is leading the adoption of virtual reality. Chinese companies will be able to leverage initial customer sales and experiences to become the market leaders in the G-20 countries they first enter.

Chinese government industrial policy and oversight are becoming more sophisticated. In 2016, China has been making pledges to create a level playing field for foreign and domestic investors. It’s too early to see if the changes will have any tangible effect. Interestingly, China has become a more attractive place to seek legal action for companies that accumulate patents for litigation and licensing purposes. Canadian patent-licensing firm, WiLAN Inc. filed a lawsuit against Sony Corp. recently in Nanjing, alleging that the Japanese company’s smartphones violated WiLAN’s wireless-communication-technology patent. The Chinese government has been strengthening its patent laws and China’s courts have developed rapidly over the years, driven largely by Beijing’s objective to promote homegrown technologies and protect the increasing number of patents Chinese companies own. In China, lawsuits are less time consuming and costly than in the United States—the normal venue for such suits. Germany is another favorite international venue for these suits.

The number of acquisitions by Chinese companies is taking off. The simplest means of developing a competitive position in foreign markets are through acquisition and joint venture/merger with an industry leader. The acquiring company may pay premium, but it can develop a strong market share quickly.

While the media industry is closed to foreign companies in China, the movie industry in the United States is not closed to Chinese companies. The Dalian Wanda Group acquired Legendary Entertainment in January 2016 and has pending deals to take over Dick Clark Productions and Carmike Cinemas Inc. to become the largest movie exhibitor in the United States. It already is the largest exhibitor in the world. In October 2016, Jack Ma of Alibaba and Steven Spielberg of Amblin Partners formed a partnership, Holding Ltd., to help Amblin distribute its movies in China and enable Alibaba to become a bigger part of Hollywood’s production and distribution ecosystem.
The Chinese conglomerate, HNA Group, that has China’s biggest privately held airline, hotels, supermarkets, etc. has agreed to spend $20 billion this year to buy 25 percent of Hilton Worldwide, the aircraft-leasing arm of CIT Group, the US computer-logistics company Ingram Micro, and the Radisson and Country Inns & Suites chains—some of these deals are pending.
A key feature of many Chinese investments in foreign markets is the quid-pro-quo to have an offsetting benefit in China. The HNA Group bought the Hilton stake from the US private equity firm Blackstone Group LP. Is it coincidental that Blackstone Chief Executive Stephen Schwarzman made a $100 million donation in 2013 from his personal fortune to fund a scholarship program modeled after the Rhodes Scholarship to bring 200 mainly US students to China every year?
International companies will be open to the new opportunities being developed by the Chinese. General Electric Co. recently announced it wishes to develop new sales in industrial equipment in developing countries by piggybacking China’s push to open more markets to Chinese companies, particularly President Xi Jinping’s initiative, “One Belt, One Road,” focused on roads, ports, and other infrastructure in some 65 countries.

In 2015 Western sentiment of industry leaders and working-class communities is rapidly growing that China’s markets are closed, Western markets are open, and Chinese companies are dumping excess capacity in the West with rock-bottom prices. These actions are then leading to suppressed wages, lost jobs, and company failures in the Western countries. The number of trade remedy cases against China by G-20 members has been steadily rising since 2010. In 2016, trade with China became a hot political issue in the presidential campaign.

Chinese government officials will support Chinese firms in foreign markets, and will act quickly to help Chinese companies facing foreign-government barriers.

The UK government approved a contract for Huawei to supply equipment for Britain’s telecoms infrastructure. But recently, the new prime minister, Theresa May, delayed approval of a nuclear power plant to be part-funded by Chinese investment. Xinhua, China’s official news agency, immediately commented that ditching the nuclear plant would create repercussions for Britain and British companies elsewhere.
Chinese takeover deals (44 each) in Germany in 2016 so far are worth more than $11.3 billion. That’s more than the previous 14 years combined. Germany’s openness to Chinese investment is changing; German government officials are trying to limit the acquisitions, reviewing proposed acquisitions more closely, and saying no to some. After Germany withdrew its approval on security grounds for a $736 million purchase of German chipmaker Aixtron SE by China’s Fujian Grand Chip Investment Fund LP. Chinese government officials immediately complained about Germany’s protectionist tendencies. German officials then complained about investment reciprocity in China, in effect saying, “We’ve always been open to foreign investment, but you haven’t been.”

