China, the most populous country on Earth, has now seen two decades of strong growth. What are the energy challenges it faces in sustaining its economic growth?
One of the main challenges for China is indeed to meet the growth expectations of its population. Growth means more energy, and energy where it’s needed most. Beijing has to develop the inland provinces and reduce the standard-of-living gap between east and west, otherwise China will face growing social unrest. And it has to continue to expand its industrial base. The authorities have a raft of projects underway aimed at gaining access to more, and more secure energy supplies to fuel development and at integrating the nation better via new roads, pipelines and transmission lines.

So China’s very strong energy demand is likely to continue?
China is already the world’s No. 2 energy consumer, and although it still only uses half as much as the United States, it is the fastest growing energy market. It’s risky to make predictions about China’s future, but the IEA recently drew up a scenario based on gross domestic product (GDP) growth at an average of 6.4% per year through the current decade and 5% per year until 2030. In that scenario, China’s primary energy demand is projected to grow by 2.6% per year until 2030, and oil demand will probably grow even faster. But you know, most growth scenarios are based on the assumption that there is no change in the efficiency of the Chinese economy, and that is probably wrong. Fuel is a significant part of production costs. The Chinese are smart and are going to look for more efficient ways to manufacture. So the chances are that they will use less energy than the “business as usual” projections.

There are those who think competition from China threatens resource availability.
The IEA doesn’t see China as a dangerous burden on the world’s energy resources. There are ample fossil fuel resources in the world. We are not going to be constrained in our consumption of oil by resources, we are going to be constrained either by economic vulnerability or by carbon dioxide.

CHINESE ENERGY CONSUMPTION Share of different energies in 2004

What are China’s main energy resources?
Coal is the major resource. China has an estimated 114 billion tonnes of proven coal reserves. Oil and gas are harder to quantify and the IEA doesn’t like to put figures on them. But to give you some idea, the US Department of Energy estimates that China has oil reserves of 18.3 billion barrels and gas reserves of 1.5 trillion cubic metres. Why are we so reluctant to advance statistics? We make major mistakes because the Chinese figures don’t always include everything. For example, in December 2005, China revised its 2004 GDP upwards by 16.8%, apparently because of poor measuring of privately-run services. Another reason to doubt the figures is that the definitions China uses for ultimate resources and economically recoverable resources are “soft”. They change.

Furthermore, the geology is poorly known in many areas. In numerous places, China has not had the best exploration-production technologies, such as 3D and 4D seismic and EOR. If you go back in with new technologies and boost recovery from 30% to 35% or even 40%, your resources base changes substantially. China currently produces only about 1.9 billion tonnes of coal, 40 billion cubic metres of gas and close on 1.3 billion barrels of oil annually, so even though they will probably find more resources (there was a major gas discovery in December 2005) and become more efficient at valorising them, domestic energy sources will not meet growing demand.

So China’s energy dependence is going to increase?
In the mid-1990s, China became dependent on imports for a portion of its oil supply and now they’re at about 40%. China is already the No. 3 oil importer, after the US and Japan. Demand in 2005 stood at about 6.6 million barrels per day and the IEA scenario projects that it will reach 13.3 million barrels per day by 2030 with China importing almost 10 million barrels per day. That’s as much as the United States imports today. By then, import dependence will be about 74%.

China will soon become a gas importer too. They intend to switch to gas for power generation when available, and even though gas is more expensive than coal many cities are already switching from coal-fired space heating (residential and commercial buildings). Gas will be used more as feedstock for industrial processes, too. Gas imports will probably start in LNG form. The Chinese are now completing their first import terminal in Shenzhen and should begin importing in 2006. Another is being built in Fujian.

Who are China’s main suppliers?
The top oil suppliers are Saudi Arabia, Oman, Iran, Angola and Russia. They provide about 60% of China’s imports. China has from the start pursued a policy of geographical diversification, and particularly in the last few years. The first LNG will come from Australia and cargoes for the second terminal will come from Indonesia. Later pipeline imports may start with gas from Siberia or Central Asia.

And despite China’s enormous coal resources, it actually imports coal from Australia, Indonesia, even Vietnam. This is because it’s so expensive to move coal around China that in many cases it’s cheaper to bring it in. The problem is that despite new railway building, the infrastructure is saturated.

How do the Chinese feel about this growing import dependence?
They don’t necessarily like their oil coming by sea because they don’t control the seas. A lot of people in China recognise that so many countries have a vested interest in the well-being of the Chinese economy – because of the trade relationships, the manufacturing base, etc. – that the likelihood of a trade embargo on China is very small. But others are quite nervous. China is not monolithic you know: the government has many factions with different views. There are some who advocate increased reliance on imported energy,particularly gas, to achieve sustainable development goals, while others favour a more self-reliant approach where coal would be used to produce liquid fuels (coal to liquids, CTL) for instance, to substitute for imports.

