China's Energy Outlook 2004

China's Energy Outlook 2004

Rditedbv The Compiling T^ Institute of Nuclear and New Energ\ Technology, Tsinghua Universitj

Tsinghua University Press

World Scientific

China's Energy Outlook 2004

Edited by The Compiling Team of China's Energy Outlook Institute of Nuclear and New Energy Technology, Tsinghua University

| | p Tsinghua University Press

V(© World Scientific

Published by Tsinghua University Press Xueyan Building, Tsinghua University Beijing 100084, P. R. China World Scientific Publishing Co. Pte. Ltd. 5 Toh Tuck Link, Singapore 596224 USA office: 27 Warren Street, Suite 401-402, Hackensack, NJ 07601 UK office: Shelton Street, Covent Garden, London WC2H 9HE

Library of Chinese Version Cataloguing-in-Publications Data(2005) No. 155291 China's Energy Outlook 2004 ISBN: 7-302-12277-6 I.China... II. Tsinghua... III. Energy-Outlook-China-in English IV. TK01

British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. China's Energy Outlook 2004 Copyright ©2006 by Tsinghua University Press and World Scientific Publishing Co. Pte. Ltd. All rights reserved. This book, or parts thereof, may not be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording or any information storage and retrieval system now known or to be invented, without written permission from the Publisher. For photocopying of material in this volume, please pay a copying fee through the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA. In this case permission to photocopy is not required from the publisher.

ISBN: 981-256-748-8

Printed in China

Foreword

China's energy issue, which has long been closely watched by the government and broad-based people from all walks of life, is now becoming a focal point of international concern. All the authors for this book, with varied experiences and backgrounds in China energy research, have the common desire for raising the public awareness and interest in this increasingly important topic through the release of this publication. This book is the first volume of the "China's Energy Outlook" series, which is expected to be released every two years on a regular basis. China's energy supply and demand, energy rules and laws as well as environmental impacts of energy development over the recent two decades have been largely reviewed, and some insights and analyses have been offered with respect to the slack energy demand at the end of last century and the near-abnormal growing trend over the recent two years. Three topics such as China's power shortage, rural energy and long-term energy development strategy have been particularly discussed, and the prospect of China's energy supply and demand in 2030 has been envisaged. On top of that, China's role in the international energy markets as well as possible interactions between China's domestic and international energy markets has been analyzed. The contents and comments in this book are presented from a non-governmental point of view, with some arguments representing only the authors views. The contributors for this publication are listed below in an alphabetical order: Chen Wenying, Duan Maosheng, Gu Alun, Liu Bin, Lu Chuanyi, Su Mingshan, Tong Qing, Wang Gehua, Wang Yanjia, Wei Zhihong, Wu Zongxin, Zhang Aling, Zhang Xiaohua, Zhang Xiliang, Zhao Xiusheng, Zhao Yong, Zhou Sheng.

Special appreciation is due particularly to Ms. Wang Yanjia who has contributed substantially to the compiling and editing of the whole book, and our great thanks also go to Mr. Antony Peyton who assisted in the English language improvements. The project team of China's Energy Outlook Institute of Nuclear and New Energy Technology, Tsinghua University December, 2004, Beijing

II

Content

Executive Summary

VII

1 Review of Energy Development 1.1 Energy Consumption 1.1.1 Primary Energy Consumption 1.1.2 Final Energy Consumption 1.1.3 Energy Efficiency 1.2 Energy Production 1.2.1 Coal 1.2.2 Oil and Natural Gas 1.2.3 Electric Power 1.2.4 New and Renewable Energy 1.3 Energy Legislation and Power Industry Reform 1.3.1 Energy Law and Regulation Building 1.3.2 Institutional Reform of the Power Industry 1.4 Environmental Effects

1 1 1 5 7 7 8 10 12 13 14 15 21 23

2 Hot Spots 2.1 Power Shortage 2.2 Rural Energy 2.2.1 Status and Characteristics of Rural Energy 2.2.2 Successful Experiences of Rural Energy Development in China

27 27 30 30 33

2.3 3

34

2.2.4

Strategic Reflection on Rural Energy Development

34

Energy Development Strategy

36 45

3.1

Basic Assumptions

46

3.1.1

Definition of Well-off Society

46

3.1.2

Quadrupling

48

3.1.3

Energy Consumption Per Capita

49

3.1.4

Assumptions of Future Social-Economic Development

49

3.3

Final Energy Demand

50

3.2.1

Overview

50

3.2.2

Transport Sector

53

3.2.3

Industrial Sector

55

3.2.4

Residential Sector

57

3.2.5

Commercial Sector

59

Primary Energy Demand

60

Energy Supply Outlook

64

4.1

Coal Supply Outlook

65

4.1.1

Coal Resources

65

4.1.2

Coal Supply

66

Petroleum Supply Outlook

68

4.2.1

Petroleum Resources

68

4.2.2

Petroleum Supply

70

4.2

4.3

IV

Problems that Confront Rural Energy Development

Energy Demand Outlook

3.2

4

2.2.3

Natural Gas Supply Outlook

73

4.3.1

Natural Gas Resources

73

4.3.2

Natural Gas Supply

75

4.4

Electric Power Supply Outlook

78

4.5

Renewable Energy Supply Outlook

82

4.5.1

Cost and Price of the Supply

85

4.5.2

Renewable Energy Supply

87

5 China and the World Energy Markets 5.1 Energy Imports 5.2 Energy Exports 5.3 Impacts on the World Energy Markets 5.3.1 Coal and Coke 5.3.2 Oil References

89 89 93 97 97 98 101

V

Executive Summary

Over the recent years, China's ungrowth growing energy demand rate, along with extensive power shortages and soaring oil imports, has posed such a serious question: Where does China's energy go? China's energy consumption was 1.678 Gtce in 2003 (NBS 2004a), with the oil imports reaching 91.12 Mt, 13.2% and 31.2% (Tian 2004) up respectively from the year earlier. Meanwhile, the growth rate of power generation reached 15.5% (NBS 2004c) and China's top leadership attaches great importance to these two digital growth rates. At the same time, China's energy issue is becoming an extremely "hot" topic, which has aroused worldwide attention and broad concerns: Does the nation secure enough energy to support its fast economic growth in the future? Great energy demand, particularly in the petroleum industry is expected to raise the already volatile oil price at international markets, and large quantity coal consumption would contribute to climate change and global warming. The energy industry in China has experienced significant developments ever since the 1980s, with dramatic changes in the industrial structures, energy regulations and policies as well as environmental protections. At present, China's energy industry ranks the second in the world, supporting the country's rapid economic growth and sustaining the huge demand for 1.3 billion people. Coal dominates energy consumption in China and accounts for around 70% of its total energy consumption over the past two decades; this figure is well above the world average of 26.5%(NBS 2004a, BP 2004). Coal consumption is primarily driven by the energy demand, and is supposed to be an important barometer for China's total energy consumption. However it is not so easy to obtain a complete and accurate dataset to measure the real amount of coal use, the statistics for coal production from small-scale coal-mines still remains to be improved.

The towns and villages owning coal mines have played very important roles in alleviating the energy shortages in the past. However, problems such as low efficient exploitation of resources, frequent work-place safety accidents and serious environmental pollutions, have resulted in huge costs in China. The trend for oil consumption increasing over time and has sped up recently due to the development of the automobile industry and increase in energy consumption for transportation services. Simultaneously, the domestic crude oil production is at a slower rate than that for oil consumption thus causing fast growth in oil imports. China is still at its preliminary stages of natural gas development and this consumption is effected by several factors such as resource development, infrastructure construction and market prices, and although natural gas consumption accounts for less than 3% of the total energy consumption, it contributes a lot to environmental improvement. Primary power mainly comes from the hydroelectric plants, while nuclear power accounts for only a small percentage of power generation. In addition the share of power from wind, solar and other renewable sources is growing but still only at a very small rate. Other than coal, other sorts of primary energy are far lower than the world average and China could not change this situation of coal-dominated dependency by developing any single form of energy source. Although the growth of final energy consumption in transportation is the fastest one among all sectors, the industrial sector is the main consumer. The share of coal decreased from 59% in 1995 to 39% in 2002, while the share of oil and electricity reached 31.1% and 18.2% respectively in 2002 (NBS 1998, NBS 2004b). The environmental pollution caused by energy production and consumption is a great challenge and although the trend of enlarging the areas affected by acid rain has stopped due to many measures adopted, acid rain has become more serious in some regions. Carbon dioxide and exhaust emissions from automobiles have received browd numerous attention and further efforts should be made in the future. China has formed a better legal framework on energy aspects, and the year 2003 was special in terms of the energy-related legal system building. Revising the "Law of Electricity of People's Republic of China" (simply called "Law of Electricity") and drafting a "Law of Renewable Energy of People's Republic of China" will have major repercussions on energy development in the future. The development of energy-intensive sectors is the direct reason for fast growing energy consumption and the recent supply shortage. Governmental decisions in other fields are the indirect reasons in the promotion of energy consumption, VIII

for example, the government confirmed the auto-making industry as a pillar sector and promoted investment in its infrastructure construction to keep the economy on track with its rapid growth. In addition, improper decisions due primarily to inefficient communication and faulty data also account for the emerging energy shortage. The hot issue of energy shortage has sparked a new wave of research activities on energy planning and development strategies, characterized by a strong government role and high-profile participation, as well as higher priority given for the energy conservation, petroleum security and strategic reserves than ever before. Future energy demands will still be driven by the development targets of GDP increasing by four times and building a well off society in all round way. It is estimated that the primary energy consumption will reach 3.3 billion tee and 4 billion tee in 2020 and 2030 respectively, and it should be noted that China is still in the preliminary stage of industrialization and so before 2020 energy consumption will increase slightly faster. It is difficult to support this GDP fourfold increase, just by doubling energy consumption, but after 2020, China will enter a post industrialization phase and energy consumption will slow down to some extent. China possesses a relative abundance of coal reserves, which could meet the fast growing demands on a short term basis, but there is no sufficient capacity to meet these demands from a long term point of view. The limitations from production capacity, transportation infrastructure and environmental quality make it impossible for coal to solve any problems, and it is also possible that China could be a net coal importer in the future. Crude oil production is approaching its ceiling capacity and the main objective, for the oil industry is to stabilize the output and then attempt to slightly increase it. It is estimated that the domestic crude oil output will maintain at the level of 180 million tonnes and meanwhile the demand would reach 680 million tonnes in 2030. In other words, the oil import dependency will be over 70% and that is a serious threat for energy security, thus it is extremely necessary to build oil stockpiles immediately. Natural gas is the best sort of energy to replace coal, especially for final use and power generation. The Chinese government intends to improve environmental quality by promoting utilization of natural gas, and it is predicted that natural gas consumption could reach 380 billion cubic meters in 2030. However domestic resource development is far from achieving this target and the importing of natural gas will meet 50% of total demands by trans-border gas pipelines and IX

liquid natural gas (LNG) receiver terminals. Hydropower development is constrained by the availability of resources, long construction periods and huge investment required. It is expected the hydropowerinstalled capacity will be 270 GW in 2030, which is almost close to the capacity limits. Coal-fired power plants will still dominate electricity generation with a total installed capacity of 700 GW in 2030, while the coal demand for generating electricity will be 1.4 billion tonnes. Gas for power receives backing from the government that will encourage the development of the natural gas industry and provide environmental benefits. It is predicted that the installed generating capacity using gas will be 80 GW and will consume 65 billion cubic meters of gas. China has very high expectations of nuclear power and views it as a unique way to replace coal for power generation on a large scale, to reduce carbon dioxide emissions, and create a secure and available source. China has an ambitious nuclear power development plan, which would see a projection of the installed nuclear power capacity at 40 GW in 2020. However, great challenges loom ahead for the nuclear industry, since the construction of more than ten nuclear power plants is expected to be performed simultaneously over most of the coming decade. The national long and medium term renewable energy development planning promotes using renewable sources by efficient and modern means, therefore great efforts must be made in reaching the target of renewable energy utilization (including renewable sources for power generation) with the aim of 200 million tee in 2020, which will account for 5% of total energy consumption. China is playing a rising but modest role in the world energy market, and as it exports less and imports more coal, the coal price at Asian markets would only rise slightly over a short period, since other coal exporting countries in the Asia Pacific region could replace China in the market by increasing their level of exports. In order to meet the domestic coke demand, China Will import coking coal for coke making, meanwhile, China will export coke to other countries and keep its dominant position in the international coke market over the coming two decades. China is not a key player in the international oil market, since the country mainly suffers from volatile oil prices and so does not actively affect the price. The oil import by China only accounted for 5.6% of the world trade total in 2003 and there is no doubt that the strong trend in oil demands in China would bring a negative and psychological impact on the world oil market, due to the result of high estimations of insecure oil prices.