Chinese and Indian immigrants are now outpacing those from Mexico in most regions of the United States. In 2014—the most recent year for which data is available—about 136,000 people came to the United States from India, about 128,000 from China, and about 123,000 from Mexico. In 2005 Mexico sent more than 10 times as many people to the United States as China, and more than six times as many as India. Workers are coming to the United States from China because Chinese corporations are expanding in the United States and because employment opportunities in China are changing. Chinese purchases of industrial robots are increasing rapidly as manufacturing labor has become more scarce and expensive. In 2010 Chinese purchases of industrial robots numbered about 15,000 units; in 2015 they were about 65,000 units; and in 2018 they are projected to be about 150,000 units.

PLAUSIBLE DEVELOPMENTS WE MIGHT SEE IN THE FUTURE

Chinese multinationals are poised to rapidly expand in all the G-20 countries. In the next ten years Chinese corporations could become the global leaders—displacing the US and European one—in many industries. Chinese multinationals could replace American multinationals as the face of global capitalism. Given recent signals of change, plausible outcomes could range from a dynamic global trade realm with Chinese multinationals acting as leaders to an ugly global business environment where governments act to support national champions and restrict the opportunities available to foreign competitors.

Globalization

By 2030 maybe 40 percent of the Fortune 500 will be based in emerging markets, compared to 26 percent in 2015.
There could be a massive shift in control of global markets from West to East.
Global trade could continue to grow in the next ten years, stimulated by the wide-ranging activities of Chinese multinationals.
On the other hand, globalization trends could stall if Western countries impose major trade barriers and severely restrict the activities of unfriendly-nation multinationals on security grounds. This is very possible.

Chinese Multinationals Going International

Chinese commodity producers will lead the way. As the demand for commodities begin to grow again and as prices increase in the next two years, Chinese commodity producers and product manufacturers will expand rapidly into G-20 countries. They will buy existing producers and distribution companies, taking advantage of their weakened financial states because of the commodities slump.
Leveraging their protected market positions in China against foreign competition, Chinese multinationals will blitzkrieg the United States and European countries to develop market share rapidly.
Chinese companies will operate in any country as long as their staff is reasonably safe and they get paid—North Korea, Russia, South Sudan, Venezuela, the United States, Iran, and Congo—no problem. American and European firms will continue to be limited by national laws, international sanction, and business standards for activities such as environmental management.

East West Competition

G-20 multinationals will partner or merge with Chinese multinationals as opportunities arise. Some interesting East-West combinations could result.
Chinese companies will challenge and surprise many in a number of global markets. For example, US, German, Japanese, and South Korean firms dominate the global car and truck manufacturing industry. That could quickly change with one or two acquisitions or the emergence of a new type of car manufacturing organization (like Tesla) in China.

Business Climate in G-20 Countries

The expat Chinese business community will expand dramatically in G-20 countries.
The business culture and competitive practices in G-20 countries will evolve. Just like there’s an evolving Silicon Valley model based on the emergence of the online companies, there will be an East-West model that involves cultural and economic connections to China.

The United States and European Governments

The number of proposed deals involving Chinese multinationals that must be approved will increase dramatically in both the United States and in Europe. Individually each deal appears rational and is hard to dispute under the country’s commerce laws, but collectively they suggest structural shifts might occur if they all are allowed to go through.
The explosion in number of proposed deals could overwhelm the G-20 government bureaucracies and market regulators. Governments may struggle to review and evaluate the deals in a consistent manner.
G-20 countries will dedicate more authority and resources to government offices to manage the growth of Chinese multinationals in their countries. Given the Chinese companies’ inevitable ties to Chinese government officials, security concerns and unfair government subsidies will be most often cited.
European Union markets will be particularly vulnerable to Chinese competitors because European competitors are already not dominant in many industries. EU authorities might encourage large foreign investment from Chinese companies or fight it, or do both. Given nationalism trends in the EU, Chinese companies may not be welcome; but given the unemployment problems, outside investment will be very welcome.

