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China Increasing Investment in Oil to Reduce Foreign Imports

"The establishment of a national oil and gas pipeline company would be subject to the reform of (the) national petroleum and natural gas system, and the proper timing of unveiling the national oil and gas pipeline company is under discussion"

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Tugboats dock an oil tanker on a crude oil quay at a port in Zhoushan, eastern China's Zhejiang province, Nov. 11, 2016. Pixabay

China is increasing investment in oil exploration to limit its dependence on imports, but forecasts say domestic production will keep declining as the country’s demand grows.

After years of warnings, it appears that China’s government is now taking the strategic implications of import dependence as a higher priority, spurred by rising reliance on foreign natural gas as well as oil.

On March 6, the South China Morning Post reported that China National Petroleum Corp. (CNPC) plans to boost its exploration budget fivefold this year to 5 billion yuan (U.S. $745 million), citing an interview with chairman Wang Yilin by the company’s online newsletter “China Petroleum Daily.”

The increase is aimed at reversing declines in domestic oil output, which has stagnated for over a decade due to diminished returns from aged oilfields and China’s difficult geology.

In 2018, production fell 1.4 percent to an average of 3.79 million barrels per day (mbpd), according to the National Bureau of Statistics (NBS). At the same time, China’s apparent oil demand rose 5.3 percent to 13.52 mbpd, Platts Commodity News said.

Using those figures, China’s import dependence for oil reached 72 percent, slightly more than CNPC’s calculations and those based on International Energy Agency (IEA) data.

Wang put the ratio at “almost 70 percent.”

Variations aside, China’s reliance on foreign oil has risen sharply since it first crossed the 50-percent threshold in 2008.

Yet, Wang’s remarks suggest that the national oil company (NOC) sees the deterioration of China’s energy security as a “political” issue driven by the government’s concerns.

“As energy is a lifeline of the economy, CNPC as a key state enterprise and the nation’s largest oil and gas supplier must carry out the political task of enhancing national energy security by having a sound resource development strategy,” Wang said.

While the rise of import dependence has been rapid, it shows few signs of changing course, according to projections.

In data released with its Oil 19 medium-term forecast on March 14, the Paris-based IEA estimated that imports will account for 72 percent of China’s oil demand this year, rising to 76 percent in 2024.

oil refinery
Lin held out little hope for gains in domestic oil production and instead urged increases in the amount of oil held in China’s strategic petroleum reserve (SPR). Pixabay

Domestic production will drop to 3.58 mbpd by that time, the IEA said. While demand is expected to grow by 10 percent during the period, production in China is slated to fall by more than five percent.

In a long-term forecast in November, the IEA projected the import proportion will hit 82 percent by 2040, even though demand growth is expected to slow.

 

No reason for optimism

Despite the increases in investment, there seems to be little confidence that more exploration spending will turn the situation around.

Edward Chow, senior associate for energy and national security at the Center for Strategic and International Studies in Washington, wondered whether the announced budget expansion would be devoted solely to domestic exploration or also to overseas resources.

“I don’t see any reason for optimism on large new domestic discoveries,” Chow said. “It isn’t like they hadn’t been looking before.”

Confidence may be lacking at the corporate level, as well.

Although the fivefold increase in the budget may make a numerical impression, the planned investment pales in comparison to the billions that CNPC promised to invest in foreign oil exploration and development in the 1990s under the government’s “go out” strategy.

In late 2017, CNPC argued that it would soon have rights to production of four mbpd overseas, or more than China’s output at home.

The suggestion was that import dependence was nothing to worry about, since nearly two-thirds of China’s demand would be covered by a combination of domestic production and foreign “equity oil.”

But from an energy security standpoint, the ownership of foreign oil may make only a marginal difference since it is still subject to cross-border risks and transit uncertainties on the high seas.

The government’s concern appears to have grown along with signs that import dependence for gas is quickly following the same pattern as authorities promote fuel-switching from coal to fight urban smog.

In his interview, Wang said that China’s reliance on foreign gas reached 45.3 percent last year. Based on RFA calculations from consumption figures, the import share stood at 39.2 percent in 2017.

Last year, domestic gas production rose 7.5 percent while consumption climbed 18.1 percent, the NBS and the National Development and Reform Commission (NDRC) said.

The IEA has said that dependence on foreign gas will reach 54 percent in 2040, but if the current pace persists, that level could come much sooner.

“What is clear is that China has been unsuccessful in arresting the trend of increasing oil import dependency, which has now extended to gas,” Chow said by email.

“Short of technological breakthroughs in producing domestic energy or reducing demand, this has clear energy security and foreign/defense policy implications,” he said.

A worker fills an oil truck at a China Petroleum & Chemical Corp. filling station in Shanghai, China, March 22, 2018.
A worker fills an oil truck at a China Petroleum & Chemical Corp. filling station in Shanghai, China, March 22, 2018. RFA

‘A very unsafe source of risk’

Although the government is apparently pressing CNPC to do more, a commentary in the Communist Party-affiliated paper Global Times argued that the efforts are not enough.