What is China’s strategy for securing its energy supplies?
To begin with, they have diversified their import sources, particularly since they became dependent. Secondly, they are taking upstream positions. And thirdly, they are using partnerships to gain expertise for the future. Chinese companies have been investing in upstream assets, and sometimes companies, all over the world: in Russia, the Caspian, Indonesia, Sudan, Nigeria, Iran, Latin America … To achieve its aims, China has cleverly mixed upstream projects with investment in other industries, infrastructure loans and aid programmes as inducements. So far, the Chinese have been aiming at resource ownership, like the Japanese did in the 1960s and 1970s. They have a sense of isolation without sufficient resources. But they have now realised they are not going to land much of the oil and gas. Their strategy is starting to evolve, because it’s not economically efficient. It makes more sense to have competitive companies out in the world exploiting oil and gas and making money doing it, and bringing that money home so that China can buy the oil and gas it needs on the world market. So companies like CNPC and CNOOC are starting to operate more on a commercial mandate rather than on a national security mandate. At the same time, they are learning more about their business. They know they have technical limits; CNOOC can’t go very deep offshore and CNPC can’t go into very difficult formations. So they are partnering in a number of places to gain know-how. They are active in Peru and Venezuela ...even partnering with India on a tiny Syrian project. And I think they will mature into valid business partners around the world. Their longest suit for the time being is money, but in 10-15 years this will change.

Does this mean China will be looking for technology input at home, asking international companies to come in and help explore and improve recovery?
Yes, they will. There are several joint ventures already up and running, particularly offshore, but China is still nervous about having a lot of foreign companies onshore. They’ll want to tidy up some of their problems before they expose the interior of the country to full international scrutiny. I mean political tensions, accidents, environmental disasters … But they’re working on this.

On the other hand, some foreign companies are less than enthusiastic about working in China. After all, environmental mishaps can involve huge legacy costs these days. The same applies to industrial safety: foreign companies are starting to invest in China’s coal industry, but they will want improved safety in the mines. Then there’s the business environment for foreign companies; things are still difficult, but the authorities are definitely trying to improve the situation.

To what extent has China’s energy sector been privatised? And how is the industry structured?
China’s energy companies are very diverse, public and private, national and regional, but in theory they still all operate under the guidance of the National Development Reform Commission’s Energy Bureau. Oil tends to be very centralised, with big national companies, likePetroChina (CNPC), CNOOC and Sinopec, based in Beijing with local branches. Coal companies are mostly regional. Some power companies are national with holdings all over China, but most are regionally based.China National Nuclear Corp is based in Beijing, but liaises with the local project developers.

There are lots of private energy companies. For example, China has thousands of small private coal mines employing anything from a few dozen to hundreds of people. There are also so-called private oil companies, usually closely tied to local governments, that are mostly small oil-processing operations. There are small private power cogeneration companies too. But privatisation in its early phases is more a fund-raising operation than privatisation per se. If you look at some companies, you find the majority shareholder is still the government. So they still answer in important ways to the government and the largest companies have managers appointed by Beijing.

The energy industry structure is still evolving. There is still too much regional power. The history of much of China’s economic development is one of tension between the regions and the centre. But the Chinese know they need a more coherent energy strategy. They can’t have the country chopped up into independent blocks. They need consistent pricing, coherent transportation policies to integrate China east-west, and more meaningful privatisation to attract increased outside capital and technology.

Presumably this integration will be enhanced by the new energy transport infrastructure you mentioned earlier?
Yes, that’s one of the goals. China lacks pipes. There are gas fields in the west that don’t have access to pipeline capacity to get the energy to the big cities, so you have a local surplus. And there are frequent power blackouts, partly due to an inadequate national grid. The networking is not advancing as fast as Beijing would like, but there are major projects underway. There are west-east gas pipelines and three different power lines coming across the central-south. There is a new pipeline from Kazakhstan to bring oil into western China avoiding the sea routes, with plans for expansion. And there are discussions underway with Russia about further gas and oil pipelines. It’s no use having access to resources if you can’t get them to the consumers …

Are the Chinese worried that destabilisation in the Middle East and some Central Asian countries could threaten their supply?
They are certainly conscious of the risks. They have watched the military intervention in Iraq and the hurricanes in the Gulf of Mexico destabilise oil supplies, and for that matter gas. China is doing all the things other major importers are doing: supply diversification, transportation, strategic reserves … The Chinese plan to have reserves corresponding to 90 days of net imports within 15 years. They have completed the first phase of one storage facility in Zhejiang, but of course it hasn’t been filled yet.