China’s Active Government

China’s government will actively encourage Chinese multinationals to compete in the largest markets in the world and become global market leaders.
At the same time, the China government will actively combat protectionist measures imposed against Chinese corporations.
China will continue to use domestic-market subsidies, access to low-cost financing from state-owned banks, etc., and new strategic initiatives like President Xi’s “One Belt, One Road” to help Chinese companies become global leaders.
The government will encourage Chinese companies to try and dominate commodity supply chains to protect China’s future access to commodity resources, like the United States has protected the world’s access to Middle Eastern oil.

Multinational Food Factories

FORESIGHT

Global food trade will change dramatically in the next ten years. Developing countries and China in particular will need to import much more than they have and will be vulnerable to future disruptions in supply. The urgent need for food imports in developing countries and the applications of genomics and automation to agricultural production will create attractive market opportunities for corporate players. Family owned businesses that dominate farm production today will continue to be important players, but multinationals will begin to dominate many agricultural markets with large productive farms. China will rely on national companies to secure future imports. Chinese companies, both private and state-owned, will scour every continent for agribusiness opportunities. Tensions with China’s neighbors, particularly India and Vietnam, are going to rise over access to food and water. The new supplies for developing countries will mostly come from Latin America and Africa.

RECENT SIGNALS OF CHANGE

For many emerging economies, self-sufficiency in food supply is no longer possible. Rapidly growing food demand is forcing many countries to rely on imports of food.

In 2009, the Food and Agricultural Organization of the United Nations (FAO) estimated agricultural production will have to increase by 70 percent by 2050 to meet projected demand. The increased demand will be due to a larger global population and higher daily calorie intake per person. Most of the increased demand will come from developing countries. Unfortunately, around the world most land suitable for farming is already farmed.
In 2015, the FAO predicted that climate change because of increased greenhouse gas emissions would likely have significant impacts on future food and livestock production. The agricultural sector already absorbs 25 percent of the total economic impact of climate-related disasters in developing countries.
Based on FAO and US Department of Agriculture (USDA) statistics, the U.S. has 11% of the world’s arable land. The U.S. is the largest producer of corn in the world, responsible for over one-third of the world’s corn crop, and the largest producer of soybeans. It is also among the top wheat and rice suppliers, and is responsible for one quarter of the world’s meat exports.
An estimated 20% of U.S. agricultural production (based on volume) is exported, making the U.S. the largest food exporter in the world, responsible for 16% of global agricultural exports. In addition to the United States, the other major agricultural exporters are Canada, Australia, Brazil, and Argentina.
World fish production increased from 95 million tonnes in 1990 to approximately 165 million tonnes in 2014. Farmed fish accounts for the entire increase in world fish production since 1990. Caught fish remains flat at approximately 90 million tonnes per year. In 2013, human consumption of farmed fish in tonnes exceeded beef consumption around the world.
China currently feeds 20 percent of the world’s population with only 7 percent of the world’s water supply. 80 percent of the China’s water is in the southern part of the country, while almost 70 percent of the farmland and 50 percent of the population lies in the northern part. Much of China’s water is also unfit for human consumption, 70 percent, and agricultural use, 30 percent. Consequently, China is one of the fastest growing agricultural importers, and the U.S. comparative advantage in land has enabled it to be the largest agricultural supplier to China.
All governments actively manage their agricultural markets. China is no different.
- China’s commodity exchanges are the largest in the world, but remain largely closed to foreign investors. The Dalian futures market is the largest commodities exchange in China. By volume, seven of the top 10 agricultural-commodities contracts traded anywhere in the world last year were based in China.
- In September 2016, China’s Premier Li Keqiang said China would soon lift a ban on U.S. beef imports that had been in place for more than 10 years due to concerns about the spread of bovine spongiform encephalopathy (BSE), or mad cow disease.
- China consumes almost a third of the world’s cotton, Recently, China’s government accumulated a stockpile of cotton that was 60 percent of world stocks, enough for 10 billion pairs of jeans, because of a government program to buy cotton from Chinese cotton farmers with guaranteed minimum prices. At the same time, China’s government controls cotton imports through a strict quota system and large import tariffs.
Import demand for food and other agricultural products is expanding fast in developing countries besides China. In 2014 about two-thirds of U.S. agricultural exports went to developing countries, compared with 48% in 1994. Many are becoming dependent on imports to meet their increasing demand that is outstripping country production.
The Commonwealth of Independent States (CIS) and Central Asia lost some 40m ha of productive land in the post-Soviet period.
Africa agricultural production has been increasing rapidly, and has the potential to increase a lot more.
- The FAO estimates Rwanda’s grain production increased by 300 percent between 2000 and 2014.
- The value of crops in Cameron, Ghana, and Zambia rose by at least 50 percent in the past 10 years.
- 400 million hectares (ha) of land in West Africa’s Guinea Savannah is available for food production; much of it has the ability to double crop; and only 10 percent is currently cropped. (For comparison purposes, Germany currently has a total of 20 m ha under cultivation.)