X

1 Review of Energy Development

Energy is a key factor supporting the economic development and the daily life of everyone. The energy industry in China has developed considerably and had many changes since 1980. This chapter reviews the situations of energy consumption, energy production, energy policies and regulations, and the environmental impacts. Analyses several key issues will also be analyzed.

1.1 1.1.1

Energy Consumption Primary Energy Consumption

The statistical data of commercial primary energy consumption in China is experiencing a transitional period, which is characterized by continuous improvement and an acceptance towards an international statistics system. Non-commercial energy consumption is not adopted in the present statistical system. However, with further development of new and renewable energy, more biomass energy will be used with modern methods instead of the traditional ones. Therefore, the reform of the energy consumption statistics system will be a necessary issue in the future. Figure 1.1 shows the energy consumption data published by the National Bureau of Statistics. The history of commercial primary energy consumption of China can be divided into three phases: Steady growth, continuous negative growth and strong rebound. Phase 1 (1980—1996): At this stage, energy consumption grows in unison with national economic developments, and China's total energy consumption increased from 603 million tee in 1980 to 1.389 billion tee in 1996, with an average annual growth rate of 5%. In this phase, the history of primary energy development in China is mainly an expansion of quantity, but with not much quality

1.1

Energy Consumption 1800r

Coal

Oil

Natural gas

Hydro/nuclear

1 1500 a. 1200

i I

900 h 600

I

300 1

1980

1

1

_l

1

1985

I

i

i

1990 Year

i

i __ i — i — i — i

1995

I

i_ _ ]

1

2000

Figure 1.1 Tolal primary energy consumption in 1980-2003. Source: National Bureau of Statistics. China Energy Statistics (1997-1999), China Energy Statistics (2000-2002). Note: Hydropower is converted into coal equivalent using the average annual coal intensity of coal-fired power plants. Nuclear power is converted at the efficiency of 30%. improvement. The reform of the energy industry is lagging relatively behind other industries, which resulted in an energy shortage in a long period, and the government used many kinds of measures, which were mainly administrative acts, to promote energy conservation and energy efficiency improvement, all in an effort to mitigate this energy shortage. Also in this period, the average energy consumption elasticity coefficient was below 0.53, and a relatively low energy consumption growth was achieved in supporting a relatively fast economic development. Phase 2 (1997-2000): During this time a steady negative growth of energy consumption occurred in China, and it should be noted that energy consumption in 2000 was about the same as 1999. Meanwhile, the growth rate of economic development was kept at about 8% '. Many disputes over energy statistics data in this period were raised, and based on their own judgments, several research institutes publicized their own amendments to China's energy consumption data, which is listed in Table 1.1. Though their estimations are not identical, their values are all higher than the official Chinese statistics.

® Based on China statistical yearbook, the annual GDP growth rates from 1997 to 2000 are 8.8%, 7.8%, 7.7% and 8%, respectively.

1 Table 1.1

Review of Energy Development

China energy consumption in 1997-2000.

(Mtce)

Data publishing institutions Year

National Bureau of Statistics

1997

1320

1998

1263

1999 2000

IEA

IAEA

IEEJ

LBL

1383

1300

1384

1593

1324

1290

1326

1248

1598

1397

1293

1306

1246

1633

1404

1326

1302

Source: National Bureau of Statistics : China Energy Slalislics (1997—1999), China Energy Statistics (2000-2002); International Energy Agency (IEA): www.iea.org; International Atomic Energy Agency (IAEA): www-pub.iaea.org; Institute of Energy Economy Japan (IEEJ): Energy Economy Slalislics Summary 2004 (Japanese version); Lawrence Berkely Laboratory (LBL): Comments on Recent Energy Statistics from China, Oct.2003, LBNL-53856. Note: The primary electricity is calculated as electricity-thermal equivalent; IEA data is total primary energy supply (TPES), and data published by the other institutions are total primary energy consumption. This situation is caused by many factors. One factor is the constraint raised by economic reform and adjustment in energy consumption growth, and also, the inaccuracy of statistical data cannot be ignored. In Fig. 1.1, the value of oil, natural gas and hydropower (nuclear power generation is included here) grew steadily, and coal consumption dominated the total quantity of total energy consumption, but compared with other primary energy types, statistical errors of coal consumption took place more easily. In this period, a diversification in businesses' possessions and market-based sales of the coal industry contributed a bigger challenge to coal consumption statistics. This challenge is mainly enlarged by the fast expansion of small mines controlled by village-and-town owners and private owners, who can compete with the state-owned large mines due to a relatively low price in the market. Phase 3 (2001 to present): In the background of steady economic growth, energy consumption growth rebounded strongly, and tensions between energy supply and demand reappeared. This happened especially in 2002 and 2003, where China's total energy consumption reached 1.482 and 1.678 billion tee respectively, and the

3

1.1

Energy Consumption

annual growth rate broke all historical records when it reached 9.9% and 13.2% respectively. At this time energy consumption elasticity exceeded 1 and the fast growth of this phase is mainly credited to the strong demand for coal and oil. The unconventional growth of energy consumption is mainly caused by four factors: (1) Completeness and accuracy in the coal consumption statistics is one reason for fast growth of coal consumption. (2) The government confirmed its plan to build the automobile industry to promote China's advancing economy, and the rapid development of this industry and fast growth rate of automobile possession rate drove oil demands higher year by year. (3) Developments in highways, real estate and the automobile industry caused the swift expansion of energy intensive industries, such as iron and steel, cement, aluminum material, etc. Direct and indirect coal consumption, which is derived from their electricity consumption, is the main reason for the fast growth of coal consumption. (4) Improper judgment for short term energy surplus and/or local energy surplus, such as the concern of electricity sales by new hydropower plants, the exaggeration of low thermal power plant operation hours, and policy measures to encourage electricity usage raised by power sectors, had all conveyed a misleading signal to the public, which accelerated the expansion of energy intensive industry. The primary energy consumption mix from 1980 to 2003 can be divided into two phases. The first phase — before 1990, showed that the component of coal in primary energy increased yearly, while the share of other high quality energies decreased. The main reason is being that the energy shortage solution is primarily based on coal supply increase. In the second phase — after 1990, energy mix optimization began to emerge and though coal remained dominant, the share of oil, gas and primary electricity (hydropower) began to increase. However, comparing this data with the international average level, China's energy mix needs greater improvement toward being cleaner and more efficient. In Table 1.2, China's primary energy mix in 1980, 1990, 2000 and 2003 are compared with the world energy mix of 2003. In regard to the issue of energy mix optimization and reduction of the components of coal, this problem cannot be solved with an advancement of any single type of clean energy, and a balanced development plan utilizing many types should be conducted.

4

1 Table 1.2

Review of Energy Development

Comparison of primary energy consumption mix. China

(%) World

Year

1980

1990

2000

2003

2003

Coal

72.2

76.2

66.1

67.1

26.5

Oil

20.7

16.6

24.6

22.7

37.3

NG

3.1

2.1

2.5

2.8

23.9

Primary electricity

4.0

5.1

6.8

7.4

12.3

Source: National Bureau of Statistics. China Statistics Summary 2004, BP Statistical Review of World Energy (June 2004). Note: The primary electricity includes hydropower and nuclear power. The statistics for hydropower use are power generation coal intensity (China), and electricity-thermal equivalent (world). The statistics for nuclear power are converted at the efficiency of 30%.

1.1.2

Final Energy Consumption

Final energy consumption in China increased from 982 million tee in 1995 up to 1.025 billion tee in 2002, and the energy mix, either by sector or by fuel, changed greatly. The most prominent change is the share of transportation energy consumption increasing from 5.3% in 1995 to 9.7% in 2002, while the share of industry energy consumption decreased from 72% to 67.7%, residential usage decreased from 13.2% to 11.7%, commercial usage increased from 5.4% to 6.5%, and the share of agriculture energy consumption remained unchanged at approximately 4% (refer to Fig. 1.2). Final energy consumption mix by fuel was gradually optimized and the proportion of coal decreased from 59% in 1995 to 39% in 2002, the proportion of oil and electricity increased to 31.1% and 18.2% respectively, and the proportion of gas and heat increased from 5.5% and 3.7% to 6.2% and 5.4% respectively. In Fig. 1.3, the energy consumption mix of each sector by fuel in 1995 and 2002 are compared. It could be seen that the fuel structure of each sector, especially residential, industrial, and service sectors, had changed considerably. The proportion of coal in these three sectors (residential, industrial and service) decreased from 75%, 62% and 40% in 1995 to 42%, 46% and 16% in 2002 respectively. While the proportion of electricity increased from 9.6%, 12.3%, and 10% up to 20.6%, 19.1% and 23.2% respectively.

5

1.1

Energy Consumption 100 r

Household Commerce

80

Transportation Industry

60 -

Agriculture •10

20 -

1995

2002

Year Figure 1.2 Final energy consumption by sector in 1995 and 2002. Source: Calculated based on China Energy Statistics Yearbook 1996, and 2000-2002. 100 r

Heat Electricity Natural aas

ff

Js

rtation I

Coal

5 c_

c

m i

u

•o

o S O

X

2002

Figure 1.3 Final energy consumption by fuel of each sector 1995 and 2002. Source: Same as Figure 1.2. In 2002, total electricity consumption in China reached 1654 TW« h, with an 11.7% increase higher than 2 0 0 1 . Seen from the electricity consumption data of 2002, south central, east China and north China are the major electricity consumption areas, and the total electricity consumption of these three areas accounted for 7 3 % of total consumption. Provinces with more than 100 TW« h electricity consumptions include Guangdong, Jiangsu, Shandong and Zhejiang; and these 6

1 Review of Energy Development four provinces all belong to east China and the south-central area. In 2002, in 13 provinces/municipalities, the electricity consumption growth rate exceeded 11.7%, which is the national average level. Among these 13 provinces/cities, nine of them are located in the south-central region, east China and north China. The average electricity consumption per capita in 2002 exceeded 1000 kW-h for the first time, but there is still a great gap between China and the world average level, which is 2433 kW- h/capita. In 2002, electricity consumption of all sectors was allocated as follows: Industry 71.1%, agriculture 5.1%, transportation 2.2%, service 8.3% and residential only 13.2%. In comparison, in most developed countries, the proportion of residential electricity consumption is higher than 20%, and per capita electricity consumption for living in China is merely 156 kW*h/year, which is still at a low level (CEDRC 2003). The end-use natural gas consumption in 2002 was 28 billion m3, with a 15% increase more than in 2000. The main natural gas consumption markets are located in the southwest (which contains the largest market), north, northwest, northeast and the areas surrounding oil fields. Due to transportation limitations, the usage of natural gas is restricted to exploitation areas and their surroundings, but with the successful implementation of the west-east natural gas pipeline project, more and more natural gas could be used in central and eastern areas for production and people's daily life. For the natural gas consumption structure in 2002, 36% was used for chemical feedstock, 30% was used for industrial fuel, 14% for power generation and 20% for city gas (CEDRC 2003).