Does China see renewable energies as a way of diversifying its sources and reducing its vulnerability?
Yes, China is diversifying its domestic supply. The country aims to add 2 GW a year of nuclear power until 2020. China is also adding even more to its hydro facilities, but there are social limits to the number of additional dams they can build. And with its huge coal reserves, China is also building two big coal-to-liquids plants in Ningxia and Shaanxi provinces with a combined capacity of 438 million barrels of oil per year. There are also a lot of renewable energy projects: the Chinese are particularly interested in wind energy, for instance. China’s wind industry development has been quite rapid and promises to continue as the Renewable Energy Law that went into force at the beginning of January is implemented. Nevertheless, under prevailing economic and political conditions, it will be many years before wind, and, eventually, other more expensive renewables like solar photovoltaics can begin to provide a significant share of total generation.

Is Beijing trying to decrease China’s vulnerability by reducing energy demand via efficiency programmes?
There is a certain amount of energy wastage in China and the authorities are acting on this. They started about 1980 with a set of major energy-efficiency programmes that have been evolving ever since, including standards for appliances and a scheme to reduce energy intensity in key industries such as steel and cement. China also has more stringent fuel-economy standards for new cars than those in the US.

The Chinese have had some remarkable success here. From 1980 to about 2000, energy efficiency improved by about 70% overall. But they have a long way to go: China is still one of the least efficient economies in the world. What is worrying, in aggregate terms, is that it appears they have become less efficient in the last few years. One reason for the slowdown is that the old tools no longer work. It is much more a market economy now. You need to use market-based instruments and the central government doesn’t control those very well yet.

One measure that will help is the continuing shift from artificial towards real-world energy pricing, which will rectify the price signal to consumers. Oil at $60 a barrel is a strong incentive to use less. There is also a fuel tax that was approved a couple of years ago but never implemented; it is now being discussed again, but there’s still no timetable for implementation.

Ongoing economic growth will depend on the development of road transport. Does China have the necessary refining capacity?
Here you have a country that is developing per capita income and purchasing power. A country where there are something like 25 vehicles per 1,000 people, whereas in Europe there are 500-600 per thousand, and 800 in the US … There’s a lot of growth to come in road transport, with energy demand expected to increase by about 4.6% per year for the next two decades. So China needs more refineries and needs to diversify its refinery mix. But the Chinese are doing so at a time when the available marginal barrel is changing, so they will probably have a good, nicely adapted refinery mix when they are finished.

China is currently building or extending refineries in Guangdong, Fujian and Xinjiang. One is in partnership with the Kuwaitis and another with the Saudis. This is an interesting development: we are now seeing joint refining projects with Middle East oil suppliers ... China obviously sees that its relationship with the Middle East has to change to reflect its growing oil dependence.

Is China acting on sustainable development yet, as far as energy is concerned?
Articles and books on energy policy are full of the phrase “sustainable development”. And it’s not just a catch phrase because China has to meet the expectations of its population. There are still things about the way Beijing runs society that are not very pleasant, but the Chinese people are prepared to put up with that if the country is growing at several percent a year. But if you want to have a measure of political tranquility in your major cities, the people do have to be able to breathe. There has also been a series of industrial environmental disasters that the local populations are quite aware of, and China has got to do something about those too.

One strategy for improving urban air quality is to switch from coal to gas for space heating, as I mentioned. But in some cases the shift has been made too quickly, and the gas availability is not reliable enough to supply all consumers. In Beijing this winter, there are restrictions in gas supplies to consumers who have already made the switch. And in other cities as well. So there are still problems. China has been trying to improve its environmental performance since the 1980s, but environmental bureaus are controlled by local administrations, which give much higher priority to economic expansion. That’s changing in some places but to get progress here, you first have to have a turnover in personnel.

As a major fossil-fuel consumer, where does China stand on climate change?
China is the second largest contributor to energy-related CO² emissions after the US, accounting for 14% of the world total. Chinese policymakers are fully aware of global warming and its effects, and the country played a major role in the pre-Kyoto debate. But the Chinese give priority to closer-in environmental problems. And they understand that if they clean up China, they are helping to clean up the world. The immediate pressures on China are today’s particulates, today’s acid rains, today’s industrial pollution … and drinking water. For a long time, China has considered water quality and availability to be its top environmental priority.

China is a non-Annex 1 country under the UN Framework Convention on Climate Change, meaning it has not agreed to binding targets for reduction of CO² emissions under the Kyoto Protocol. Having said that, if European and other emissions-trading schemes begin to put meaningful value on carbon, the Chinese are going to be quite happy to engage in trading because they’ll have a lot of efficiency opportunities where they can benefit from joint implementation or green development mechanisms. They’ll be attentive because there is foreign direct investment potential in the climate change issue, and a technology transfer opportunity too.