Falling prices may pose new test for China oil policies, speakers say

China, which successfully revised its oil strategy in response to new technologies since 2008, could face fresh tests if prices stay low for a prolonged period, speakers at a Carnegie Endowment for International Peace forum suggested.

China, which successfully revised its oil strategy in response to new technologies since 2008, could face fresh tests if prices stay low for a prolonged period, speakers at a Carnegie Endowment for International Peace forum suggested.

“Beijing’s perception of ways to achieve stability is different now,” observed Mikkal Herberg, research director at the National Bureau of Asian Research. “One question is whether it will start to think of its energy security more as a global stability issue than a simple supply question.”

China’s place as the country with the world’s fastest growing energy demand means its policy steps can have global implications, Herberg said. “Decisions made in Beijing about motorization, vehicles, and oil use have consequences beyond its borders,” he said. “Air pollution is the wild card. There could be a 3-4 million b/d swing in global consumption based on its moves.”

Prolonged low crude prices could be a mixed blessing for China because they might encourage more consumption in the long run, he said.

The government has started to pay more attention to environmental issues because it increasingly recognizes that people won’t tolerate serious pollution, said Xu Qinhua, a professor at Renmin University of China’s School of International Studies.

China’s energy demand growth has slowed down to a single-digit annual percentage, she told attendees at the Dec. 2 event. Natural gas demand growth, meanwhile, was in the double digits during 2013, Xu said. The country now is the world’s largest gas consumer, but gas represents only 5.8% of its total energy mix, she said.

Increasingly essential

Natural gas demand has become an increasingly essential component in Sino-Russian relations, Xu maintained. China financially supported construction of three pipelines from Central Asia and is increasing its LNG import capacity, Xu said. While it also has started to make deals with Russia, she emphasized, “It’s not that China is thirsty for Russian gas, but that Russia increasingly depends on China for a growing market.”

The government has tried to strike a balance between controls and encouraging nonstate operators to stimulate markets, Xu said. “The cost to generate electricity from gas is double the price of coal, but gas can replace coal ultimately,” she said. “China also is trying to keep pace with the US in oil. Our revolution there will be very ambitious, and will last for a long time.”

Herberg said China’s dependence on imported crude is certain to grow. Beijing has used energy diplomacy to help its state-run producers get better foreign contracts, and its influence has become a key factor in major energy producing regions, he said.

“Its noninterventional policy is serious and consistent, but its oil position is biggest in Sudan and South Sudan where it has had to start trying to be a mediator,” Herberg said. “In this respect, China and the US keep bumping into each other in energy producing regions. This raises the question of whether the two countries can find common ground and work together.”

The government’s effort to reduce coal consumption has backfired to a degree because it has led manufacturers to turn to petroleum coke (petcoke), which is 92% carbon with enough sulfur to create sulfur dioxide when it’s burned, according to Wang Tao, a resident energy and climate scholar at the Carnegie-Tsinghua Center for Global Policy.

A troublesome substitute

US refiners exported 7-8 million tons of petcoke to China in 2013, where some of it was used to manufacture steel and aluminum, he said. Some 80% was used to replace coal, however, and while most of the country’s state-owned plants burned it in fluidized bed boilers, smaller independent refineries produced more as a byproduct in the central provinces where serious smog problems have occurred, Wang said.

The problem reflects a broader challenge that China and the US will both have to face, said Deborah Gordon, who directs the Carnegie Endowment’s Energy and Climate Program. “Contrary to expectations, the high price of oil the last 4 years didn’t bring more renewables and alternative to the market,” she said. “It simply brought us more kinds of oil—and all oils aren’t created equal.”

It’s becoming almost as important to choose the right crude as it is to use less of it, she said. In that respect, China’s domestic resource is a problem because it’s a heavy grade with a lot of associated gas which potentially could create flaring problems, Gordon said. “We’re starting to look at where greenhouse gases are hidden in the oil value chain,” she said.

The country also is on pace to become a net petroleum product exporter this year, noted David Livingston, a trade, markets, and risk associate in the Carnegie Endowment’s Energy and Climate Program. “This is largely due to a significant refining capacity buildout, both at larger plants and smaller teapot refineries,” he said. “For the first time, the government is letting these teapots import crude oil which previously went only to larger refineries.”

Gasoline demand has grown as the general economy has motorized, he continued. “There are now about 300 million motorists, with about 100 million added in the last 4 years,” Livingston said.

More net than scalpel

Water also has become an increasingly important consideration in China, said Scott Moore, a research fellow at the Council on Foreign Relations. “China is moving toward a price on carbon in the economy,” he said. “It’s less well known that it’s also moving in this direction with water out of concerns for quality and allocation. I expect litigation to play an increasing role.”

Other policies act more like an encircling net than a scalpel in some cases, Livingston said. Fuel prices, which many expected to be adjusted downward as crude oil prices have dropped the past few weeks, have remained constant. Fuel taxes have climbed in an apparent response to environmental concerns, he said.

China, which expanded its direct energy investments overseas in the early 2000s, has changed its focus from conventional to unconventional oil and gas, said Kong Bo, an assistant professor at the University of Oklahoma’s College of International Studies.

“In most [Organization for Economic Cooperation and Development] countries, officials have generally been relaxed about Chinese national oil companies’ investments because they’ve moved to minority positions,” Kong said. “But they also want to bring technological and managerial know-how back to China from North America.”

It also has changed its financial emphasis to neighboring countries to reduce dependence on Middle East suppliers, Kong said. “It has acted very decisively to take advantage of these cheap oil prices to fill its strategic reserves,” he said. “It has built more pipelines to Myanmar, Central Asia, and Russia, although it also has begun to expose itself to transportation risks where the political situation is unstable.”

Matt Ferchen, a resident scholar specializing in China’s political and economic relations with emerging economies at the Carnegie-Tsinghua Center for Global Policy, observed: “In China, there’s both a vision for reform and a new urgency which has been thrust upon the government to do something about air quality, the environment, and energy security. The feeling is if something isn’t done now, there will be bigger problems later.”

Contact Nick Snow at nicks@pennwell.com.

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