Large multinationals dominate the agricultural equipment and materials supply industries, while farms large and small are largely family owned. The long-term trend of consolidation in the agricultural equipment and materials supply industries and farms continues, driven by innovation and the need for more productive farms.

Information data on the Earth ecosystem and the ability to gather more using space satellites and in-situ sensors are rapidly increasing. Much of this information is directly useful to improving farm productivity, and as a result a new wave of innovation in farming is occurring.
In the United States, farming is a family-owned enterprise—nonfamily corporations run just three percent of farms—and large farms dominate—eight percent of the farms account for 80 percent of US food sales, according to 2012 data from the USDA. Big problems continually face farmers; the successful ones will be savvy, entrepreneurial, risk takers, and effective users of new technology.
In 2014, the FAO estimated 90 percent of the world’s more than 570 million farms are owned by an individual, small group of individuals or household. Only 6 percent of the world’s farms are larger than 5 hectares.
Sensitivities around foreign ownership of farmland are increasing in developed countries. In April 2016, the Federal Treasurer of the Australian government declared the proposed A$370m sale of S. Kidman & Co. to China’s Dakang Australia Holdings (part of the Pengxing Group) was not in Australia’s interest. Last year the sale was rejected on security grounds because some of the property adjoined some sensitive military sites.
The suppliers to farmers are often multinationals. Today some of the largest ones are pursuing mergers and acquisitions to consolidate global capacity and position themselves for agricultural-market upturns. These are very large deals, often cross-border, requiring anti-trust and regulatory approvals of the governments of countries affected.
- In August 2016, the U.S. national-security regulator, the Committee on Foreign Investment in the U.S., or CFIUS, approved China National Chemical Corp.’s planned $43 billion takeover of Swiss seed giant Syngenta AG. The US regulator was involved because about a quarter of Syngenta’s sales come from North America. The deal still needs to be approved by European authorities.
- At the beginning of September 2016, Monsanto Co. and Bayer AG announced that Bayer would buy Monsanto in a $57 billion deal that would create an agricultural powerhouse. The German pharmaceutical and chemical multinational would obtain Monsanto’s market-leading position in seeds and crop genes, and position Bayer for the potential growth in high-tech crops to sustain the world’s population.
- Dow and DuPont announced plans in December 2015 to combine to form DowDuPont, a multinational worth $130 billion, and then split into three publicly traded companies—an agriculture firm, a material sciences business and a specialty products company. Europe’s antitrust authorities have said they are concerned about possible reduced competition and innovation in the seed and farming products industry as a result of the merger.
Food quality and safety issues arising from new technologies, particularly GMO foods, are explosive topics.
- In July 2016, more than 100 Nobel laureates signed a letter to Greenpeace urging Greenpeace and its supporters to abandon their campaign against GMOs in general and Golden Rice in particular.
- In September 2016, a former employee at a Chinese state laboratory that studies GM foods said his superiors had him falsify reports. This allegation quickly spread on China’s social media. The Beijing government is trying to shift public opinion toward acceptance of GMO food.

PLAUSIBLE OUTCOMES IN TEN YEARS

The global food supply system will generally meet the world’s rapidly increasing demand for calories; but there will be many disruptions and problems and many food security and health issues. The dynamics of the system will remain chaotic with the commercialization of disruptive technical innovations, the imposition of new trade restrictions by governments, the cyclical nature of commodity markets, the impacts of climate change and weather patterns on arable land, and the independent investment decisions of multinationals pursuing perceived opportunities.

Corporate power over food production is going to increase significantly.

Farms will continue to consolidate and get bigger in major agricultural export regions like the United States and Canada as well as in developing countries with promising export opportunities.
New multinational entrants will start buying and forming large farms, employing technology to greatly improve the farm’s productivity and distribution system’s efficiency.
Because of the growth opportunities and risks, the multinationals will leverage investments in agriculture innovation. Silicon Valley will likely be a key center of agricultural innovation.
The image of farming and agriculture will begin to shift from an important cultural and social activity to a strategic natural-resource exploitation activity. Will multinational farmers be viewed any differently than multinational oil companies?