1.1.3

Energy Efficiency

China's energy consumption per 10,000 Yuan (RMB) GDP decreased from 13.48 tee in 1980 to 1.45 tee (using the constant price in 2000) (NBS 2003). Through the advancement of technology and due to the implementation of energy conservation retrofits, the energy intensity of many key energy intensive products noticeably decreased, which lead to large and direct energy saving benefits. However, there is still a large gap between China and the international advanced energy efficiency level (refer to Table 1.3). This gap will be further reduced by the utilization of largescale equipment; the usage of advanced production processes to replace outdated ones, and the introduction of modern enterprise management methods.

1.2

Energy Production

China has a gigantic energy industry with the largest coal production, second 7

1.2

Energy Production

Table 1.3 Change of energy intensity of some types of energy intensive products in China and comparison with the international advanced level. Energy intensity products Power supply coal intensity (gee/ kW-h) Comparable energy intensity per tonne of steel production (large and medium enterprises) (kgce/t) Integrated energy intensity of cement production (large and medium enterprises) (kgce/t) Synthetic ammonia (large enterprise using NG as feedstock) (kgce/t)

1990

H

2000

2002

HH BB

997

766

201.1

193.8

715

International advanced level 316 646

127.7 (estimation)

1343

1273

1215

970

Source: Energy Policy Study, 2002, 1:81; China Energy Study 2002, p. 91.

largest electricity output and fifth largest oil production (2002) in the world (BP 2004). However, the per-capita energy production capability is far lower than the world average due to China's huge population, and for a long period China's energy consumption depended on its domestic production. Energy supply was mainly based on its abundant coal resources, and the energy industry gave priority to coal production and coal-fired power generation. Although the oil and natural gas industry has made great progress once oil became a main export product to acquire foreign exchange, they still only account for one-fifth of primary energy production. In recent years, China's energy supply has been more closely linked to the world economy with oil import dependence increasing steadily and the natural gas import infrastructure already commenced construction.

1.2.1

Coal

Common complaints about coal include its inconvenient use, low efficiency and high pollution, however, coal is still dominant in China's energy scheme and the coal share in the primary energy production constantly stays as high as 70%-75%. It decreased fractionally during 1999-2001, but recovered to 74% in 2003 with a production figure of 1.667 billion tonnes or 1.2 billion tee (NBS 2004c). Compared with other energy industries, the coal industry was the earliest one to carry out system reform and ownership diversification. The development 8

1 Review of Energy Development of villages-and-towns coal mines as well as private coal mines contributed to the to solving of the problem of energy shortages, but at the same time it had significant repercussions on the development of state-owned coal mines and the domestic coal market. Due to limited funds and technological conditions, villages-andtowns coal mines as well as private coal mines are normally small in size with low mechanization, low resource utilization rate and hidden safety problems. Therefore, the fate of these mines changes with the energy supply and demand situation and with the government's policy. 700

• Villages-and-towns . • State-owned 600

.1 500 E

Figure 1.4 Production amounts and shares of the villages-and-towns coal mines in China's total. Source: Energy Policy Study, 2003,6. Note: Private coal mines are included in villages-and-towns coal mines, state-owned coal mines consist of key and local state-owned coal mines. Figure 1.4 displays the production of villages-and-towns coal mines (including private ones) during 1980-2003 and its share in the total production for some key years. Villages-and-towns coal mines developed quickly before 1995, their production increased from 113.6 Mt in 1980 to 665 Mt in 1995 with an annual growth rate of over 12%, which is close to the state-owned coal mines' market share. Following this, the government strengthened its ability to supervise and manage coal enterprises and ordered the closure of many small illegal coal mines as the shortage released. Villages-and-towns coal mines' production dropped to less than 270 Mt and along with energy demand's driving an increase in these two

1.2 Energy Production years, they continued to develop and their production increased by 154.5 Mt in 2002, exceeding the total increase amount of key and local state-owned coal mines (CERS 2003). A serious question arises as whether to solve the energy supply strain by depending on the villages-and-towns coal mines. If the answer is positive, then it is an absolute necessity to improve the production conditions for them since their accident death rate is far higher than the key state-owned coal mines, and the latter is already much higher than those in the US and Russia. See Table 1.4 for the comparisons of the coal mines' accident death rate. Table 1.4 Coal mines' accident death rate. Year Average

China Local Key state-owned s t a t e . o w n e d c o a l coal mine

I«

mine

1980

8.17

1995

4.86

1.43

9-06

2000

5.80

0.466

2001

5.13

1.880

2002

5.07

10.50

Villages-and-towns

(person/Mt)

US

Russia

coal mine

mm • 1HI HI 9.03

12.07

-

3.458

10.990

0.039

4.231

15.438

0.041

0.490

0.027

0.335

-

Source: Energy Policy Study, 2003,6: 36,39-40.

1.2.2

Oil and Natural Gas

China National Petroleum Corporation (CNPC), China Petroleum and Chemical Corporation (Sinopec) and China National Offshore Oil Corporation(CNOOC) are the three main oil and natural gas production companies, with the first one dominating production. See Table 1.5 for a display of relevant data. The major challenge facing China's oil production is the slow increase in production while the actual demand calls for a faster growth (Fig. 1.5) and in turn the high dependence on imports will make oil security an increasingly serious concern. Although southwest China has a rather long natural gas production history, the natural gas production in China as a whole is still in the initial development stage with its share in the primary energy production of only 2.99% in 2003 (NBS 2004a). The development of China's natural gas industry faces challenges from exploitation, infrastructure construction, to up-, middle-and down-stream market developments.

10

1 Table 1.5

Review of Energy Development

Oil and natural gas production in 1998 and 2003. 2003

1998 Crude oil

Production (104 tonnes)

Percentage (%)

Production

Percentage

(104 tonnes)

300

I 25° §• 200 3

I >50 o

I '00 1 50 1 0 2000

2005

2010

Figure 3.16

2015 Year

2020

2025

2030

Natural gas demand (by sector)

The primary electricity supply will reach 1.11 trillion kW- h in 2020 and 1.7 trillion kW-h in 2030, meeting 20.5% and 28.3% of the total electricity demand respectively. Hydropower and nuclear power are major sources of primary electricity, while only a small part comes from new and renewable energy.

63

4 Energy Supply Outlook

It's a great challenge to meet the end-use energy demand of 4 Gtce in 2030. Although alternative energy supply schemes result in the difference in the primary energy demand, the amount of 4 Gtce in the primary supply is believed to be essential to China's future socio-economic developments. This chapter will start with an investigation in the current status of coal, oil, natural gas and hydropower resources; discuss the outlook of the energy supply and the development of electricity production; and finally the developments of several resources that are all confronted with the same tendencies and key issues. 1. Energy supply globalization Since the shortage of energy resources in China, especially high quality energy, such as oil and natural gas, it is difficult to satisfy the rapidly growing domestic demand. The gap between energy production and demand is mostly made up by the use of energy imports, and an appropriate of the global energy development trend should be made to establish a sound and suitable assessment strategy for China's utilization of foreign energy resources. 2. The Energy supply market The market mechanism of the main energy resources has not been fully brought into play because of the current social economic structure. More competitive market for the energy supply, utilizing the highest quality energy (domestic and international) at the most reasonable price, is expected to ensure social and economic development. The relative advantage of coal prices compared with oil and natural gas is disappearing with the cost increase in the energy supply. Therefore, progress should be made in implementing full levels of competition, breaking monopolizations in an effort to improve the production and management levels of the energy industry and also maintaining the prices of the energy supply within a reasonable range. 3. Energy supply diversification Diversification of the energy supply is necessary for China, and energy supply is

4 Energy Supply Outlook guaranteed only on the condition that full utilization is made of all available resources, for it is restricted by the environment issues including unavoidable water pollution, worsening conditions in excavations, and emissions of greenhouse gases and sulphur dioxide due to the heavy dependence on coal resources. The government has of course expressed its intention to make great efforts in developing high quality resources such as oil and natural gas, as well as hydropower, nuclear, wind power and other renewables. 4. Energy supply security Nowadays, with the emerging shortage of electric power and coal supplies, coupled with the increased dependency on imports of oil, a greater dependence on importing natural gas, as well as the possibility of importing coal as supplements has occurred. This situation has confronted China with serious issues to establish an integrated security system of energy supply, which needs to be adapted to its national conditions and ultimately the development of the whole world. 5. Energy supply technology process Innovation in science and technology has considerably improving the energy structure and the energy supply. The developments in nuclear technology, as well as research and development in renewable energy technology and facilities, all ensure the process of diversifying the energy supply structure. Furthermore, clean coal technologies and pollutant controlling technologies prove efficient in solving environmental problems caused by coal combustion. Therefore, promoting the strategy of "technology spurs energy" to its maximum will play an active and accelerating role in the process of creating an abundant, clean, economical energy supply structure in China.

4.1 4.1.1

Coal Supply Outlook Coal Resources

Compared to other fossil fuels, coal resources in China are abundant although coal resource per capita is still lower than the world average. China has long used its own standard to measure the coal reserves coal resources, referring to the sum of proven reserve and forecasted reserve, which stands at 5,499,700 Mt according to (Mao 1999), and this accounts for about 6.5% of total world coal resources according to UNDP estimation (CERS 2003). Recently, China expert reaccounted 65

4.1 Coal Supply Outlook coal resource using the world coal resource assessment approach, and according to the result, China's coal reserve in 2003 was 204Gt (Yu 2004) which was higher than the 114Gt estimated by the BP World Energy Statistics (BP 2004). Within China, coal resources lie mainly in the north and northwest, while energy and electric power consumption is centered in the east and south (as in Fig. 4.1), this distribution causes energy delivery problems to guarantee an energy supply. Shipping coal directly by transport or indirectly by power grids should be an important issue.

Figure 4.1 Regional distribution of coal resources, power consumption and total energy consumption. Source: Mao Jiehua, Xu Huilong (1999). Forecast and Assessment for China's Coal Resources. Beijing: Science Press, 1999, p. 240 (in Chinese); China Energy Statistical Yearbook 2003.

4.1.2

Coal Supply

China coal supply growth will be driven by coal demand. People tend to believe that coal supply will increase rapidly as a result of strong growth of coal demand. In fact, coal supply has been driven by an increasing demand in the past three years. For example, coal output amounted to 1667 Mt in 2003, which is 15% 66

4 Energy Supply Outlook higher than that in 2002 (NBS 2004c). Could the coal industry keep up a steady increase? Could the coal industry be a sustainable industry for China's increasing energy demand? These are questions for consideration for the coal supply is subject to many factors. (1) Coal production capacity is limited by proven reserve and sustainable investment for the industry. (2) Concentration of coal mining industry was very low. Coal output from the top ten coal companies amounted to 252.94 Mt, which was just 25% of the total coal output in 2001 (CERS 2003). Spare capacity of large coal enterprises has been rapidly diminishing since 1993. Margin coal demand will have to be supplied by coal produced by small and middle size coal mines, which will cause production safety issue, if there is no incremental production installation in large coal enterprise. (3) Some of China's existing coal mining capacity was not equipped with required safety installation, especially for small and middle size coal mines. Capacities in small and middle size coal mines are limited by production safety regulation. According to statistics of the State Administration of Work Safety, 99.1% of the total 1596 death in coal production in 2002 occurred in small and middle size coal mines (Su 2004). The main features of China coal safety issue are that (a) high level of total casualties; (b) high level of serious accidents; (c) big economic loss from accidents; (d) make a very bad impression to society. (4) Coal supply will be hindered by environmental capacity. Large and nonmoderate consumption of coal will be limited by environmental quality requirement. Although clean coal technologies provided options to reduce sulphur dioxide from coal consumption there are many barriers to the adoption of these technologies, such as high investment requirements and the matter of costeffectiveness. If China plans to rely on its domestic coal resources to meet the increasing demand in coal, then investment in coal mine capacity expansion and coal transportation capacity expansion needs to be undertaken. On the other hand, if the country relies on imported coal for coastal regions to supplement the coal shortage of its domestic supply, if the price is relevant, China could become a net coal import country in the future. China coal industry acted on its own accord Investment from the central government in the coal industry was reduced as China restructured its coal industry institution, and the figures show that the proportion of coal industry investment in total energy investment was reduced 67

4.2 Petroleum Supply Outlook from 13.2% in the period of 1991-1995 (eighth five-year-plan period) to 7.2% in the period of 1996-2000 (nineth five-year-plan period), and finally to 3.5% in 2001. To raise money some coal enterprises with good management and higher performances have been trying to be listed in the stock market to raise funds. Yankuang Group is the forerunner in this attempt and was listed in 1988 in overseas stock market. Up to April 2004. 13 coal enterprises were listed in the Shanghai Stock Exchange and Shenzhen Stock Exchange, while two enterprises were listed in the Hong Kong Stock Exchange or overseas stock exchanges.

