The chief means of meeting this insatiable demand is the domestic coal reserve, which accounts for 74% of China’s 360-gigawatt total annual power output. Oil is a distant second on 13.5%, followed by domestic hydro-power at 8.2%, nuclear energy at 1.1% and natural gas at 0.3%.
But coal presents several problems. Around 70% of the country’s coal is transported by rail from the coal-rich north to the energy-hungry coastal regions. While China accounts for 24% of global rail traffic, it only has 6% of the world’s rail tracks, resulting in bottlenecks in the transport network followed by regional power shortages. Despite US$248 billion being committed to rail expansion over the next 15 years, historical underinvestment means there is much ground to be made up.
A potentially more serious concern is environmental pollution and the related healthcare and clean-up costs, which are adding ever more weight to calls for a diversification away from coal.
Although China’s thirst for fuel means that consumption will still increase in absolute terms, there are plans to reduce coal’s contribution to the power supply to around 60% by 2020, with increased output from gas, nuclear and renewable options.
To this end, official muscle has been put behind alternative power sources. China’s Renewable Energy Law, which came into effect in January, decreed 20% of total national energy consumption should come from renewable sources by 2020.
China is set to spend US$200 billion over the next 15 years to achieve this goal, which would make it the world’s largest consumer of renewable energy.
In solar power, China already leads the world, with a total of 52 million square meters of solar energy heating panels in China representing 40% of the global total. Wind power appears to have incredible growth prospects. Installed capacity was just 1.3GW in 2005, but China aims to increase that to a world-leading 30GW by 2020. Potential installed capacity stands at 250GW onshore and 750GW offshore.
Nuclear power, and the foreign players queuing up to build the 30 new atomic power stations planned over the next 15 years, could also win big as China targets a 400% increase in capacity by 2020.
However, alternative energy sources do not produce nearly enough power to replace fossil fuels. It is generally agreed that not only do these sources provide negligible power, but the power they do produce is still prohibitively expensive.
While renewables may be the holy grail for China, oil is increasingly becoming the focus of its geopolitical maneuvrings. Once a net exporter of oil, China imported 47.3% of its crude in the first half of 2006.
Oil will fall as a proportion of total energy consumption with greater efficiency in coal delivery and the growing emphasis on renewables and nuclear power. But – just like coal – actual oil demand will continue to rise, principally through imports.
The US Department of Energy predicts China’s crude imports will represent 75% of national oil consumption by 2025, and domestic oil producers are busy buying foreign assets to meet this need. Beijing’s diplomatic tentacles have spread to Africa, Asia, Australia, the Middle East and the Americas in search of the black stuff.
China National Petroleum Corp (CNPC) acquired PetroKazakhstan for US$4.2 billion, teamed up with an Indian group to buy a stake in Syrian oil assets and secured drilling rights in Sudan in a joint bid with China Petrochemical Corp. It has also struck exploration and supply deals in Venezuela and Peru, and took a 4% stake in Rosneft for US$500 million when the Russian oil giant went public in July.
China Petrochemical has also snared a slice of the Russian pie by forming a 25.1% owned joint venture last year with Rosneft to explore the eastern seaboard of Russia for oil and natural gas. Not to be outdone, China National Offshore Oil Corp (CNOOC) paid US$2.7 billion in April for a 45% stake in a Nigerian oil field.
Escalating consumption has made conservation measures commonplace in China. Factor in an energy market that is becoming ever more volatile in the current geopolitical landscape and the only certainty for China is that as demand keeps rising so will the priority attached to securing energy resources.
But such acquisitions will not be used exclusively to serve the home market, unless Beijing further deregulates energy pricing. China’s retail prices remain among the lowest in the world as authorities seek to protect vulnerable sectors.
Sinopec, the listed arm of China Petrochemical, received a one-off state handout of US$1.17 billion in January to compensate for losses incurred due to caps on domestic oil-product prices. This was a sweetener to stop the company from putting profits before domestic needs – last year’s diesel and gasoline shortages in southern China and Shanghai were created by Sinopec re-exporting refined products to Korea and Japan to maximize profits.
Unless there is a substantial rise in domestic prices, companies will continue to siphon off some of their newly acquired foreign oil assets to use as a source of foreign exchange.
For every tonne that is traded, swapped or sold abroad, another question mark will be placed against China’s energy security.
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