Foreign multinationals will be investing in productive farmland in Canada, the United States, Brazil, Argentina, and many countries in Africa.

Both state-owned and private multinationals from China will be very active.
Foreign ownership of many nations’ farming capacities will increase. How might this influence a nation’s food and water security concerns and policies?
How will federal or state farm or crop subsidies be affected?
How will efforts to create a resilient regional ecosystem—where regional policies for food production, water use, economic industries, and environmental management are coordinated, if foreign multinationals assemble large farms focused on export opportunities?

Population protests and disagreements among NGO groups over food and water issues could increase in the future in both developed and developing economies because of many conflicting issues:

Food security and food safety issues associated with the growth in imports.
Loss of small-farm jobs.
Increased availability of information about the use of local water, land, and infrastructure resources.
Potential risks to regional ecosystems from GMO foods.
Regional and local water policy decisions.
Climate change mitigation and adaptation policies that conflict with agricultural markets.

Latin America and Africa countries will turn into the world’s food baskets.

The major increases in food production over the next ten years to meet the world’s population needs for more calories will come from Latin America and Africa.
The major supply countries could organize themselves into the “OPEC of food’—or OFEC, if they realized the leverage they might have and coordinated national strategies for exploiting their farming capacities.
Precision-farming technologies will spread from North America to Europe and Latin America and then Asia and Africa.
The center for technological innovation will continue to be in North America.

National governments will continue to try to shape food demand and production in their countries.

Food imports will continue to be strictly monitored and controlled in countries. Governments will continue to apply targeted tariffs or restrictions to reduce imports and protect national producers.
Food trade issues in front of the World Trade Organization will increase.
National and local water policy decisions will be affected by the increases in food exports, and possibly by the changed ownership of large farms.
Tensions among countries in Asia will rise over these issues. China and India will compete worldwide for access to food supplies. Vietnam and Thailand will be squeezed.
Energy and environmental-management policies of many countries will be highly influenced by food and water security outcomes.

Farmed fish production will very likely continue to grow rapidly because of technology innovations and provide an increasing part of total calorie intake around the world.

Arctic by Russian Rules

Many of my blogs will focus on an emerging global issue—in this case the Arctic and Russia’s actions there—and provide insights on possible developments we might see in the next five years. The blog format will be Foresight Summary, Recent Signals of Change, and Plausible Developments in the Next Five Years.

Foresight Summary

Development of oil and gas resources and other mineral deposits in the Arctic will start increasing again now that commodity prices have started to recover. Confrontations with NGOs and local communities over environmental and social problems in all Arctic countries will begin to increase. Russia will continue to strengthen its dominant Arctic position and as commodity prices rebound will exploit the new economic and political opportunities in the region afforded by Russia’s large search and rescue and security resources in the region, the warming climate, and new technologies for overcoming the hazards of the region. The United States is not building economic and security capabilities in the region and will struggle to influence future outcomes. For the foreseeable future Russia will define the rules and ways in which human activities evolve throughout the region. For Norway, the Arctic will continue to be strategic; Norway will continue to invest in the region, led by Statoil the state-owned oil company, and remain the West’s most active operator and negotiator with Russia in the region. As NATO reinforces its capabilities in Eastern Europe, Russia will exert its presence in the Arctic. While China is not an Arctic nation (with land bordering the Arctic Ocean or above the Arctic Circle), the Chinese government and Chinese companies will increase their presence in Russia, Canada, and Greenland. Specialized shipments of oil, gas, and minerals extracted from Arctic deposits will start flowing regularly along the Russian Arctic coast to Asia countries.

