Outlook for Energy and Economic Developments in China

Kang Wu, Ph.D.

Fellow and Head of China Energy Project, East-West Center

Before the Commission on U.S.-China Economic and Security Review

Hearing on China’s Energy Needs and Strategies

Thursday, October 30, 2003

1. Introduction

China has a huge energy sector and a large energy market. The world’s most populous country ranks second in total primary commercial energy consumption after the U.S. and third in primary commercial energy production after the U.S. and Russia.

The Chinese economy has expanded substantially since the late 1970s. While the economy is facing many problems, it is expected to continue to grow strongly. The relatively rapid economic growth in China generates the need for massive amounts of additional energy in the coming decades, creating challenges—among them, security challenges—for both China and the rest of the world.

The main objective of this statement is to briefly discuss China’s energy situation in the context of long-term energy and economic developments in the country. Topics covered include discussions of the changing structure of primary commercial energy consumption in China in the past two decades, the future energy economic developments, China’s rising energy import dependence at present and in the future, and an examination of China’s quest for energy security.

2. Changing Structure of China’s Primary Commercial Energy Consumption

In 2002, China’s primary commercial energy consumption reached 18.8 million barrels of oil equivalent per day (boe/d), while the consumption was 45.9 million boe/d for the U.S., 12.8 million boe/d for Russia, and 10.2 million boe/d for Japan. On a per-capita basis, however, China’s primary commercial energy consumption is about half of the world average. In 2002, China’s per capita primary commercial energy consumption was only 9% of that of the U.S. Even if China’s vast non-commercial primary energy is added, the per capita energy consumption in the country is still a little over one tenth of the U.S.’s per capita energy use.

China’s primary commercial energy consumption increased at an average annual rate of 4.0% during the 1980-2002 period, which was far below the official GDP growth of 9.5% per annum during the same period, leading to a hot debate whether or not the low GDP elasticity of China’s energy consumption during the past two decades was justifiable. Improvement of energy efficiency (from a state of very inefficient use of energy at the beginning), introduction of energy conservation measures, structural changes of the economy, and increase of total productivity of the country are all valid explanations of the relatively low growth of energy consumption in China. However, others suggest that it is quite possible that the official real GDP growth during the underlined period was overrated. We also question the validity of the super high GDP growth during the past decades but have approached the issue largely from the point where the measurement of conventional GDP itself has many flaws, particularly for a large developing country like China, as well as India.

Coal dominates China’s primary commercial energy consumption. Oil is the second-largest source and it is very important to the economy. China’s growing dependence on imported oil since the early 1990s has increasingly been a concern to the Chinese government. Natural gas currently has a minor share in total primary commercial energy consumption in China, but its importance is growing. Nuclear power was a late starter in China’s energy development, but its expansion has been rapid since the 1990s. Hydropower has traditionally been given a priority status, and thus construction of hydropower plants has proceeded in a relatively rapid fashion over the past decades.

In 2002, coal accounted for 68.4% of China’s total primary commercial energy consumption, down from 75.1% in 1980 and 79.3% in 1990. The coal consumption in 2002 is estimated at 1.31 billion metric tons (tonnes), up from 610 million tonnes in 1980 and 1.1 billion tonnes in 1990, but down from 1.45 billion tonnes in 1996. Back in the 1950s and early 1960s, the share of coal in total primary commercial energy consumption was over 90%.

Oil demand growth has been strong in China since the early 1990s. Total petroleum product consumption amounted to 4.8 million barrels per day (b/d) in 2002, up from 1.6 million b/d in 1980 and 2.2 million b/d in 1990, and accounting for 25.7% of the total primary commercial energy consumption.

In 2002, natural gas accounted for 3.0% of China’s total primary commercial energy consumption. This share is still very low compared with the gas share in total primary commercial energy consumption for the rest of the Asia-Pacific region (15%) and in rest of the world (26%). Despite its minor role in China’s overall primary commercial energy consumption, natural gas consumption has been growing fast since the mid 1990s.

China’s electric power generating capacity and electric power generation are the second largest in the world after the U.S., although China’s per-capita electricity consumption remains low. The country’s gross power generation reached 1,602 terawatt hours (TWh) in 2002, up from 301 TWh in 1980 and 621 TWh in 1990. About 84% of China’s electricity is generated by fossil energy, mainly coal. Hydropower is the main non-fossil energy power, followed in distance by nuclear power.

By the end of 2002, China had over 80 gigawatts (GW) of installed hydroelectric power generating capacity, accounting for about 24% of the country’s total installed power generation capacity. The actual generation of electric power by hydropower plants accounted for around 15% of the national total in 2002.

China started the development of nuclear power in 1982. The country’s first nuclear power plant, at Qinshan in Zhejiang Province started commercial production in 1993. Commercial production started for the two nuclear power units at Daya Bay, Guangdong Province, in 1994. In 2002, four more generators began commercial operations. Altogether China has an installed nuclear power capacity of 6.1 GW as of October 2003. Together, hydroelectricity and nuclear power accounted for 3.0% of the total primary commercial energy consumption in China.