4.2 4.2.1

Petroleum Supply Outlook Petroleum Resources

The estimation of China's petroleum reserves is a rather complex subject in relation to the technological development for oil exploration, and varies somewhat according to different research institutions or international and domestic organizations at different socio-economic development stages. In the first assessment of China's energy resources undertaken in 1987, the petroleum reserve estimates published by the Oil Exploration & Development Research Institute under the former Ministry of Petroleum Industry were projected to be up to 78.7 billion tonnes, while the total amount given by the Geologic Research Institute under the original Ministry of Geological and Mineral Resources was 61.47 billion tonnes. The quantity of petroleum resources within China's continent and continental shelf was updated in "Strategic Analysis on Mineral Resources—Petroleum and Natural Gas" published by this institute in 1992 to reach 81.47 billion tonnes, including the South China Sea. In the second assessment of China's natural resources, the China National Petroleum Corporation (CNPC) and China National Offshore Oil Corporation (CNOOC) projected the oil and gas resources to be 94 billion tonnes, based on field surveys and prospecting of the 150 basins across the country in July 1994. According to the assessment outcomes of China's petroleum and gas reserves at the end of 2000, the total quantity of the petroleum resources within China's continent and continental shelf is generally estimated to range between 102 and 104.1 billion tonnes, with the recoverable amount varying from 11.41 to 16 billion tonnes (CEDRC 2003, Zhou 2002). 68

4 Energy Supply Outlook But in fact, only the remaining recoverable reserves can be viewed as an gallge to indicate how many resources still left for use by China, in consistence with the international conventions for indicating the commercial availability of petroleum or gas resources. By the end of 2002, China's remaining recoverable reserves of petroleum was estimated to be approximately 2.5 billion tonnes. Considering the possible technological progress in oil exploration and extraction, it could be projected to increase by 2.4—3.3 billion tonnes (Zhou 2002). The estimates of China's oil and gas reserves vary to some extent from different sources and at different stages of techno-economic development and they can be summarized into a general Table as shown in Table 4.1. Table 4.1 China's petroleum resource outlines (Gt). Total petroleum resources 102.1-104.1

Recoverable reserves 14-16

Cumulative proven reserves 6.4 (40%-46%)*

Remaining recoverable reserves 2.5

*Pcrcentage of identified reserves.

At present about 1/3 of the central and western part of the country remains to be further explored for oil and gas reserves, and in fact the petroleum reserves that have been explored and identified only account for less than 15% of total potential resources. Even in the eastern old oil-producing areas, huge potential resources still need to be further tapped. It is estimated that only 40% of the potential reserves in the Daqing Oil Field have been identified, and the identified percentage for the Bohai Bay Basin is merely 45%. So the possibility of discovering additional recoverable oil reserves still exists. With growing pressures on China's oil and gas supply, a new round of nationwide assessment of the petroleum and natural gas resources has been launched to re-evaluate and re-estimate the country's resource potentials, and project the future productions for meeting the increasing oil and gas demand. This is supposed to be the first-ever assessment exercise organized by the central authorities since the founding of the P. R. China. However, in the 1980s, the first oil and gas assessment & evaluations were carried out within the petroleum industry, while the second such assessment & evaluation in the 1990s was conducted onshore and offshore in a separate fashion under the circumstances of institutional changes. These two past assessments focused primarily on the aggregate amounts including historical cumulative outputs, remaining proven reserves and undiscovered potential reserves, but fell short of computing recoverable reserves, leaving it 69

4.2 Petroleum Supply Outlook difficult or impossible to make international comparisons or reflect the true potential of China's petroleum and natural gas. This new initiative, jointly sponsored by the Ministry of Land and Resources and the National Development and Reform Commission, is aimed at re-establishing a national assessment system for oil and gas, so as to evaluate the country's petroleum resources, obtain all the energy-related data, project the future trend of oil and gas development and set up a national resource management database and evaluation system, and ultimately offer scientific advice for formulating important strategies and economic development plans, and also guide the exploration and production of oil and gas.

4.2.2

Petroleum Supply

I

.It 1949

• 1966

• * .

Partial oil export

Since the founding of the People's Republic of China, the petroleum supply has gone through the stages with the increase of petroleum production and cousumption introduced in Fig. 4.2.

1973

iifr 1991

•

a~

-.

ills Sil

1993

1996

Now

Figure 4.2 China's petroleum supply course. At the early stage of the founding of the P. R. China, the petroleum demand for socio-economic development was relatively limited and dependent primarily on few imports. Since the discovery of the Daqing Oil Field and its subsequent full-scale production, the oil demand had become fully satisfied with China's own domestic supplies by 1966. Additionally, with the exploration and production of some large oil fields like Liaohe and Shengli. the country's oil was partially exported in 1973 in return for badly needed foreign exchange. After 1991, particularly since the switch-over from the centrally planned economy to the socialist market-driven one. the rapid economic growth kept oil demand rising to the point that the annual imports outstripped the annual export, and China eventually became a net importer of petroleum products in 1993 and crude oil in 1996. Over the last decade. China's net import of oil has increased seven times. 70

4

Energy Supply Outlook

and the dependence on foreign sources is well over 30%. According to the research and projections conducted by the international and domestic institutions. China's energy demands and imports will grow considerably by 2010 and 2020. Though the outcomes projected by different sources vary to some degree, the general trend and extent of significant increase are widely recognized. It is important to keep oil production from decreasing or to maintain a flat or even moderately growing level of 180 Mt, while the domestic demand increase could be met by increasing the oil imports, which is expected to account for 73% in 2030. The apparent high dependence on foreign sources has raised both international and domestic concerns over the petroleum security, which could be summarized into the following three points: (1) It remains a question as to whether China's substantial and steady oil imports could "pour oil on fire" for the already soaring world oil prices, and might create some influence on the world economy as a result. (2) The national foreign exchanges would be heavily burdened with the rising imports and escalating oil prices, with the consequences of driving up the domestic production costs and dampening the competitive edges of Chinese exports. (3) The transportation of imported oils is now over-dependent on the sole sea route through the Straits of Malacca, leaving the long-haul safety at risk. The Chinese government has taken a series of response measures to anticipate the challenges ahead: (1) To spread the risk and reduce the uncertainty by diversifying the sources for petroleum imports. Two crude oil importing structures have been compared between 1998 and 2003 as indicated in Fig. 4.3, and the sources have become more diverse over time.

Middle east Africa Asia/pacific Europe

1998

2003

Figure 4.3 Importing sources for crude oil between 1998 and 2003. Source: Tian Chunrong. Analysis of China's Oil Import and Export in 2003. International Oil Economy, 2004, 12 (3): 9-15 (in Chinese). 71

4.2

Petroleum Supply Outlook

(2) To reduce the petroleum dependence by developing alternative products, for example, development of coal-based liquid fuels and application of ethanoladded vehicle fuels. (3) To improve energy efficiency, China's first standard for vehicle fuel consumption is to be released soon. (4) To step up the exploration and production of offshore oil fields, with top priority given to both on-shore and offshore resources, and to complement the offshore deficiencies by increasing the on-shore outputs. (5) To promote the development of oil exploration and prospective technologies as well as new extracting processes, so as to increase the domestic crude oil output and identify more economically recoverable reserves. (6) To debate over the resumption of petroleum futures trading, with the aim to optimize the allocation of scarce resources in the marketplace. (7) To seek more petroleum resources overseas by encouraging the domestic petrochemical corporations to "go global", through the international programs in oil exploration and production, or holding the stocks offered by the international counterparts. (8) To speed up the construction of the domestic strategic petroleum reserve (SPR) facilities. All these measures are considered necessary, but seem slower in progress than the pace of petroleum demand. For instance, in the late 1990s, the former State Development and Planning Commission (SDPC) was once contemplating the establishment of a strategic petroleum reserve system, however, the slack demand and lower international oil prices at that time gave an impression of an optimistic energy supply. Therefore China's national strategic petroleum reserve plan was created with an investment of over 100 billion Yuan and a target period of 15 years, but no real or substantial progress was made until 2002 when the energy was in short supply and the dependence on oil imports was climbing to 30%. But if the international oil price continues to stay higher, even though the construction of those four major petroleum stockpiling bases has been completed, it wouldn't be possible to put the SPR oil into operation because of the extremely high cost, and in the event of a supply shortage or interruption at this time, the country would suffer a lot with the petroleum delivery at high risk. Furthermore, incentives to encourage the domestic oil companies to explore the overseas petroleum markets have long been regarded as essential to national petroleum strategies. A precondition for this purpose is that the exploration and production of domestic resources should be deferred and protected for strategic 72

4

Energy Supply Outlook

reserves, however it seems hardly possible in China under the current supply and demand circumstances. Additionally the output from those overseas oil fields would be traded in the international oil market at the international oil price, and even if the overseas output from China's own oil companies are assumed to fully supply the domestic markets, this may only meet one of the three requirements by the Chinese government for establishing more economic, secure and reliable petroleum supply sources. It is also inappropriate for the government to require the business-savvy oil companies to sell their oil products into the domestic markets at the price below the international level, particularly when the domestic oil prices have been well integrated into the international markets. So it's fair to say that it is an oil company that makes its own "go global" strategy. To sum up, the domestic crude oil outputs could be kept at the level of 180 Mt over the coming two decades, and the oil imports and the percentage of dependence on foreign sources are quite contingent on the domestic petroleum demand. So it is hardly possible to secure China's petroleum supply and minimize any impact of price spikes or international oil market fluctuations, unless a more complete strategic reserve system has been well established.

4.3

Natural Gas Supply Outlook

4.3.1 Natural Gas Resources According to the results of the Second National Assessment of Petroleum and Natural Gas Resources completed in 1994, China possesses 38 trillion cubic meters of conventional natural gas resources, and the average projected recoverable reserve amounts to 9 trillion cubic meters. Based on the recalculation of the major basins in 2000, the original gas in the Chinese continental shelf, excluding Taiwan and the middle and southern part of the South China Sea, is 47.23 trillion cubic meters, among which 9.3 trillion cubic meters is an economical recoverable reserve. China is the sixth largest country in terms of having a recoverable natural gas reserve®, however, at present it has quite a low exploration rate, only 6.6% in resources and about 17% to 18% in recoverable reserve, indicating great potential for future identification. According to the projection from the national Ninth Five-

® Based on the data published at 14th World Oil Conference by CD. Masters (1994). 73

4.3 Natural Gas Supply Outlook

year Plan tasks, China's proven gas reserve will increase by an annual average of 240 billion cubic meters in the next 20 years, additional proven reserve will total 1.07 trillion cubic meters from 2001 to 2005, 1.28 trillion cubic meters from 2006 to 2010, and 1.35 trillion cubic meters from 2011 to 2015, reaching a peak in the period 2011 to 2015. The quantity of recoverable reserve is predicted to be 3 to 4 times as much as the present amount. In the recent past, natural gas has brought in a new phase of reserve discoveries and rapid production increments, and this phase is still ongoing. It should be noted that the level of natural gas resources per capita and reserve abundance per country area is notably low compared with the world average, taking up only 13.2% and 45% of the world average respectively, and includes a relatively high proportion of low-permeability resources. China's proven natural gas resources, present in the form of associated gas in gas fields and oil fields, coal seam gas and natural gas hydrate buried in the blue water or the frozen earth, are mainly concentrated in the middle, western and offshore areas, taking up 3 1 % , 28% and 2 1 % of the national total amount respectively. From the perspective of basins distribution, such natural gas resources are mainly concentrated in seven basins: Sichuan, Tarim, Qinghai, East China Sea, Yingge Sea, Ordos and East of Hainan Province. The newly discovered Sulige giant gas field in the Ordos Basin, with 500 billion cubic meters in reserve, is the first world-class gas field discovered in China that makes the total reserve in the Ordos Basin reached 760 billion cubic meters. In the Tarim Basin, 12 large gas fields were discovered, with a prediction that proven gas reserve will amount to 1 trillion cubic meters in five years. The giant Trias Ertan gas field was discovered in the northeast area of the Sichuan Basin, with a combined capacity of 2.74 trillion cubic meters. Thus, the four onshore large gas fields consist of the Tarim Basin, the Chaidam Basin, the Ordos Basin and the Sichuan Basin. Up to the end of 2001, China possessed 3002.388 billion cubic meters of proven geological natural gas reserves with recoverable reserves of 2 trillion cubic meters. The cumulative production amounts to 313.636 billion cubic meters while the remaining production amounts to 1.7 trillion cubic meters. The statistical data at the end of 2002, showing the proven geological natural gas reserves in the four major gas fields can be in Table 4.2.

