China’s oil demands are already the stuff of legend. Urbanization, industrialization and a six-fold increase in private vehicle ownership over a decade have left the country dependant on foreign sources for 40% of its oil. This figure is expected to pass 60% in 2010 and 76% in 2020 as imports go from 4.6 million to 8.5 million barrels per day.
The price is not just financial – the International Energy Authority predicts China will account for 18% of global carbon dioxide emissions by 2025, up from 12% in 2000.
Beijing is taking action. Measures outlined in the 11th Five-Year Plan for 2006-2010 won’t end the dependency on foreign oil and dirty coal, but they should see wind, water, sunlight and nuclear power keeping the lights on for significantly more people than before. Those same people could also be filling their gas tanks with ethanol fuels.
"China needs to import a lot of oil so the government is looking at alternative fuels," said Christine Pu, energy and chemicals analyst at Deutsche Securities Asia. "The advantage of ethanol is it’s good for the environment."
Launched in 2000, China’s fuel ethanol industry is still in its infancy. According to GTZ, a German company that advises on energy management on behalf of the German government, total bio-ethanol production is around 4 million tonnes. Three quarters of it is edible ethanol and the remainder fuel ethanol.
"At present it’s largely limited to research institutions and there has yet to be much spillover from the labs into the marketplace," said Frank Haugwitz of GTZ-China By the end of 2005, Heilongjiang, Jilin, Liaoning, Henan and Anhui Provinces were wholly dependant on 10% ethanol-90% gasoline fuels (E10), with certain regions in Hubei, Shandong, Hebei and Jiangsu following suit. Studies have shown that using E10 reduces carbon dioxide emissions by up to 3.9%.
GTZ has calculated that a nationwide roll-out of E10 could see fuel ethanol demand reach 8.5 million tonnes per year by 2020.
Impending expansion
The government appears ready to meet its goal. Four bio-ethanol plants, with production capacities ranging from 200,000-500,000 million tonnes per year, are under development. In the Jilin Fuel Ethanol plant, China already possesses what is believed to be the world’s largest fuel ethanol facility with a capacity of 600,000 tonnes per annum.
The vice-minister for finance said in July that China is committed to a long-term bio-fuel development program, noted Professor Liu Dehua of Tsinghua University’s chemical engineering department, who has been involved in China’s fuel ethanol program since its inception.
"By 2020, liquid bio-fuel production will be 20 million tonnes a year – comprising 15 million tonnes of ethanol and 5 million tonnes of bio-diesel."
China has also cast its net wide in search of the key to success with fuel ethanol. Professor Liu has been to Brazil twice – most recently in April, accompanying officials from the National Development and Reform Commission and the Ministry of Science and Technology – to study a system under which all vehicles must run on fuel comprising at least 20% ethanol.
"China wants to learn from Brazil’s experiences in promoting fuel ethanol production and find out what impact using ethanol has on the environment," said Liu. The officials were also keen to see Brazil’s flex-fuel vehicles that run on varying combinations of gasoline and ethanol.
Thirty years ago, Brazil faced some of the energy challenges that now confront China. It imported 75% of its oil in 1975 and received a series of economic body blows as the price of oil fluctuated during the course of the decade.
The development of fuel ethanol has greatly reduced this vulnerability.
However, experts warn against viewing the two countries as being at separate points on the same developmental path.
"Brazil used to import a lot of crude oil as China does now," said Deutsche Securities Asia’s Pu. "But the big difference is that Brazil is a large producer of sugar cane while China uses corn for its ethanol."
Agricultural issues
The situation is complicated by the high priority China attaches to food security. If it’s a choice between corn for food and corn for ethanol, the food need wins hands down. Three of the four large scale ethanol facilities under development will use sugar-based energy crops or sorghum – not only does this resolve the food-or-energy dilemma, but ethanol can be created more efficiently from these crops.
A GTZ report went so far as to identify potential planting areas in southern provinces such as Guangdong and Guangxi, where the climate is more conducive to growing sugar and sorghum.
"China has multiple choices," said Professor Liu. "It wants to diversify and can grown corn in the north and sugar cane in the south."
But the mounting pressure being placed on China’s deteriorating farmland by the growing food demands of an increasingly affluent population means that land use is a sensitive issue. China will be a net grain exporter this year on the back of bumper crops but in the long-term, imports will grow and grow. Despite the food supply pressures, Liu believes farmers will benefit from the fuel ethanol development whether they diversify into sorghum and sugar or stick with corn.
"When the government first started the ethanol program, the price of oil was not high and the attention given to the pollution situation was not great. The reason ethanol production was important was the impact it would have on farmers’ incomes."
For Beijing-based independent energy analyst Jim Brock, fuel ethanol in China can serve the same purpose it does in the US as far as farmers are concerned – a means of insurance.
Surplus corn that decays before it can be transported elsewhere, or grain that fails to make the grade for human consumption or cattle feed suddenly has an end-use.
"There is not really any conflict between food supply and energy supply," he said. "In almost all cases, the production value for food is much more.
"It all comes down to having a supply valve so the corn that cannot be used for food is used for energy."
Ultimately, the rise of ethanol as a viable alternative fuel hinges on the price of oil. A GTZ price comparison earlier this year put fuel ethanol in the region of US$460 per tonne, although this included a US$175 subsidy per tonne of ethanol. Production costs can be as much as US$617 per tonne, 70% of it spent on raw materials. Gasoline was priced at US$616-654 per tonne, although this too included a state subsidy.
Deutsche Securities Asia’s Pu points to a rise in global oil prices, together with oil price liberalization in China and technological improvements in ethanol production, as factors that could drive the fuel ethanol bandwagon onwards. It would take a sizeable spike in crude prices to make fuel ethanol truly competitive; otherwise, it is a question of how much Beijing is willing to spend to find the key to cost-effective ethanol production.
"Is China willing to subsidize ethanol to the extent that it has been in Brazil and the US?" asked Brock. "My impression is no – the government is willing to incentivize but not subsidize."
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