Recent Signals of Change

The key to recognizing new trends, anticipating possible developments in the future, and identifying the strategic implications is to focus on recent signals of change in the world—big, disruptive, out of the ordinary changes—in whatever part of the world, physical or societal, they occur. Recent changes related to the Arctic that indicate new trends or developments may be emerging include:

As of July 2016, it appears energy and materials commodity prices hit bottom in 2015 and now are steadily recovering. The commodity fuel (energy) index of indexmundi.com is up approximately 45% since the beginning of 2016, although it’s still 23% down from the highs of a year earlier. Noticeably, private equity firms are beginning again to invest in oil opportunities. The metals price index of indexmundi.com is up 10% for the year, but still down 15% from a year ago.
According to NASA, the Earth is getting greener in the rapidly warming northern regions. The amount of leaf area per ground area is increasing as a result of warmer northern temperatures and longer growing seasons. Some unknown amount of greenhouse gases is being pulled out of the atmosphere. It’s probably unlikely this will reduce the Arctic warming trends in a major way.
The non-governmental organizations (NGOs) with activities above the Arctic Circle are rapidly expanding, except in the Russian sector. The Arctic continues to be getting warmer, and environmental change research in the region continues to expand. At the same time, as social problems don’t seem to go away, particularly among the indigenous groups, NGO activity expands and media coverage increases.
Automation technologies and more data will be good for jobs, economic development, and better environmental management. Digital data about the Arctic is expanding very quickly because of increased human activities in the area for environmental, navigation, and economic purposes and the deployment of drones and commercial sensing satellites with large data collection capacities. The Arctic is one location where new automation capabilities and vast quantities of more data will lead to economic growth and job increases.
A large luxury cruise ship, the Crystal Serenity, will traverse the Northwest Passage for the first time in August 2016. The trip could be a turning point for Arctic tourism in Canada. Iceland, Greenland, and Norway already promote Arctic tourism. Some NGOs and insurance companies are concerned about the safety and environmental risks.
However, Arctic sea routes won’t become major shipping lanes for many years, if ever. It is clear the routes won’t reliably ice free during the summer and late fall for many years, if ever. Shipping traffic on the more navigable Northern Sea Route (NSR) along the Russia coastline has fallen significantly since the high point of 70 ships in 2013. The likely biggest use of the routes will be the movement of Arctic resources (like Russian LNG) to growing Asian markets.
Russia continues to develop key infrastructure in the far north. Russia just announced construction beginning in 2017 of another 170 km of rail across the Yamal Peninsula to support the development of natural gas reserves and a new port in the area. President Putin highlighted the railway in his 2016 annual press conference. Russia also just launched in June 2016 its largest and most powerful nuclear-powered icebreaker, the Arktika, for the Arctic. Russia now has six reactor-driven ships for the Arctic; the United States has none. Finally, Russia announced the first of its kind floating nuclear power station has started tests in advance of its deployment in October 2017 in the Arctic.
Ship transport of Russian Barents Sea oil along the Norwegian Arctic coast in the first part of 2016 reached new highs because of cumulative oil-development and port infrastructure investments over the last decade in the Russian sector above the Arctic Circle. While US Energy Information Administration in its 2016-published energy outlook shows oil production from Alaska decreasing to less than half its current level after 2030.
Russia’s US$27 billion Yamal LNG project within the Arctic Circle will begin operation in 2017. This remarkable project will use West-designed and Far East-built ice-class LNG tankers to enable year-round export shipments from northwest Siberia to European and Asian markets. The LNG tankers are intended for navigation both westbound and eastbound along the Northern Sea Route (NSR), the Arctic seaway along Russia’s coast linking the Atlantic and Pacific. The Russian company, Novatek, has a 50.1% interest in Yamal LNG; China National Petroleum Corporation and France’s Total Group both have a 20% holding; and the Chinese state-owned Silk Road Fund has a 9.1% interest.
Russia threatened by NATO in the Arctic. In Vladimir Putin’s July 2016 visit to Finland, he strongly advised the country to stay out of NATO. Both Sweden and Finland are increasing their military cooperation with NATO countries and having debates about joining the organization. The Russian Defense Ministry recently announced the deployment in 2017 of its Podsolnukh beyond-the-horizon radar system in the Arctic. In June 2016 a new law in Russia, aimed at strengthening security along the NSR, gave the Federal Security Service (FSB) responsibility for law enforcement along the Russian Arctic shipping passage. Before, law enforcement responsibilities in the area were distributed among the courts and various government agencies.