74

4 Table 4.2

Energy Supply Outlook

Natural gas reserves in the four gas fields at the end of 2002. The total proven reserves of original natural gas

The total proven recoverable reserves of natural gas

Tarim Basin

650.9

456.4

Ordos Basin

867.9

571.8

Sichuan Basin

758.9

502.7

Chaidam Basin

237.4

128.2

2515.1

1659.1

Total

Source: Zhai Guangming. China Oil ami Gas Technology Development

4.3.2

(billion in')

Strategy, 2003, p. 11.

Natural Gas Supply

Future natural gas supply will mainly have three available methods (Fig. 4.4): The first is transporting onshore and offshore natural gas through gas pipelines to the markets, with a predicted production amount of 150 to 160 billion cubic meters in 2030. The second is importing natural gas from neighboring countries through gas pipelines, examples include the China-Russia gas pipeline and the gas pipeline from Middle Asia to Xinjiang Province, the former of which is in the planning stage, but not yet under construction. The third is importing LNG from other countries through LNG receiving facilities, including natural gas from China's high seas gas fields. To date, only the first method has been completed in China, methods the other two methods are scheduled to materialize in at least 3 to 5 years. The natural gas supply, in spite of the construction of LNG receiving facilities and importing pipelines, is ultimately dependent on regional monopolization and the failure to form a competitive market; therefore, the demand for natural gas depends to a great extent on its price. As an important resource, natural gas is continually and directly priced by the central government NDRC (National Development and Reform Commission) has responsibility for the wellhead price, disposal price and pipeline transmission fee, while the local governments are accountable for local gas prices. Nowadays, two parallel pricing regimes are in place, aimed at projects finished before and after 1995. The NDRC is actively designing a new price setting system, including setting different prices according to uses of big or small sizes, gradually canceling the price difference within and exceeding planning quotas, and also giving a large 75

4.3 Natural Gas Supply Outlook amount of leeway in the gate station gas price setting activities. Some of these measures could solve the problems of the active system to some extent; however, the market-oriented and reasonable pricing mechanism for natural gas has yet to arrive in China.

Figure 4.4 Long-term plan for China's natural gas infrastructure. Source: http://www.chinapipelines.com.

Prices of natural gas and the development of natural gas markets will supplement each other, and these prices should encourage simultaneous consumption and production, and guarantee the commercial feasibility in every sector of the natural gas industry chain. The scale and state of a country's natural gas industry are largely dependent on the prices of natural gas, and the Chinese government is trying to find innovative ways to gradually transform the natural gas system into a market system, with itself acting as a market supervisor and offering encouraging measures to the development of this industry through revenue. While rapid expansion has been occurring in China's natural gas industry, a great deal of money should be invested especially in its infrastructure construction. The important natural gas projects between 2000 and 2005 are mostly including: Development of the East China Sea gas fields, construction of LNG receiving facilities in Guangdong Province, construction of the West-To-East Natural Gas Pipeline and the feasibility study project of the gas pipeline from Russia to 76

4 Energy Supply Outlook Northeast China. It is estimated that the total investments in the projects mentioned above will amount to 2 0 - 4 0 billion US dollars, but based on the prediction from the NDRC, investments in the natural gas projects will amount to 3 0 - 6 0 billion US dollars from 2006 to 2010, above US$80 billion from 2011 to 2020, and about US$100 billion from 2020 to 2030 (IEA 2003b). Table 4.3 Investment forecast for China's natural gas market development. Year

2001-2005

2006-2010

2011-2020

2021-2030

Incremental natural gas demand (billion m'/year)

20-40

30-60

80-100

>100

Investment required (USS billion)

20-40

30-60

80-100

>100

Source: IEA. Developing China's Natural Gas Market. Beijing: Geological Press, 2003, 6 (in Chinese).

The main sources for the vast amounts of money to develop Chinese natural gas markets are derived from loan financing and stock financing at home and abroad. Expansion of the country's natural gas market development is currently underway, and policies of economical and energy development from the central government fully ensure its brisk development, which clearly indicates that suitable financing for natural gas projects is available. Present security concerns about the natural gas supply have not been addressed because of the great growth potential of domestic resources, and because supply exceeds demand, due to the foreign LNG production capacity. In addition, the use of long-term contracts and fixed prices in LNG trade has aided this lack of concern. However, there have been some changes in the last two years, including the rapid rise in natural gas prices in North America, the increase of short-term supply contracts in LNG trade, the development of GTL technology (Gas to Liquid) and competition between countries switching to natural gas resources from oil resources. All these events indicate that an early preparation for the existing supply security problems must be made. One of the bright spots among the Chinese economy is the natural gas industry, and accelerating the development of this industry, adjusting the energy structure and encouraging the usage of natural gas, cannot only relieve the pressure of national security concerns from the overly-fast increase of oil demand, but also that from environmental problem concerns. The positive situation of a rapid increase in natural gas reserves over the next decades, poses both problems and 77

4.4 Electric Power Supply Outlook opportunities for China. For example the challenge to develop the natural gas industry on a relatively large scale in a short space of time will undoubtedly be a major one. West-to-East Natural Gas Pipeline The West-to-East Natural Gas Pipeline project, officially announced in March 2000 and approved by the State Council in February 2002. is one of several major infrastructure projects under the "go west" policy. The project, after the signature of the framework agreement by PetroChina and its partners in July 2002. has been under full-scale construction from that time. The cross-country pipeline, with a combined length of 3900 km, passes through eight provinces—Xinjiang. Gansu. Ningxia. Shaanxi. Shanxi. Henan, Anhui and Jiangsu before reaching Zhejiang Province and Shanghai. The pipeline is planned to deliver natural gas from the Tarim Basin in Xinjiang and the Ordos Basin to East China, the largest targeted market for 30 years, with 12 billion cubic meters annually. To expand the natural gas market. 23 distribution branches, with a total length of 2000 km. are also designed in Henan, Anhui. Jiangsu and Zhejiang Province. The West-to-East Pipeline, with a pipe diameter of 1016 mm. a thickness of 14.6-26.2 mm and 10 MPa pressure, is a gas transmission pipeline with a large diameter, high pressure and long-distance: along with 137 line truncation valves. 35 pump stations and 2 underground gas storages. PetroChina. the initiator and sponsor of the project, completed the construction of the eastern section in early 2004. with the western section planned to be finished in 2005. Aggregate investment in the whole project totals 146.3 billion yuan RMB.

4.4

Electric Power Supply Outlook

What kind of generating installation structure can be used to meet the electric power demand of more than 5000 TW-h in 2030? This is a question that China has to face and make a decision on, but due to the restrictions in many aspects, such as resources, environmental capacity, etc., there aren't too many choices available. Without doubt, the generating installation structure will proceed towards a high efficient and clean development in the future, but it is very difficult to alter the dominant position of coal-fired power plants.

78

4 Energy Supply Outlook

1. Hydropower In spite of its abundant water recourses, China's developing rate of hydropower volume is only 12.6% at present, which is lower than the world average level. Furthermore, the establishment of power stations will bring some ecological disruption to the reservoir surroundings and river basins. Considering the comprehensive benefits contributed by the water conservancy projects and the possibility that the negative effect on the ecosystem can be reduced to the lowest by taking some technological measures, the actual major viewpoint is to fully utilize the waterpower recourses and develop the hydropower on the premise of not causing calamitous influence on the ecological environment. It is estimated that by 2030 the installed capacity of the hydropower plants will be up to the developing limit level of 270 GW, and the annual generation will run over 1000 TW*h based on the annual running hours of 3800. 2. Coal-Fired Power Coal-fired electricity generation will be the main option for power generation, but the development of coal-fired power plants must be in relation to the restrictions of environmental capacity and coal resources. At present China has already mastered the manufacture of large-scale steam turbine with capacity of more than 30 MW and the construction and operation of large-scale coal-fired power plants. The average installation cost in large-scale coal-fired power stations (including de-SOx facilities) has dropped to about 4500 yuan (RMB)/kW (before the shortage of power), which ultimately keeps an equal pace with the installation cost of the gas-fired power stations. Moreover, the cheaper price of coal and short construction cycle also make the competitiveness of coal-fired electricity generation stronger than other power generating forms. So the coal-fired electricity generation must be first-selection if only the economic factor is considered, and it is exactly the reason why the thermal power plants are "in full flourish" at present. Considering the environmental capacity, especially the greenhouse effects brought by carbon dioxide emissions, China should try its best to reduce and control the proportion of coal-fired power under the limit value of 60% by 2030. The new generating units should be mainly ultra-critical ones with efficiencies of 43% - 4 5 % , or super ultra-critical ones with efficiencies of 47%-50%, or the integrated gasification for combined cycle(IGCC) units with efficiencies of 47%-50%. But considering the shortage of water resources in northern China, the new power plants should give priority to the air-cooling generating units, which will reduce the generating efficiency to some extent. It is expected that the average generating efficiency will be up to 40% by 2030, namely 307 gce/kW'h. If the installed 79

4.4 Electric Power Supply Outlook capacity of coal-fired power plants reaches 700 GW by 2030, namely the volume of 3200 TW • h, the coal demand for electricity generation will be up to nearly 1.4 billion tonnes. 3. Oil-Fired Power Due to the high oil price, the development of oil-fired power plants is not encouraged in China, so it does not have a bright future, and its installed capacity will be kept at 15 GW. But attention must be given to the small-scale diesel generating units, which could be suddenly increased in case of an electricity supply shortage, and bring a surge in diesel consumption. This is an emergency measure for electricity users to prevent the electricity supply breaking and when the supply takes a more favorable turn, the operation of the small-scale diesel generating units will be stopped. 4. Gas-Fired Power The gas turbine electricity generation is the cleanest form in thermal power. In the past 20 years, it has achieved the fastest development in the world. China has not caught up with this trend because it was restricted by its resource supply and infrastructure construction, and while the aforementioned conditions were improved, the natural gas was still in an inferior position due to having to compete with the coal-fired electricity while encumbered by the burden of a high price. In 2002, there were only 166 gas turbine units of above 6000 kW in China with a capacity of 6.491 GW (CERS 2003). So encouraging the use of gas-fired electricity generation is an important action undertaken by the government to foster the consuming market of natural gas, which not only can support the development of the natural gas industry, but also can bring considerable environmental benefits. The present electricity shortage and the increase in coal prices have brought an opportunity to the gas-fired power plants. It is estimated that by 2030 the total installed capacity of gas-fired power plants can reach 80 GW, accounting for 6%—7% of the total installed capacity. Finally, the annual generation is over 300 TW* h, which means 72 billion cubic meters of natural gas will be consumed every year. 5. Nuclear Power Contrary to the world's anti-nuclear trend, most areas of China regard nuclear power as a clean and safe energy resource, and have a desire for the establishment of nuclear power stations. The government also chooses nuclear power as the only measure to replace coal-fired power on a large scale and reduce C0 2 emission at present and at a specified future time. On the other hand, nuclear power is 80

