China's Energy Future

In his new book, Energy: China’s Choke Point, Michael J. Economides, with Xina Xie, examines the key drivers of the country’s energy policy and how China is attempting to meet its growing energy demand.

In the following excerpts, Economides analyzes the factors that impact China’s ability to keep pace with its record-breaking demand growth.

—Judy Maksoud

Energy, economy, politics

Energy demand has traced, and to a large extent has defined, China’s progress, and it will continue to do so indefinitely. Energy policy has attempted to keep pace with China’s evolution, but as with so many other aspects of the country, events more often than not have overwhelmed policy. And in that peculiar Chinese hybrid of market economics, which blends capitalism with strict, centralized state controls, the energy picture is often blurred.

It becomes even more convoluted when we consider a few important facts. For 20 years, the growth in China’s energy demand has been by far the largest in the world and has accounted for a huge portion of total global demand. Yet, China does not have the domestic resources of oil and natural gas to meet its needs, and it will remain dependent on increasing volumes of imports, representing an ever-larger fraction of its energy use. Almost 70% of China’s total energy demand still comes from coal—a share of energy mix that has not been seen in Europe and the U.S. since the 19th century—with all the associated environmental and economic consequences….

China’s energy mix

Pushed by the government, natural gas is projected to go from 2% of the energy mix in 1998 to 8%, a more than tenfold increase.

From 1997 to 2007, China’s total primary energy consumption increased from some 38 quadrillion Btu to about 76 quadrillion Btu, a staggering 100% increase. Putting it another way, China’s consumption went from equaling 40% of the largely flat U.S. consumption to equaling 75%.

Oil consumption during the same decade also increased by 100%, from 3.8- to 7.6 million barrels of oil per day. China’s increased oil consumption amounted to almost 40% of the total world increase during the same period.

There has never been a country in the history of humankind that experienced such growth in oil consumption within a decade. For three years in a row, from 2002 to 2005, the country’s energy demand increased by nearly 20% per year. This has never happened before, and it is unlikely to be repeated, ever.

More interesting are two other issues that touch on China’s energy predicament and the resulting environmental challenges. In China’s 1998 energy mix, coal amounted to 75% (or 28 quadrillion Btu) of about 38 quadrillion Btu. This fuel, which has been blamed for much of China’s intense air pollution, was forecast to represent an increasingly smaller share of the country’s overall energy consumption, dropping to 62% by 2015.

However, this hides the fact that, by then, China’s total energy usage is likely to reach 95 quadrillion Btu and that total use of coal will be almost 59 quadrillion Btu, more than double the country’s 1998 consumption. In fact, the U.S. Energy Information Administration has projected that 75% of the increase in world coal use through 2030 will be absorbed primarily by China, and to a far lesser extent by India. Air quality in China will not improve any time soon, and certainly the new concerns about carbon dioxide emissions will be summarily ignored in that country.

Natural gas is poised to become an even bigger challenge. Pushed by the government and intended to show an environmentally friendly face, gas use is projected to go from 2% of the energy mix in 1998 (very near to 0.74 trillion cubic feet of gas) to 85 quadrillion of 95 quadrillion Btu, or very near 7.6 Tcf of gas, a larger than tenfold increase. Where this gas will come from is not yet known.

The modern era

The structure of China’s petroleum industry and establishment changed inexorably in July 1998. After a March decision by the National People’s Congress, and amid fanfare in the People’s Great Hall on July 27, 1998, China National Petroleum Corp. (CNPC) and Sinopec were declared integrated oil companies with mandates to function from the upstream to the midstream to the downstream. (With the industry) still totally owned by the state, at the time it did not appear to outsiders to be any different from the multitude of other restructurings that had happened earlier in China, in both the energy and other sectors. Soon, however, the event would prove to be of major significance.

Inside China the change was earth-shattering. Before the establishment of the two as integrated companies, the actual day-to-day influence of a centralized management on local oil fields was minimal. In classic Soviet style, oil fields operated for their entire lives not as petroleum businesses in the way Westerners would conceive of them, but instead as city-states or large danwei. This involved petro­leum-related services, and each major field had self-contained exploration, self-contained drilling, and self-contained logging service companies in addition to locally run research and development groups.

But the oilfields also were much more. The enterprises ran all their logistics, from schools for the employees’ families to hospitals and garbage collection. During his occasional forays overseas, the head of the giant, million-plus-barrel-per-day Daqing oil field in northern Heilongjiang Province would shock people by telling of having 3 million employees under his command.

The emergence of the two companies meant control and management of an unwieldy mélange of operations, facilities, and people that had grown comfortable with a state enterprise that did not particularly run with profit, let alone efficiency, in mind. China was then confronted with two new realities. As an importer of quickly increasing amounts of oil, it had to manage its domestic industry, and as an emerging economic superpower, it could ill afford to continue running a vital energy industry as a relic of past Soviet influences.

Almost 70% of China’s total energy demand still comes from coal…with all the associated environmental and economic consequences. The Chinese characters for “national status.”

CNPC, which previously dealt only with upstream operations, suddenly acquired refineries, petrochemical plants, pipelines, and especially, service stations in northeastern and northwestern China and Sichuan. The employee ranks swelled to an astonishing 2.7 million, a figure that included 1.5 million who had previously engaged in exploration and production; the rest came from the acquired and merged companies. Almost 10 years later, CNPC still employed a huge number of people—1.73 million in 2007.

Sinopec was put in control in northern, central, eastern and southern China, but the split was not done in a surgical fashion….

Oil and gas assets were not split proportionally in 1998, reflecting the government’s opinion about ideal stewardship based on past experience and skills. At the time of the restructuring, China claimed 19 billion tons (139 billion barrels) of possible oil reserves. Of this endowment, 13.36 billion tons, or 70.2%, went to CNPC. Of the rest, about 20% went to Sinopec, while China National Offshore Oil Corp. (CNOOC) and some other tiny interests accounted for the remaining 10%. Of the natural gas total reserves of about 60 Tcf, CNPC got 44 Tcf, around 73%.

The 1998 split did not change much during the subsequent decade. By 2008, the country had increased its oil reserves somewhat, to 22.5 billion tons (164 billion barrels) of possible oil reserves. CNPC manages 68.5%, Sinopec 22.4%, and CNOOC, 8.4%.

Natural gas saw an even bigger relative growth in a decade. Proven reserves increased to more than 780 Tcf. CNPC held 72.2%, Sinopec 17.9%, and CNOOC, 9.6%.

After the restructuring, the situation of the Chinese oil companies became one of the most telling examples (to conventional Western thinking) of the often contradictory ways of doing things in the new China. It was yet another example of China’s baby steps from a planned to a market-oriented economy, but with all sorts of twists and restrictions that would make the changes look ineffective and at times, even whimsical.

Nonetheless, in China things seem to work, perhaps because the country actually outpaces even the wilder conventional expectations, perhaps because economic growth covers up deficiencies, or perhaps because the Chinese are not culturally prepared to criticize authority—or do so only at great peril.