Rapid growth in demand for energy in general and oil in particular puts China in need of an energy policy able to manage consumption and increase indigenous supply.
A recent US Department of Energy report assesses China’s push for stability of energy supplies and the effects of its emergent energy policy on world markets.
DOE observed: “Over the past two decades, China has experienced major economic and social-and, to a far lesser extent, political-changes as a result of Deng Xiaoping’s historic call for ‘socialism with Chinese characteristics.’” The results from these changes, DOE reported, have been “explosive economic growth, a dramatic migration of millions of Chinese from rural provinces to urban centers, an opening to the outside world not seen since a century ago, a reorganization of government and corporate structures, and the elimination of the Maoist social support system.”
In addition, DOE said China’s shift from small-scale to world-scale manufacturing and the transition from autarkic to internationally integrated economic policy have caused internal and international tension. “China’s...dependency on exports, foreign direct investment, and imported commodities exposes the inefficiencies of its post-communist economy to the forces of globalization,” it said.
China in turn has tended to seek out energy security by developing equity positions in oil-producing countries-i.e., “removing” energy sources from the market, even at substantial premiums, DOE reported, adding, “This confluence of drivers shapes China’s energy policy.”
Oil supply, demand
China is attempting to meet its projected energy needs by increasing domestic energy production and efficiency, DOE said. Domestic oil supplies, however, are currently producing at capacity and may have peaked. Many analysts speculate that future rises in demand will have to depend mostly-if not entirely-on foreign sources. Further consumption growth and increased reliance on imported energy have important security implications for China.
“As is typical for all Far Eastern importers, China’s oil suppliers are heavily concentrated in the Middle East and West Africa-both regions that are subject to internal and international instability that may negatively impact China’s oil supply security,” DOE observed. “In addition, the fact that more than 80% of China’s crude oil imports transit the Strait of Malacca and 24% through the Strait of Hormuz increases China’s sense of vulnerability.”
And while about 90% of China’s crude imports are carried by ship, less than 10% are shipped aboard Chinese-owned tankers.
“Efforts to address the perception of energy insecurity have led the Chinese government to finance many energy projects that have uncertain prospects of a positive return on investment; to absorb political risk where it has proven prohibitive to private commerce; and to establish closer relations with ‘problem states,’ such as Sudan, that are rich in energy. All of these policies have an impact on strategic US interests,” DOE noted.
Energy efficiency
China has established certain policies to reduce energy demand and increase supplies. Some of these include increasing energy efficiency to maximize energy output from existing resources, increasing the use of renewable energy, and increasing both the domestic production of traditional energy resources and improving domestic infrastructure, such as refinery capacity and pipelines, DOE said.
According to China’s National Development and Reform Commission (NDRC), China uses energy less efficiently than do developed countries.
Energy consumption per $1 million of gross domestic product in China, meanwhile, is about 1,300 tons of coal equivalent, or 2.4 times more than the world average, DOE said, while energy consumption per unit of GDP of eight major Chinese industries is 40% higher on average than the most advanced world level.
“The gap in energy utilization between China and other countries indicates the existence of a huge energy savings potential and a potential reduction in overall energy demand,” DOE said.
And although China’s government has claimed that it aims to quadruple GDP by 2020 while only doubling energy use, DOE said “significant improvements” in energy efficiency must still be made in order for the country to reach the 2020 goal.
NDRC addressed this issue in a January 2005 report, “China Medium- and Long-Term Energy Conservation Plan,” which outlines the country’s plan for meeting its conservation goal while maintaining strong economic growth. Conservation efforts in this plan include coal-fired industrial boiler retrofit projects, installation of combined heat and power cogeneration, development of alternative-fuel vehicles and high efficiency motors, building energy conservation projects, and using energy-efficient lighting.
If all of the projects detailed in this plan are implemented, China could realize a total savings of about 240 tons of coal equivalent in a 5-year period.