4 Energy Supply Outlook regarded as one of the important measures of ensuring national energy security when the government adjusted the energy policy in 2003. The outstanding change was to turn the developing policy of nuclear power from "appropriate development" into "developing with higher speed", and thus a series of changes occurred. Firstly, the establishment of nuclear power was listed in the five-year-plan of the power industry and the long-term planning for the first time. Secondly, this change greatly improved the expectancy for nuclear power. The installed capacity of nuclear power will be up to 40 GW by 2020, which will bring an enormous challenge for the nuclear power plants. If each nuclear power unit is calculated to 1 GW, the construction period of six years, China needs to set up 32 nuclear power stations (units) to achieve this goal from 2004 to 2014, therefore it means that three nuclear power stations should go into construction on average every year, and meanwhile not less than 18 nuclear power stations should be under construction simultaneously during half the time of that period. Consequently, China must begin to immediately develop excellent builders for nuclear power stations so as to offer support for meeting its planned objectives. If the nation can attain the goal of an installed capacity of 40 GW in 2020, and maintain this steady growth, it is estimated that by 2030 the installed capacity of nuclear power plants will reach 55 GW, and then annual generation of nuclear power will be over 380 TW»h, accounting for more than 7% of the total electricity generation. 6. Electricity from Renewables Combined with the worldwide technological development and the actual utilization situation, the wind power generation and waste incinerating power generation are more accomplished and widely used technologies. Now the utilization of renewable energy has started to transfer from the initial demonstration phase to the scaled Utilization phase in China and by 2030 the total installed capacity of renewable energy electricity generation will be up to 70 GW with a total volume of 165TW-h. 7. Power Mix Figure 4.5 and Table 4.4 respectively show a possibility of the mix of installed capacity and power output in the future. A conclusion can be made based on them that the proportion of coal-fired power is dropping year-by-year despite of its leading position in electricity generation, and China's electricity generation is proceeding towards diversification development.

81

4.5

Renewable Energy Supply Outlook 1500

Coal Gas Oil Hydro Nuclear New energy

O

1000

500

Figure 4.5

China's future mix of power capacity.

Table 4.4 2000

Year Total (TW-h)

1380.1

Power output mix. 2010 2641.0

2020 4303.7

2030 5164.7

Coal (%)

79.42

70.89

68.82

62.06

Hydro (%)

16.30

18.60

19.60

20.64

Natural gas (%)

1.00

3.73

5.56

6.11

Nuclear (%)

1.22

5.08

6.01

7.57

Oil (%)

2.00

0.80

0.50

0.41

Rcnewables (%)

0.00

0.90

1.11

3.21

4.5

Renewable Energy Supply Outlook

The full utilization of renewable energy can increase China's energy supply, alleviate the pressures on energy security, mitigate environmental deterioration and improve the environment, and it also provides a lot of employment opportunity. In China, the renewable energy resources are distributed extensively, and are too abundant to exhaust and with the improvement in technology development, these available renewable resources will be more and more plentiful in the future. 1. Solar The energy radiated from the sun is nearly 170 billion tee per year, and there are two third territories in China where the solar density exceeds 0.6 MJ/m2. The average sunshine period is above 2000 hours annually in the Northwest and Qinghai-Tibet

82

4 Energy Supply Outlook Plateau, which contain the largest solar energy density (Fig. 4.6).

Figure 4.6 Distribution of solar energy resources. Source: http: www.China-energy.com. 2. Wind The available wind energy resource is about 253 GW in terrestrial areas (according to the data of wind-force from 10 meters height above ground) and 750 GW in offshore areas, and 1000 GW totally. The areas with abundant resources are mainly distributed in the southeast coast and nearby islands. Inner Mongolia, Xinjiang, the Hexi Corridor of Gansu Province, and some areas of the Northeast, the Northwest and North China, and also the Qinghai-Tibet Plateau (Fig. 4.7). 3. Biomass Biomass energy resources in China are composed of agricultural waste, forest and its products' remainders, municipal waste, etc. Among them, there are 310 Mtce from the agricultural waste, such as straw, etc., 130 Mtce from firewood. Including the municipal waste, the total amount can be up to 650 Mtce every year. 4. Small hydro The available resources of small hydro in China is 125 GW (capacity is below 25 MW), which is distributed extensively over more than 1600 counties (cities) of 31 provinces in China, and 65 percent of the small hydro resources are located in the western regions, and more than 50 percent of them are in the southwest regions. 83

4.5

Renewable Energy Supply Outlook

Figure 4.7 Distribution of wind energy resources. Source: http: www.China-energy.com.

5. Geothermal In China, the verified geothermal resources reservation is 3160 Mtce, and two of four global geothermal zones stretch across Chinese territory. The geothermal resources are mainly medium and low temperature and distributed in Songliao basin, North China basin, Jianghan basin, Weihe basin, Taiyuan basin, Linfen basin, Yuncheng basin and the southeast coast. More than 2500 natural geothermal springs have been discovered which are below the 100-centigrade scale and the high-temperature geothermal resources are mainly distributed in Yunnan, Tibet, west of Sichuan and Taiwan. At present, the utilization scale is about 4 Mtce, which is less than one percent of the total exploitable geothermal resources, which is to say, the reservation status is kept quite well. It should be noted that the geothermal development in Tibet. The Yangbajing geothermal power station is the largest one in China with total capacity of 25 MW, annual generation 97 GW-h that accounted for 50% of the power of Lhasa city grid. 6. Ocean energy resources Ocean energy resources are about 460 GW and among them, exploitable tide energy is about 100 GW. the wave and ocean current energy about 100 GW. Until now. the total installed capacity of tide power plants is 5930 kW and the annual generation is 10,210 MW-h. The developing areas are mainly focused in the Zhejiang Province and Fujian Province. The future plans entail the expected construction of 300 MW power plants up to 2010, and the supply scale will be at the annual 310,000 tec. 84

4

4.5.1

Energy Supply Outlook

Cost and Price of the Supply

The main constraint factors of renewable energy are the un-commercialized technology and high cost. The renewable energy technologies are in different stages in China, which are shown in Table 4.5. Table 4.5 Technology phase review of renewable energies in China. Technology phase Technology type

R&D Demo Commercializing Commercialized

Small hydro plant

•

Solar water-heater

•

Passive solar building

• •

Solar cooker

•

Solar desiccator Solar photovoltaic

•

Large-scale, grid-connected wind power unit

•

Small- and micro-scale, grid-connected

•

wind power unit

• • • •

Geothermal power generation Geothermal heating Traditional biomass energy Small-scale biogas digester

•

Large- and- middle-scale biogas digester

•

Generation from municipal organic waste Biomass gasified technology

•

Other biomass technology

•

Wave generation

•

•

Tide generation Generation from ocean temperature difference

•

Source: Zhang Zhcngmin, Wang Qingyi, Zhuang Xing (2002). Renewable development in China: potential and challenge, www.efchina.org (in Chinese). 85

4.5

Renewable Energy Supply Outlook

The general obstacles during the renewable energy commercializing process are the relatively narrow and small market, the small-scale production and the high initial investment, which result in the high cost of per unit energy output. The current tariff in China is 0.309 yuan (RMB)/kW* h and the retail price is 0.43 yuan(RMB)/kW« h on average. According to the classification of generator types, the highest tariff is nuclear power and the lowest one is hydropower. The tariff for nuclear power is 0.40 yuan(RMB)/kW« h, fossil fuel 0.30 yuan(RMB)/ k W - h , and hydro 0.25 y u a n ( R M B ) / k W - h (Zhang 2002). The specific tariff for coal-fired plants in different regions is shown in Table 4.6. Table 4.6

Average tariff for coal-fired power plants in China.

Area Guangdong

( yuan (RMB)/kW • h)

Zhejiang

Fujian

Hainan'"

Shandong

Jiangsu

JingJinTang(2'

0.34

0.34

0.33

0.31 Xinjiang

Tariff

0.51

0.42

0.41

Area

Liaoning

Jilin

Henan"'

Qinghai

Sichuan

Inner Mongol

Tariff

0.30

0.30

0.29

0.26

0.22

0.20

0.18

Source: (1) http://www.hq.xinhuanet.com/news/2004-02/12/content_1612243.htm (2) http://gov.finance.sina.com.cn/zsy772004-04-19/26.html (3) http://202.102.247.129/news/xwzx/jjhn/btlb/200406/17/324202.html Others: Zhengmin Zhang. Study on China 's Wind Power Incentive Policy. China Environmental Science Press, 2002. C o m p a r e d with coal-fired p o w e r generation, the generating cost from renewables is higher (as shown in Table 4.7), and assuming the cost of coal-fired power generation as one unit (0.23 yuan(RMB)/kW«h), then the cost of generation from biogas or biomass is at the ratio of 1.3-3.2 unit, the cost of wind power is 2.4 - 2.8 unit, the cost of small hydro is 1.3-1.9 unit and the cost of the PV system is 8.7-13.0 unit. Renewable power generation cannot compete over the conventional power plants in terms of the initial investment and the cost of generation, but it has prominent advantages in the external environmental benefit and social-economic impact. For example, one-square-meter of domestic made solar water-heater saves 1 0 0 - 1 5 0 kgee, one-square-meter of passive solar building saves 2 0 - 4 0 kgee, and a solar cooker saves 5 0 0 - 700 kg of firewood annually. All of these figures show the o b v i o u s energy savings and social-economic benefits. Besides the energy output by using biogas digester, the fertilizer benefit and the ecological bene-fit should also be taken into account. Today, the GHG impact is receiving increased attention around the world, and there is also a huge potential from using renewable energy in alleviating the issues of global climate change. 86

4 Energy Supply Outlook Table 4.7

The power generation cost of renewable energy technologies in China. Per invest-

Generation

The cost ratio

ment (yuan

cost (yuan

of renewable

(RMB)/kW)

(RMBVkW-h)

and coal-fired

Livestock farms biogas

11.000

0.43-0.73

1.9-3.2

Industry organic waste

7000-10.000

0.30-0.53

1.3-2.3

Landfill gas

7000-10.000

0.30-0.44

1.3-1.9

Biomass gasification

7500

0.34-0.47

1.5-2.0

Municipal waste incinerating

11,700

0.55

2.4

Including tax

Wind farm

>8000

0.55-0.64

2.4-2.8

100 MW

Small hydro

7500-10.000

0.31-0.33

1.3-1.4

Micro hydro

10.000-14.000

0.44

1.9

Small PV/wind hybrid system

8000-10.000

2.01

8.7

2.980

13.0

Technology type

PV system

125,000

Note

300W/100PV

Source: Study on the strategic policy of new energy and renewable energy development, MOST, June 2002; Tsinghua-Toyota CDM Project Report, 2004.

4.5.2

Renewable Energy Supply

In order to facilitate the renewable energy development, a series of incentive polices were issued and "China Medium and Long term Renewable Energy Development Plan" was also enacted. The development targets are shown in Table 4.8. According to the plan, the scale of the end use energy products from renewables, such as electricity, hot water, and city gas, (except for the traditional biomass), etc., reached a total of 47 Mtce in 2002. 107 Mtce is expected in 2010, with an average annual increase rate of 10.8 percent. Until 2020, the scale will reach 200 million tee and the average increase rate will be 6.5 percent annually. Achieving these targets is limited by the resistance of market force delivered from high supply cost and the difficulty of financing caused by investment huge amount in total but relevant small amount for each project. The failure of achieving wind power development target of the ninth-five year plan indicated that the plan only demonstrates the expectation of will, while the hard efforts will be made during the implementation process.

87

4.5

Renewable Energy Supply Outlook Table 4.8

Renewable energy development targets.