Sanctions by Western countries against Russia are also impacting Russia’s future development plans for the Arctic region. Russia’s economic development and business ambitions for the Arctic region call for more large investments in oil and gas and civil infrastructure that need international financial and technical support. Sanctions by Western countries, including Norway, Russia’s northwestern neighbor and a non-member of the EU have stopped most Arctic plans from moving forward. The remaining large project with Western capital involvement that was initiated several years ago is Yamal LNG, where the French energy company Total holds a 20 percent stake. Finland was a key supplier to Russia’s building nuclear icebreakers, but the ship equipment orders from Russia have stopped.
Despite the sanctions, on some multilateral Arctic matters cooperation with Russia has continued. From 2014 to 2016, a polar code for maritime activity was adopted, an agreement on fishing in the Arctic among the Arctic nations was signed; and an Arctic Coast Guard Forum was started.
But on other matters and at the bilateral level, cooperation with Russia has broken down. Russia is restricting Russian NGOs and international NGOs operating in Russia. Russia recently blocked the EU obtaining Arctic Council observer status. Russia recently refused permissions for Norwegian scientists to conduct research in Russia’s Arctic areas, while Norway suspended military to military cooperation with Russia.
In contrast to Russia’s commitment to the Arctic, the United States and Canada do not have grand ambitions for economic development in the area; instead they are largely trying to constrain the economic opportunities. At a recent summit between President Obama and Prime Minister Trudeau, they issued a statement pledging to develop low-impact shipping corridors, work toward a ban on all commercial fishing in the Arctic until research can determine sustainable levels, and protect 17 percent of land areas and 10 percent of marine areas by 2020. In April 2015, the United States assumed chairmanship of the Arctic Council for a two-year term and outlined the three priorities of its term: improving economic and living conditions for Arctic communities; Arctic Ocean safety, security, and stewardship; and addressing the impacts of climate change. Neither the United States nor Canada is expanding its navigation and infrastructure investments, including building any new icebreakers. The US Coast Guard has a total of two operational (old) icebreakers compared to Russia’s fleet of approximately forty. China—a nation without any territory above the Arctic Circle just commissioned its second icebreaker.
Since Russia’s incursions in Crimea and Ukraine, Norway has assumed a more confrontational approach to Russia’s aggressive behavior in the Arctic. The Norwegian government also recently announced plans to modernize the country’s armed forces and increase its military capital spending. Norwegian Prime Minister Erna Solberg was quoted as saying, “we have an increasingly unpredictable neighbor to the east which is strengthening its military capacity and showing willingness to use military force as a political tool.” Norway’s recent award of a new exploration license to Statoil in disputed waters of the Barents Sea around Svalbard also upset Russia, which claims equal access to resources in the “Svalbard Box,” an area around the archipelago. The Svalbard Act of 1925 gives the Kingdom of Norway full and absolute sovereignty over Svalbard, but provides other countries that signed the treaty with economic rights on Svalbard.
As the technological and operational leader in the Arctic region, the partially state-owned Norwegian oil company, Statoil, continues to pursue opportunities throughout the region, including in Russia despite the strained political ties between Russia and Norway and the EU. Statoil’s strategic cooperation with Rosneft involves joint exploration in the Russian Barents Sea and Sea of Okhotsk, as well as pursuing interests in a license in the Norwegian Barents Sea. Statoil plans to drill two wells in the Sea of Okhotsk in the far east of Russia in the summer of 2016. “We are pleased to have entered a key stage in our long term cooperation with our partner, Statoil . . .,” said Igor Sechin, chief executive of Rosneft and an ally of Russian president Vladimir Putin in July 2016. On the other hand, Norway and Statoil would like to continue selling natural gas extracted from Norwegian waters to Europe. But replacing the aging gas fields in Norway has been difficult, and Statoil and other energy companies haven’t yet made the next big discovery in Norwegian waters that would justify building the large necessary gas export infrastructure.
China’s support to Russian energy and infrastructure projects in the Arctic is critical but fragile. Russia desperately needs capital for expensive development projects in the Arctic abandoned by western firms due to the sanctions, and China has stepped up to help. For example, the Yamal LNG project and Chinese lenders recently signed a $12 billion loan agreement after two years of talks. But many other agreements signed in the last two years haven’t yet led to firm contracts, and the perception is China has been able to take advantage of Russia’s weak negotiating position. Also, China’s goal of building land and sea routes that will enable Europe to connect more easily with China will effectively reduce Russia’s role as a key trading partner of Europe.