Other steps are being taken. In 2003, China’s National People’s Congress (NPC) tightened fuel-efficiency standards, which call for car mileage of as much as 2 mpg more than the average in the US.
An $80 million program was recently launched with the United Nations to promote energy efficiency and reduce energy consumption by nearly 19 million tons of coal equivalent.
Renewables
Renewable energy sources have the potential to make a large contribution to decreasing China’s demand for fossil energy, DOE reported. Renewable sources currently account for only 6% of China’s total energy consumption. In February 2005, however, NPC passed the Renewable Energy Law, which establishes the regulatory framework for renewable energy development, provides economic incentives and financial support for research and development, and promotes construction and utilization of renewable energy facilities.
DOE said the Chinese government also sees renewable energy as “an integral part of its long-term strategy, with the plan to have 10% of energy consumption from renewable sources by 2010, 18% by 2020, 30% by 2030, and 50% by 2100. China has secured financing to meet these goals from the World Bank ($87 million) and the Global Environmental Facility ($40.22 million).
Oil production
China has taken several steps to increase domestic sources of oil, DOE said.
Daqing oil field, which started production in 1967, accounts for about 25% of the country’s total crude oil production. Although it’s the largest oil field in China, Daqing peaked in the 1970s, and its production is declining steadily. After supplying the country with more than 50 million tonnes/year of oil for 27 years, the field failed to meet that level for the first time in 2003.
In order to make up for this decline, CNPC has let contracts to several foreign firms to boost oil recovery and extend the life of the second-largest oil field, Liaohe, in northeastern China.
In April 2004, China announced several new finds in the area of Shengli field in the northeast; oil production is expected to extend there. China also opened up far-western reserves in Xinjiang province. The Tarim basin, Junggar basin, and Turpan-Hami basin combined have 20.9 billion tonnes of oil and 10 tcf of gas reserves, DOE said, adding, “Despite significant efforts to increase domestic production, these new discoveries will not offset declining production.”
China also has been trying to bolster offshore production. About 85% of China’s oil production capacity is onshore, DOE said. Offshore production, however, has been growing at an average of 15.3%/year, reaching 28.4 million tonnes in 2004 and accounting for 16.2% of total domestic supply. “The Chinese government hopes to make offshore production China’s largest source of oil by doubling production to 67 million tonnes by 2010,” DOE said.
Recent offshore oil exploration interest has centered on the Bohai Sea area, east of Tianjin, believed to hold more than 1.5 billion bbl of reserves, and the Pearl River Mouth area.
Coal production
Coal currently accounts for about 65% of China’s total energy consumption and is seen as continuing to dominate the country’s energy markets.
Coal’s share of total energy in China is expected to decrease to 58% by 2025 despite gross volumes projected to rise to 3.242 billion short tons in 2025 from 1.422 billion tons in 2002, DOE said.
“These levels of coal consumption are major environmental and infrastructure concerns for China and the world. The coal sector has shown some signs of trouble over the past few years, specifically in relation to transportation bottlenecks that have prevented the distribution of this abundant resource,” DOE noted, alluding to coal shortages caused in part by insufficient railroad infrastructure.
China also has started to look into the possibility of increasing its use of coal by investing in coal liquefaction technology. China’s central planners have proposals for about $24 billion in large-scale coal liquefaction projects. “Optimistically, if all of the proposed $24 billion in liquefaction projects are realized, this process could replace up to 1 million b/d of oil,” DOE reported.
Natural gas, LNG
Although natural gas has not been a major source of fuel in China, the country has embarked on a major expansion of its gas infrastructure. Most notable of this expansion is construction of the West-East pipeline connecting the Tarim and Ordos basins to the southern coast. China also is considering importing gas by pipeline from Russia and Kazakhstan.
China is building its first LNG receiving terminal near Guangdong. A second terminal is under construction in Fujian province and is to be completed in 2007. Other provinces, including Jiangsu, Zhejiang, Liaoning, Hebei, Shandong, and Shanghai, are also considering LNG receiving terminals, DOE said.