Type

2002

2010

Small hydro ( G W O T - h )

28.5/95

50/165

75/247.5

Wind power (GW/TW-h)

0.5/0.9

4.0/9.2

20.0/46.0

PV generation (MW/TW-h)

20/0.04

450/0.81

1000/1.8

1.88/4.59

5.50/21.2

20.00/83.5

Biomass generation (GW/TW»h) Geothermal generation (MW/TW-h)

30/0.12

50/0.25

2020

100/0.5

Biogas (billion m3)

4.2

Automobile-used alcohol (Mt)

0.80

5.00

10.00

-

0.50

1.00

Bio-fuel (Mt)

15.9

26.5

Geothermal utilization (PJ)

38

76

Solar water-heater (million m*)

40

140

270

Solar cooker (million set)

0.4

4

5

Hot water supply (million household)

0.3

0.6

1.1

107

200

Source: Energy Bureau of NDRC (2003). China Medium and Long Term Renewable Energy Development Plan, July 2003.

88

5 China and the World Energy Markets

China is now playing an increasingly important role in the world energy market, and the connections between its energy production and consumption, and the world market are all strengthening gradually. This has already been reflected in the following aspects: Firstly, China's rapid economic growth has resulted in the increase of energy demands, some of which is met by imported energy sources, especially crude oil and oil products; at the same time, China is also exporting energy to the world markets. Secondly, China has gradually become a major oil import country, and the volatile oil prices in the international markets is affecting China's economy to a greater degree. The issue of energy security, especially oil security has also become a major concern for China. Thirdly, the changes in China's coal and coke export policy as well as the change of the country from a coal exporter to a coal importer will in turn alter the demand and supply situation of the international coal market. Fourthly, with economic globalization, additional foreign energy companies and investment have entered the Chinese energy market and vice versa. Fifthly, although China is less closely linked to the international market regarding natural gas and electricity, the ties will be gradually strengthened with the establishment of further LNG receiving terminals, pipelines for natural gas import and regional electric network. Sixthly, the increase of China's energy consumption and import has already become an international focus and although China's crude oil import only accounted for 5.6% of the whole world's crude oil trade in 2003, the concerns of other major oil import countries are very serious.

5.1

Energy Imports

China's energy imports have covered all major energy types except natural gas, but the import of coke was very limited and has even stopped since 1998 (Table 5.1). It can be seen that from 1991 to 2002, the import of coal, crude oil, kerosene, fuel oil, LPG and other oil products increased steadily.

5.1 Energy Imports Table 5.1 Year Coal (kt)

1991

1995

1998

1999

2000

2001

1368.0

1635.1

1586.2

1672.8

2120.0

2490.0 10,810.0

Coke (t) Crude oil (kt) Gasoline (kt) Diesel oil (kt) Kerosene (kt) Fuel oil (kt) LPG (kt) Other oil products (kt) Electricity (GW-h)

China 's energy import by type.

1200

-

5973.0 34,006.2 27,320.0 112.0

158.8

-

-

36,613.7 70,270.0 60.260.0 69,410.0

14.9

0.4

0.3

n • «Han>" 26.0

1264.0

761.3

1290.8

6591.4 16,271.6

2002

2111.9

2554.7

0.2 274.7

477.2

2018.9

2145.3

17.569.9 14.800.0 18.236.0 16.596.6

-

2325.5

4765.9

3223.1

4817.4

4888.6

6261.6

115.0

956.8

1905.8

2081.2

1614.6

2013.1

3843.2

17

366

1546

1798

2300

3110

639

Source: China Energy Statistical Yearbook 2000-2002 China Energy Statistical Yearbook 1997-1999 China's energy imports are mainly oil and oil products, especially crude oil, and in 2002, crude oil import was 69.41 Mt, an increase of 15% compared with 2001. China became the second largest oil consuming country in 2003, accounting for 7.6% of the world's total consumption (BP 2004), import of crude oil increased to 91,126,300 t, an increase of 31.3% compared with the previous year and accounting for 5.6% of the whole world's total crude oil trade (Tian 2004). Such an increase was achieved under the difficult conditions of the outbreak of SARS in China that year and the continuous increase of the oil price in the international market. Compared with 2002, the globe trading volume of crude oil and oil products increased by 107.9 Mt, of which 27.78 Mt, about 26%, were used to meet the increased import of China (BP 2004). In 2004, China's economy was increasing rapidly and the increasing rate of the first half-year was as high as 9.7% (NBS 2004d). At the same stage, the domestic production of oil did not increase greatly, so the oil import naturally increased. In the first half of 2004, China's crude oil import increased to 49.76 Mt and oil products to 16.04 Mt, accounting for 54.6% and 56.8% in 2003 respectively (CGA 2004). Accordingly, the oil import in 2004 will exceed 150 Mt. Since 1993, when China became a net oil importer, its oil import has been increasing at continuously. In 1993, China's crude oil import was 15.67 Mt, and 90

5

China and the World Energy Markets

the total and net import of petroleum was 33.75 and 9.69 Mt respectively. In contrast, its crude oil import as well as total and net petroleum import increased to 91.13, 129.63 and 106.06 Mt in 2003 respectively, an increase of 4.8, 2.8 and 9.9 times (NBS 1998, NBS 2004b). According to the IEA, by 2010 and 2020, China's net oil import will increase to 4.2 and 9.8 million barrels per day respectively (IEA 2002). In recent years, China's dependence on imported oil has been increasing gradually. In 1990, imported oil accounted for 7.6% of China's total oil consumption, and in 2000 and 2003, this ratio increased to 33.8% and about 39% respectively (BP 2004, NBS 2003). According to the IEA, by 2010 and 2020, the shares of imports in China's total oil demand will reach 61% and 77% respectively, and by 2030, this ratio will be as high as 82%, more than 8% of world oil demand (IEA 2002). The number of civil and other motor vehicles in China in 2002 reached 82.27 million, an increase of 42.4% compared to 2000 (NBS 2003). In the same year, China's total passenger traffic by highways and civil aviation was 907.45 billion passenger-kilometers, an increase of 19% compared to 2000. The transport sector consumes about 40% of China's total oil demand (Schneider 2004), and most of the increased oil import is used to meet the demand of this rapidly developing sector. Table 5.2 illustrates the main sources of China's crude oil import from 1997 to 2003. It can be seen that the Middle East has been the main source of China's crude oil import, accounting for more than 50% of the total import. Saudi Arabia and Iran are the major providers of China's crude oil import from the Middle East, supplying about 60% of China's import from the area. Africa is the second largest supplier of China's crude oil import, while major oil suppliers in Asia are Vietnam and Indonesia, and with the development of a bilateral relationship, Russia is now playing a more important role in meeting China's demand for crude oil import. China's imported oil is mainly from several countries, and ten countries listed in Table 5.2 supplied 83% of the total crude oil import in 2003, while most of these countries are located in the Middle East and Africa with unsteady political situations. Furthermore, China's main channel for oil import is ocean shipping, starts most of which needs to pass the Straits of Malacca, and this will threaten the stable, reliable and safe oil import for China as it is the only route, and it is vulnerable to closure or other dangers. There is also a setback in cooperation with Russia on the issues of extended laying of oil pipelines from Russia to Daqing. 91

5.1 Energy Imports Therefore in considering the future of China's oil import, one important task is to diversify the sources and channels to reduce any risks. Table 5.2 Year

1997

Iran

China's crude oil import and main sources 1998

1999

2000

2756.7

3620.0

3949.3

7000.5

Saudi Arabia

499.9

1807.6

2497.0

5730.2

Oman

9033.0

5793.4

5020.8

15.660.8

8140.4

8045.9

9277.4

Yemen

4055.0

4043.2

4132.2

3612.4

2286.9

2261.7

6996.8

16.781.7

16.668.3

16.903.9

Angora

3836.6

1105.0

2876.0

8636.6

3798.9

5705.1

10,101.5

Sudan

0.0

-

266.1

3313.6

4973.4

6425.6

6258.4

Congo

980.0

382.4

384.7

1454.4

641.6

1047.3

3389.3

Sum of Africa

5906.8

2190.9

7248.7

16.948.6

Vietnam

1499.1

865.9

1511.9

3158.5

3362.4

3542.8

3505.9

Indonesia

6587.1

3417.1

3952.9

4641.1

2645.1

3237.5

3333.7

Sum of Asia-Pacific

9413.7

5468.1

6831.7

10.613.1

8682.6 11,850.1

13.853.5

Russia

475.3

144.6

572.3

1476.7

1766.0

3029.6

5254.8

Sum of Europe and the Western Hemisphere

3369.4

2995.3

5629.4

5053.6

4167.5

7368.7

8725.7

Sum of the Middle Easl

2001

(kt) 2002

2003

10.847.0 10.630.0 12,388.9 8778.4 11,390.4

15,176.2

37.649.9 33.859.9 34.392.2 46,365.1

13.545.4 15.796.7 22.182.0

Source: Tian Chunrong, Analysis of China's oil import and export in 2002. International Oil Economy, 2003,3: 24-30; Tian Chunrong, Analysis of China's oil import and export in 2003. International Oil Economy, 2004,3: 9-15 (in Chinese). China is the world's largest coal producer, while at the same time it is importing coal from the international market. Its coal import increased very slowly during the past decade, from 1.369 Mt in 1991 to 2.49 in 2000; in 2002, it increased suddenly to 10.81 Mt, 4.3 times of that in 2001; while in 2003 it was 10.76 Mt, about the same in the previous year (Pan 2004). It is expected that coal import in 2004 will decrease, mainly because of the great increase in the coal price in the international market and the change of China's policy to limit coal export.

92

5 China and the World Energy Markets The main reason for the sudden increase in China's coal imports in 2002 was that the domestic demand for coal increased greatly by 8.25% compared with the previous year, reaching 1.366 billion tonnes (NBS 2004b). Such an increase is the result of many factors: Improvement in the domestic economic situation, significant increase of coal-fired power generation, great production increase of energyintensive products such as iron and steel, fall in the increasing rate of oil import, the control of small coal mines by the government and the low coal price in the international market. Recently, steam coal has dominated China's coal import and the main importing areas are the coastal regions. Besides coal prices in the international market, the shortage of transporting capacity has contributed to the increase of coal import. The main suppliers for China's coal import are Australia, Vietnam, South Africa and Russia. Imported electricity accounts for only 0.1% of the total demand and has no significant influence on the whole country's supply or demand.

5.2 Energy Exports China exports all main energy products except natural gas and there are differences among the various products in terms of quantities of exporting, ways of trading, purposes of exporting and the time frame (see Table 5.3). Coal (excluding coke) is the largest among exporting energy products and China exported 83.84 Mt of hard coal in 2002, which accounted for 15% of 550 Mt worldwide trade (Maiello 2002) and 6% of 1.38 billion tonnes domestic output (NBS 2004b). China exported about 75 Mt of coal in 2003 (CEIN 2004), 10% less than the year before and it was expected that coal export would decrease in 2004. Since 1998, the coal price at the Asian market has gone two ups and downs as shown in Fig. 5.1. The coal price decreases continuously to below US$26 per tonne in September 1998 from US$34 per tonne in the beginning of 1998. After then, the coal price stayed at the level of below US$30 per tonne. The price started to climb from mid-2000, reached nearly US$40 per tonne in the middle of 2001, and entered another slump. At present, the price is in the stage of growth and the price reached US$45.77 per tonne in October 2003 and it is a new high in the recent 10 years.