Citing an interview with Lin Boqiang, dean of Xiamen University’s China Institute for Studies in Energy Policy, the paper said the estimate of 70-percent oil dependence may be “conservative.”

“More importantly, the government should be aware that such high oil dependency is actually a very unsafe source of risk,” the commentary said.

Lin held out little hope for gains in domestic oil production and instead urged increases in the amount of oil held in China’s strategic petroleum reserve (SPR).

The emergency stockpile is believed to hold only enough oil to cover 40 to 50 days’ worth of imports in case of disruptions, less than half of the coverage of SPRs in Japan and the United States, Lin said.

The timing of Wang’s interview on the sidelines of China’s annual legislative sessions is a sign that the exploration push is part of the government’s larger reform plan for the oil and gas sector.

 

It is unclear whether or how much the NOCs would be paid for their infrastructure assets, or whether they would be rewarded with shares in the new pipeline company.

But the proceeds from the pipeline spinoff could be used to fund exploration and development of more promising but challenging resources of shale oil and gas.

The South China Morning Post suggested that the restructuring could at least free up exploration funds.

“After the establishment of the new pipeline company and selling its pipelines to the firm, (CNPC subsidiary) PetroChina will no longer have to fund their expansion and have more capital to plow into resources exploration,” the paper said.

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Xinhua cited remarks by CNPC’s Wang that suggested a more gradual approach.

“The establishment of a national oil and gas pipeline company would be subject to the reform of (the) national petroleum and natural gas system, and the proper timing of unveiling the national oil and gas pipeline company is under discussion,” Xinhua quoted him as saying. (RFA)

Next Story

China- Top Contributor in Global Warming

China is the leader in coal and clean energy and is the top emitter of greenhouse gases

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Climate China Coal
In this photo, smoke and steam rise from a coal processing plant that produces carbon black, an ingredient in steel manufacturing, in Hejin in central China. VOA

As world leaders gather in Spain to discuss how to slow the warming of the planet, a spotlight falls on China — the top emitter of greenhouse gases.

China burns about half the coal used globally each year. Between 2000 and 2018, its annual carbon emissions nearly tripled, and it now accounts for about 30% of the world’s total. Yet it’s also the leading market for solar panels, wind turbines and electric vehicles, and it manufactures about two-thirds of solar cells installed worldwide.

“We are witnessing many contradictions in China’s energy development,” said Kevin Tu, a Beijing-based fellow with the Center on Global Energy Policy at Columbia University. “It’s the largest coal market and the largest clean energy market in the world.”

That apparent paradox is possible because of the sheer scale of China’s energy demands.

But as China’s economy slows to the lowest level in a quarter century — around 6% growth, according to government statistics — policymakers are doubling down on support for coal and other heavy industries, the traditional backbones of China’s energy system and economy. At the same time, the country is reducing subsidies for renewable energy.

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A solar panel installation is seen in Ruicheng County in central China. VOA

At the annual United Nations climate summit, this year in Madrid, government representatives will put the finishing touches on implementing the 2015 Paris Agreement, which set a goal to limit future warming to 1.5 to 2 degrees Celsius above pre-industrial levels. Nations may decide for themselves how to achieve it.

China had previously committed to shifting its energy mix to 20% renewables, including nuclear and hydroelectric energy. Climate experts generally agree that the initial targets pledged in Paris will not be enough to reach the goal, and next year nations are required to articulate more ambitious targets.

Hopes that China would offer to do much more are fading.

Recent media reports and satellite images suggest that China is building or planning to complete new coal power plants with total capacity of 148 gigawatts — nearly equal to the entire coal-power capacity of the European Union within the next few years, according to an analysis by Global Energy Monitor, a San Francisco-based nonprofit.

Separately, investment in China’s renewable energy dropped almost 40 percent in the first half of 2019 compared with the same period last year, according to Bloomberg New Energy Finance, a research organization. The government slashed subsidies for solar energy.

Last week in Beijing, China’s vice minister of ecology and environment told reporters that non-fossil-fuel sources already account for 14.3% of the country’s energy mix. He did not indicate that China would embrace more stringent targets soon.

“We are still faced with challenges of developing our economy, improving people’s livelihood,” Zhao Yingmin said.

China is alternately cast as the world’s worst climate villain or its potential clean-energy savior, but both superlatives are somewhat misplaced.

As a fast-growing economy, it was always inevitable that China’s energy demands would climb steeply. The only question was whether the country could power a sufficiently large portion of its economy with renewables to curb emissions growth.

Many observers took hope from a brief dip in China’s carbon emissions between 2014 and 2016, as well as Chinese leader Xi Jinping’s statement in 2017 that China had “taken a driving seat in international cooperation to respond to climate change.”

Renewed focus on coal

Today the country’s renewed focus on coal comes as a disappointment.