Other fuels
To handle its growing thirst for energy, China also is developing its nuclear power industry. Its total nuclear power generation capacity has increased to 6.6 Gw as of mid-2005 from 2 Gw at the start of 2002. China plans to spend about $50 billion on 30 additional nuclear reactors in the next 15 years, DOE reported.
By 2020, China aims to have a total nuclear capacity of 40 Gw. This large capacity expansion will increase nuclear power’s share of total Chinese energy to 5% from its current 1%.
Hydroelectricity also will increase, but this will be a smaller overall percentage of electricity generation. “China is constructing or planning many new, large-scale hydroelectric projects over the forecast period, including the 18.2-Gw Three Gorges Dam project, which is scheduled to be operational by 2009,” DOE said.
Refining capacity, SPR
China’s major oil companies are increasing refining capacity. China National Offshore Oil Corp. is building a 240,000 b/d refinery in Huizhou, Guangdong province, which is expected to become operational in early 2008. Another project is a $3.5 billion expansion of the Quanzhou refinery in Fujian, which will raise its capacity to 240,000 b/d from 80,000 b/d, DOE said.
Saudi Aramco and Sinopec have agreed to build a refinery in Quanzhou that would process heavy Saudi crude. China National Petroleum Corp. also is planning a major expansion of the Dushanzi refinery in Xinjiang, which will be partially supplied by the new pipeline from Kazakhstan.
“A major issue for the Chinese downstream sector is the lack of adequate refining capacity suitable for heavier Middle Eastern crude oil, which will become a necessity as Chinese import demand rises in the mid-term future,” DOE noted. “With consumption of petroleum products rising so rapidly, interest in the construction of more modern green-field refineries has rekindled.”
In its tenth 5-year plan (2000-05), and after a decade of consideration, China has included plans for the building of a strategic petroleum reserve (SPR).
The SPR will hold state-controlled crude stocks at four sites: Dalian, Huangdao (Qingdao), Zhenhai, and Zhoushan (Ningbo), DOE reported.
“China has expressed the intention to build stockpiles equivalent to 90 days of imports, per the standard followed by members of the International Energy Agency even though China is not a member,” DOE said. “How quickly this goal can be reached, however, is uncertain.”
Economic effects
In the US, and among China’s neighbors, there is growing concern about the economic impact of China’s energy policies, DOE noted. “Attention has tended to focus on investments by Chinese oil companies in energy assets such as oil and gas fields and in foreign companies that own such assets,” DOE said. “The concern is that these actions will ‘remove’ energy resources from the competitive market, which, according to some, has the effect of constricting supply and thereby raising world prices.”
Because China can be expected to consume most of the oil produced from its purchased assets, DOE explained, the effects of the purchases should be economically neutral. “Even if China’s equity oil investments ‘remove’ assets from the global market, in the sense that they are not subsequently available for resale, these actions merely displace what the Chinese would have otherwise bought on the open market,” it said.
China also has sought to develop resources in areas of the world where most private commercial interests are unwilling to invest. “As such investments might otherwise remain outside of the reach of private-sector energy companies, these actions may actually enlarge the total global oil supply,” DOE observed.
It said, however, “These activities nonetheless pose a series of potential problems for the United States. In countries like Uzbekistan, Sudan, and Burma, China has openly supported regimes whose human rights violations, support for terrorism, or proliferation activities have engendered worldwide opposition.”
China’s behavior in this respect, as a long-term trend, “runs counter to key strategic goals of the United States,” DOE said. China’s tolerance for “despotic regimes” might undermine US efforts to spread the ideals of democracy and free trade-a longstanding focus of US foreign policy. “Further,” DOE noted, “if Chinese companies increase their ownership of assets in these countries, this may increase China’s propensity to intervene in order to protect its investments.”✦