93

5.2

Energy Export Table 5.3

Year

1991

Coal (kt)

Expor of main energy product. 1998

1995

1999

2000

2001

2002

20,001.0 28.617.0 32.297.1 37,438.6 55,050.0 90,120.0 83,840.0

Coke (kt)

1083.0

8861.2

11,464.0

9974.2 15,200.0 13,850.0

22,598.0

18,227.0

15.600.0

7167.3

10.310.0

7550.0

7660.0

Gasoline (kt)

2502.0

1855.3

1819.6

4138.3

4551.8

5724.6

6120.0

Diesel(ki)

1210.0

1306.3

984.8

604.7

554.8

256.2

1240.0

Kerosene (kt)

321.0

374.4

916.4

1249.7

1988.8

1822.2

1700.0

Fuel Oil (kt)

695.0

277.9

574.8

254.6

333.7

440.9

640.0

11.0

70.8

502.3

75.0

16.0

20.9

56.0

1488.0

1310.5

2025.4

2209.8

2804.8

3254.8

2460.0

6025

7174

9146

9878

Crude Oil (kt)

LPG (kt)

13,570.0

Other petroleum products (kt) Electricity (GW-h)

260

10.192

9700

Source: China Energy Statistical Yearbook (2000-2002). p. 10; China Energy Statistical Yearbook (1997-1999). p.10 When the coal price rose between 1998 and 2001, coal export presented the same trend from 32.3 Mt in 1998 to 90.12 Mt in 2001. Since the middle of 2001, the coal price has decreased by one third within one and a half years, and in addition the coal export has taken a downturn. Although the coal price rose again in the last two years, coal export did not present the trend of corresponding increase, but a decrease, and this fact promoted the coal price rising gradually. 50 45 40

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Figure 5.1 Coal price in the Asian market (Jan. 1998 to Oct. 2003). CIF, 6000 kcal/t, CIF in Japan since Dec. 2002. Source: Plaits ICR Coal Statistics Monthly 94

5 China and the World Energy Markets Because of the brisk development in town-and-village ownership enterprise in the coal industry, there was a coal surplus in the domestic market for a period and the domestic coal price was lower than that in the international markets. Exporting coal was one important way to make coal enterprises more profitable and this exporting was also supported by an export tax rebate, as part of a national policy to further promote industrial export and thereby earn foreign exchange. Since the end of 2001, coal surplus has converted to the opposite and coal demand grew very rapidly because of the rapid growth of the national economy, especially of the energy intensive sectors. Furthermore, the government closed a large number of small-scale coal mines that had low efficiency, serious pollution and safety problems. The coal price increased because of in sufficient coal supply at the market, and in the eastern coastal region, the price is even higher than that at the international markets (see Fig. 5.2).

CIF coal price Shanxi high-quality mix coal price in Qinhuangdao market Shenhua and Datong coal price in Beijing market price Shanxi Jincheng coal price in Shanghai market

Figure 5.2 Coal price comparison. Asian coal price: CIF, 6000 kcal/t, CIF in Japan since Dec. 2002; Source: Plaits ICR Coal Statistics Monthly; China Coal Resource Web site, www.sxcoal.com. Due to the influences of a lower export rebate rate and a higher domestic coal price, coal exporting enterprises started to pay more attention to the domestic market. Since January 1st, 2004, the export rebate rate changed from 13% to 11% for coal exporting. The Coal Export Quota Ma-nagement Measures came into force on July 1 st 2004 to ensure the sufficient supply at the domestic market and to preserve domestic coal resources (NDRC 2004b). Coke is the second largest exporting energy product of China and the export was 13.57 Mt in 2002(NBS 2004b), and 14.72 Mt in 2003 (NDRC 2004c), forming 95

5.2 Energy Export about 40% of total world trade. Clearly, China is the main player on the international coke market. Most developed countries have shut down their coke-making plants and purchase coke at the international markets because of the sevious pollution association with coke production the higher pollution control cost. Driven by demand, China's coke export increased tremendously from less than 370,000 t in 1985 (NBS 1987) to 15.2 Mt in 2000 (CEDRC 2003), a growth of 41 times within 15 years, but the export started to decline from its peak in 2000 due to a strong domestic demand created by the fast growth of the steel industry. Some measures have been adopted by the central government to limit coke export and secure domestic supply. The coke export permits policy came into force in January 2004 and the export quota was lowered from 12 Mt to 9 Mt. on May 24th 2004, the government declared to abolish the tax rebate policy on export of coke, half coke and coke coal (Li 2004). As well known, China has been a net oil importing country for many years Although the import of crude oil is much larger than the export, China keeps a certain crude export for bilateral trade relationships reason, and the nation exported 8.13 Mt of crude oil in 2003, in which, 43.7% went to Japan, 18% to Korea, 16.5% to Indonesia, others to USA, DPR Korea, Australia, Singapore. Malaysia and other countries in the Asia Pacific region (Tian 2004). China's export of oil products amounted to 13.85 Mt in 2003 and gasoline accounted for more than half that amount, followed by diesel, jet fuel and naphtha. The destinations and quantity of gasoline and diesel export are shown in Table 5.4. Table 5.4 The destinations and quantity of gasoline and diesel export in 2003. Destinations

Gasoline

Singapore

2138.7

412.1

Indonesia

1181.0

10.9

(kt)

Diesel

Vietnam

1541.7

Australia

605.1

-

Philippines

547.5

199.0

Other countries

1528.4

597.6

Total quantity

7542.4

2240.6

Source: Tian Chunrong. Analysis of China's oil import and export in 2003. International Oil Economy, 2004,3: 9-15 (in Chinese).

96

5 China and the World Energy Markets The direction and purpose of petroleum product export are focused mainly on three aspects: (1) To balance the demand and supply among the various products — that is the main purpose for product export. For example, the gasoline consumption is lower than its production, which has resulted in the annual export of more than 5 Mt of gasoline in the past three years (Tian 2004), and this accounted for more than 10% of the gasoline output in the same period. (2) To keep trade relationships with other countries and regions. (3) Refineries prefer to export oil in case of higher prices at international markets or just in consideration of reducing cost by export tax rebate. With the elimination of the export tax rebate, more reasonable domestic oil pricing mechanism and high prices driven by strong domestic demands, more and more oil products will be sold in the domestic markets. Electric power export of China mainly refers to the delivery of electricity from Daya Bay Nuclear Power Plant in Guangdong Province to Hong Kong Special Administrative Region and 9.7 T W ' h was exported in 2002, less than 0.6% of the whole country's power generate.

5.3 5.3.1

Impacts on the World Energy Markets Coal and Coke

China will gradually reduce coal export and increase import, this will certainly affect the coal market in Asia, but both the scope and extent of the impacts would be quite limited. The principal clients of Chinese coal are the power plants in neighboring countries such as Japan and Korea, and most of those power plants adopt hybrid fuel systems (coal and heavy oil) and their demand for coal will increase while the prices of heavy oil in the international market rise. Coal prices in this region over a short period will increase due to reduction of coal export in China, but the coal price would fall in a reasonable range as other coal export countries in the Asia-pacific region, such as Australia, Indonesia and Vietnam would soon supplement the market deficit. However, the coke situation in contrast is markedly different. As China is the main supplier of metallurgical coke in the world, any tiny variation of coke export policies would result in an undulation in the world coke market. Chinese coke export in the future will be affected by some factors in regard to two aspects. 97

5.3

Impacts on the World Energy Markets

First, considering the issues of environmental protection and the state energy security, China needs to reduce coke production and export. These are the driving forces of the government for taking action of reducing export quotas and export tax drawback, and adjusting industrial policies for coke enterprises. Secondly, there are two opposing driving forces on the country to slightly increase coke export, and at least to keep the export at a stable level. One of the opposing driving force comes from the coke demand of other countries, e.g. one third of coke consumed in four European steel making manufactures, which are among the top ten plants in the world, is imported from China, and it was as high as 4.5 Mt in 2003, with the result that they had the strongest response to the new restrictive actions of China. At the time the new policy was promulgated, the European Union formally requested the Chinese government to release the restriction on coke export and through bilateral negotiation an agreement was achieved in May 2004, stating that the coke export from China to the European Union in 2004 will not be lower than the level in the previous year, i.e. 4.5 Mt. The steel and iron industry in the European Union that faced a raw material shortage was gratified, to a certain extent, by the agreement (Zhao 2004). The other opposite driving force is the economic benefit, and the huge commercial profit will be an invisible hand to promote idea to encourage the coke enterprises to expand production and export. In fact the increase in the coke market demand has led to a skyrocket rise in the coke price. Three years ago the free-on-board (FOB) price of Chinese coke was US$56 per tonne, but it has reached US$400 per tonne since 2004 (He 2004). Following the WTO rules, China will eliminate various restrictions on import and export quotas, so it could be possible to increase the coke export. It seems most possible that the foreign enterprises possessing advanced technologies and strong economic strength would establish coke production enterprises in China by ways of direct investment, joint venture, etc., to ensure a stable coke supply.

5.3.2

Oil

In according with the "Management Ordinance on Commodity Import and Export of the People's Republic of China" and relevant commitments for joining the WTO, the Chinese government in 2002 released the ban of importing oil products that had already been in effect for four years, and has gradually increased the import permission of oil products, and adjusted downward the import taxes on crude oil and oil products. Total import quotas of oil products increased from 22 Mt in 2002 to 25.3 Mt in 2003, and the import quota management policy was 98

5 China and the World Energy Markets abolish on January 1, 2004. Undoubtedly, with the oil consumption expansion and release of regulated import, oil import of China will increase year by year, and will have more and more influence on the global oil market. There are lots of arguments on what is really the extent of Chinese influence on the world oil market, and it's possible that the impact will be very limited, at least it is unfair prior to 2020 to attribute the ever-present high international oil price to the rapid growth of oil consumption and import in China. Some analysts list the following facts to support their point of views as to why China will be responsible for the high oil price: (1) The country has the highest growth rate of oil consumption in the world, and the consumption demand doubled in the past decade, accounting for 41% of the total incremental global oil demand. (2) It consumed 275 Mt of oil in 2003, becoming the second top oil consumption country by surpassing Japan. (3) China has the highest growth rate in oil import, accounting for 26% of the incremental oil trade in the world in 2003. However, the following facts cannot be overlooked: (1) China's oil consumption in 2003 only occupied 7.6% of the world total. It is incontestable that the nation with regard to oil consumption is second placed in the world, but the circumstances are quite different compared to Japan. China possesses an annual crude oil production capability of 160 Mt, ensuring 70% of its oil supply, whereas oil consumption of Japan is fully dependent on import. (2) Crude oil import accounted for only 5.6% of total world trade in 2003, which was much less than that of Japan. (3) The substantial factor for determining the oil price is the relationship between supply and demand rather than the relationship among incremental quantities. Indeed, the oil price is not fully governed by economic factors, as per the data provided by the "BP World Energy Statistics", total world oil reserves in 2003 were 1.15 trillion barrels, growing by 10% over the reported figure in 2002. The global oil reserves have almost continued to increase in the past 25 years, and in theory it is possible to keep oil production alive for 41 years given the current exploration rate. Though world oil production grew by 3.8%, which is higher than 2.1% of oil demand growth, the oil price in 2003 reached a peak of the last two decades and the average price of London Brent crude oil was US$28.83 per barrel. Entering 2004, the crude oil price went upwards greatly, broke through US$30 per barrel in the first ten days of February, approaching US$40 in the last ten days 99

5.3 Impacts on the World Energy Markets of March, fluctuating in arange of US$38.60-41.65 in the whole of May, and being as high as US$42 on June 1st (Zhang 2004). This high price reflected, to a great extent, the judgment on future uncertainty in the world oil market and that some pressures upon the world oil market are caused by the strong demand growth of China, especially because it is now in the very beginning stages of its oil strategic storage, which has already been established in the major oil consuming countries in the world. Consequently, the focus of worrying about oil supply safety in the future, naturally moves to China, and overestimates on the future supply risk leads to the rise in the price of oil. Apparently, should the oil consumption growth trend in the last two years in China be kept till 2020 or even beyond, China's influence over the oil price will surely be more and more significant, but in turn the high oil price will also cause significant threats upon the economic development of China.

100

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This unique book offers a timely and insightful look into China's present energy situation and the emerging challenges of balancing energy supply and demand over the forthcoming decades. It presents a holistic analysis of the growing pressures on the energy system as a result of the country's dynamic socioeconomic progress.

The volume considers current hot topics and will be useful as a reference for those aspiring to understand more about what is happening in China's energy sector today.

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