Plausible Developments in the Next Five Years

The signals of change above suggest a number of possible developments and outcomes in the next five years that could affect the well-being of people, organizations, countries, and the environment. For any issue, the possible developments and outcomes in the future could vary significantly given the ranges of uncertainty of the major forces involved. The developments and outcomes listed below are those that could severely impact the people, organizations, governments, and countries engaged in the Arctic.

United States and Canada policy positions toward the Arctic
- US and Canadian priorities for the Arctic are unlikely to change. The focus will be on protecting the environment and limiting exploitation of natural resources.
- Infrastructure investments are unlikely to increase even though economic activity could expand if the climate continues to get warmer.
- No new icebreaker for Canada or the United States will be built and deployed in the foreseeable future.
Indigenous populations
- Indigenous groups will continue to receive widespread social services, healthcare, and educational aid.
- Interesting experiments for using new automation technology to deliver that aid will be implemented.
- Better outcomes for the groups won’t be achieved in the next five years; most indices in fact will likely continue to remain low.
Maritime activity
- Luxury cruises through Arctic waters will be a major success.
- But Arctic sea routes won’t become major shipping lanes in the next five years. It is clear the routes won’t be reliably ice free during the summer and late fall for many years, if ever.
- However, transport of commodities extracted above the Arctic Circle, principally in Russian territory, to Asia along the NSR could become regular.
Oil and gas and mining ventures
- Oil and gas prices won’t rise much beyond current levels ($45/barrel to $65/barrel oil) in the next five years.
- International oil companies will renew efforts in all countries to find and develop new large oil and gas fields in the Arctic. But except in Norway and Russia, no new exploration will begin.
- New mining ventures in Greenland, Canada, and Russia will become attractive again.
- Chinese companies will continue to be major players in the new mining ventures and in Russian oil and gas.
Russia
- Russia will continue to push development of its Arctic territory, build the civil and security infrastructure to support expansion of Russia’s economic activity in the region, and exert Russia’s effective security control over the international navigable waters.
- Russia could respond with physical action to any further NATO encroachment in the area, including Finland or Sweden joining NATO, deployment of non-Norwegian forces in Norway, etc.
- Russia may demand different terms for the control and administration of Svalbard and its surrounding waters. Russia will not likely accept Norway’s licensing of disputed oil and gas licenses in waters surrounding Svalbard.
- As long as the sanctions remain in place, Russia could limit non-Russian trade shipments between Asia and European along the NSR.
Norway
- Like Russia, Norway will continue encouraging development of its northern region. The Arctic region with its social and civil infrastructure needs will receive budget priority.
- Norway will continue to promote oil and gas development in the Norwegian Barents Sea.
- Norway will likely expand its security capabilities above the Arctic Circle to remain NATO’s northern leader and limit the coast guard assistance required from Russia.
- Norway recognizes NATO likely won’t confront Russia over Arctic incursions not involving the mainland. Norway will attempt to mend its political fence with Russia, and seek opportunities for civic and business collaboration.
China, South Korea, Japan, India and Russia cooperation
- Because of western sanctions, Russia will continue focusing on developing Asian nations as trading partners and financiers. The Arctic region will provide multiple opportunities for developing long-term economic relationships.
- LNG transport from Russia’s Arctic region to Asian countries using the Arctic sea route, NSR, along Russia’s coast could open up the route to other shipments of mined commodities from Greenland, Norway, and Russia to Asia.
- But Russia will only be moderately successful in attracting investment monies and knowhow from China and other countries that do not support the sanctions. For the non-Arctic states of Asia—China, South Korea, India, and Singapore— the Arctic is not strategic and their long-term commitment to the region is iffy.
Environmental research and insights
- Increased Arctic activity by NGOs will lead to confrontations over oil and gas developments in Arctic waters and with Russian authorities over almost every maritime operation they have in Arctic waters.
- Confrontations will also increase related to other mineral developments and a host of social, environmental, and business issues.
- Large increases in the environmental data gathered about the Arctic region will occur because of advances in automation technology, easier access to the area because of warmer temperatures, and more economic assets deployed in the Arctic.
- The cost of acquiring all this new data and analyzing it will dramatically increase. Major budget fights over Arctic priorities—wellbeing of indigenous populations, new civil infrastructure, security, or more environmental information gathering—likely occur.

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Insights on Plausible Outcomes for the Major Uncertainties of the Future

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