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The pollution in China is at extreme levels. VOA

“Now there’s a sense that rather than being a leader, China is the one that is out of step,” said Lauri Myllyvirta, lead analyst at the Centre for Research on Energy and Clean Air in Helsinki. He notes that several developed countries — including Germany, South Korea and the United States — are rapidly reducing their reliance on coal power.

Fossil fuels such as coal, gasoline and natural gas release carbon dioxide into the atmosphere, trapping heat and changing the climate. Coal is the biggest culprit.

Last year, coal consumption in the United States hit the lowest level in nearly 40 years, according to the U.S. Energy Information Administration.

One place to consider the rise, pause and rise again of China’s coal sector is Shanxi province — a vast mountainous region in central China.

Shanxi is the heart of China’s traditional coal country, dotted with large mines, but also the site of some of the country’s largest solar and wind-power projects, according to state media.

During most of the past 30 years of rapid economic growth, the coal business boomed in Shanxi and nearby provinces. As China’s cities and industries expanded, coal supplied much of that power, and China surpassed the U.S. as the world’s top carbon emitter in 2006.

But after climbing sharply for two decades, China’s emissions stalled around 2013 and then declined slightly in 2015 and 2016, according to Global Carbon Budget, which tracks emissions worldwide. This dip came as Chinese leaders declared a “war on pollution” and suspended the construction of dozens of planned coal power plants, including some in Shanxi.

At the same time, the government required many existing coal operators to install new equipment in smokestacks to remove sulfur dioxide, nitrous oxide and other hazardous substances. About 80% of coal plants now have scrubbers, said Alvin Lin, Beijing-based China climate and energy policy director for the Natural Resources Defense Council, a nonprofit.

Climate change China
This coal processing plant in China produces toxic air pollutants. VOA

As a result, the air quality in many Chinese cities, including Beijing, improved significantly between 2013 and 2017. Residents long accustomed to wearing face masks and running home air-filter machines enjoyed a reprieve of more “blue sky days,” as low-pollution days are known in China.

Annual levels of PM 2.5 — a tiny but dangerous pollutant — dropped by roughly a third across China between 2013 and 2017, from 61.8 to 42 micrograms per cubic meter, according to scientists at Beijing’s Tsinghua University and other institutions. They made the report in November in the Proceedings of the National Academy of Sciences, a peer-reviewed journal.

“That’s a big improvement, although in terms of safe air quality, we’re still not there yet,” Lin said. China’s pollution levels are still well above standards set by the World Health Organization.

While these retrofitted coal plants emit fewer pollutants that harm human health, the scrubbers do not reduce greenhouse gases. “The new plants are good for air quality, but you still have all that carbon dioxide that goes into the atmosphere,” Lin said.

Carbon emissions rising

In the past three years, China’s carbon emissions have begun to rise again, according to Global Carbon Budget.

That trend was evident in the first half of 2019, when China’s carbon emissions from fossil fuels and concrete production rose 4%, compared with the same period last year, according to Myllyvirta’s preliminary analysis of Chinese government data.

The coming winter in Beijing may see a return of prolonged smog, as authorities loosen environmental controls on heavy industry — in part to compensate for other slowing sectors in the economy. Cement and steel production remain both energy intensive and heavily polluting.

Permits for new coal plants proliferated after regulatory authority was briefly devolved from Beijing to provincial governments, which see construction projects and coal operations as boosts to local economies and tax bases, said Ted Nace, executive director of Global Energy Monitor.

“It’s as though a boa constructor swallowed a giraffe, and now we’re watching that bulge move through the system,” said Nace. In China, it takes about three years to build a coal plant.

In November, Premier Li Keqiang gave a speech to policymakers emphasizing the importance of domestic coal to energy security.

But because China’s coal-power expansion is growing faster than energy demand, overcapacity “is a serious concern now,” said Columbia University’s Tu.

And once new infrastructure is built, it’s hard to ignore.

People in China
The highest red alert was issued for heavy smog in several cities in China. VOA

“It will be politically difficult to tear down a brand-new coal plant that’s employing people and supporting a mining operation. It will make it more difficult for China to transition away from coal,” Nace said.

Reliance on China

The world has already warmed by 1 degree Celsius. All scenarios envisioned by the Intergovernmental Panel on Climate Change for holding planetary warming to around 1.5 degrees Celsius involve steep worldwide reductions in coal-power generation.

In that effort, other countries rely on China to manufacture most of the solar panels installed worldwide, according to an analysis in the journal Science co-authored by Jonas Nahm, an energy expert at Johns Hopkins University.

“If we have any chance to meet climate targets, we have to do a lot by 2030 — and we won’t be able to do it without China’s clean-energy supply chain,” Nahm said.

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China’s manufacturing helped bring down the cost of solar panels by 80% between 2008 and 2013. Prices for wind turbines and lithium-ion batteries also dropped significantly, according to Bloomberg New Energy Finance.

“China has a really mixed record. On the one hand, it’s seen rapidly rising emissions over the past two decades,” Nahm said. “On the other hand, it’s shown it’s able to innovate around manufacturing — and make new energy technologies available at scale, faster and cheaper.” (VOA)