Clearly, China’s rising primary commercial energy consumption and the structural changes since 1980 have been driven by a number of factors. The first is high economic growth. Despite the doubt about its accuracy, China is still perhaps the world’s fastest growing economy for over two decades since the late 1970s. The second factor is the growing demand for high quality energy products in the residential sector, which has led to the rapid growth of liquefied petroleum gas (LPG) and to a lesser extent natural gas use in China and the decline of coal’s share in energy consumption in urban cities. The third factor is the rapid growth of transportation services and petrochemical sector capacities, which has substantially hiked the demand for petroleum products and drastically changed the structure of oil consumption, away from heavy distillates to lighter and cleaner products. Finally, China’s demand for electricity has been strong. While China had to continuously rely on coal to satisfy the bulk of its electricity generation needs, the development of hydropower and nuclear power have also been stimulated during the past two decades.

3. Future Economic and Energy Outlook

Many of the same factors that drove China’s energy consumption in the past, plus new ones, will continue to shape the future demand for energy, in terms of both total requirements and structural changes. The new factors include calls for more efficient use of energy, the increasing concern of China’s energy security, and the balance between China’s energy consumption and the environment and ecological systems.

For China’s energy as a whole, though economic development is hardly the only determinant for the future, the long-term economic growth does form the basis for the long-term rise of energy consumption in the country. Using the same definition currently employed by the Chinese government, the average annual growth of the real conventional GDP may reach the following by 2020 under the base-case scenario: 7.5% for the 2002-2005 period, 7.0% for the 2005-2010 period, 6.5% for the 2010-2015 period, and 5.9% for the 2015-2020 period. On average, the projected growth rate is 6.6% per annum between 2002 and 2020. China’s population will grow steadily during the period, albeit at much lower rates seen in the 1980s and 1990s.

Between 1980 and 2002, coal consumption in China increased at an average annual rate of 3.5% a year. Looking toward the next fifteen years and beyond, coal consumption in China will continue to grow, but its share in total primary commercial energy consumption is expected to decline to 59.2% in 2015 and 57.5% by 2020 under our base-case scenario.

For oil, the total petroleum product consumption is expected to increase to 7.6 million b/d in 2015 and 8.8 million b/d by 2020 under our base-case scenario. As such, the share of oil in China’s total primary commercial energy consumption is expected to remain relatively steady at around 25.8% for 2015 and 25.4% for 2020.

Natural gas is expected to lead China’s growth in energy consumption in terms of percentage growth. With efforts to develop its own resources and bring in imports in the form of liquefied natural gas (LNG) and by pipeline, China’s natural gas consumption growth is expected to accelerate, raising its share in total primary commercial energy consumption from 3.0% in 2002 to 8.5% in 2015 and 10.0% in 2020.

Regarding hydroelectricity, the Chinese government’s target is to increase or at least maintain hydropower’s share in the country’s total installed power generating capacity. Our base-case scenario shows that the share of hydroelectricity in China’s total primary commercial energy consumption is expected to increase from 2.3% in 2002 to 3.7% in 2015 and 3.9% by 2020.

For nuclear power, firm plans will bring China’s total installed capacity to 8.8 GW by the end of 2005. The government is set to make a new round of plans to build additional nuclear power plants beyond 2005. The current nuclear power generating capacity in China is expected to be tripled by 2015 and quadrupled by 2020. As such, the share of nuclear power in China’s primary commercial energy consumption is expected to increase notably, from 0.7% in 2002 to 2.9% in 2015 and 3.2% by 2020.

4. The Rising Energy Import Dependence

China has long been a net coal exporter, but growing amounts of coal are also imported to meet the booming demand in South China. In 2002, China exported 84 million tonnes of raw coal. The country also imported about 11 million tonnes of coal in 2002, up sharply from a little over 2 million tonnes in 2001. Over the next ten to fifteen years, China’s coal exports are expected to continue but are likely to decline in volume. By 2020, we expect China to become a net coal importer.

Currently, China is not a natural gas importer; all of the country’s natural gas consumption comes from domestic production. However, two LNG projects have been approved, one in Guangdong Province and one in Fujian Province. Completion of the Guangdong LNG project is expected for 2006 and the Fujian LNG is set for a year later. Beyond 2007, more LNG imports are forthcoming, coupled with possible pipeline gas imports from Russia and Central Asia.

The overall projections for China’s natural gas imports under our base-case scenario are the following: for 2015, China is expected to import 14 million tonnes per year (t/y) of LNG, which is equivalent to 1.8 billion cubic feet per day (bcf/d) of gas, and 1.9 bcf/d of natural gas by pipeline from Russia. By 2020, it is possible that China will import 22 million t/y of LNG (2.9 bcf/d of gas) and 3.9 bcf/d of natural gas by pipelines from Russia and Central Asia. Altogether, imported natural gas, either LNG or pipelined gas, is expected to account for nearly 30% of China’s natural gas consumption in 2015 and close to 40% by 2020.

At present, rising oil imports is the only reason that China is a net energy importer today. In the future, natural gas will add to China’s growing energy import dependence while the gap between oil demand and supply widens continuously.

China is still the largest oil producer in the Asia-Pacific region. Its oil production reached 3.4 million b/d in 2002. The majority of China's crude oil is produced onshore, but offshore production has been increasing rapidly. Over the next ten to fifteen years, China’s upstream oil industry faces a precarious situation, as production from a number of large onshore oil fields are stagnating or declining or facing slow growth. The hope for incremental production is likely to come from the West, offshore, and other marginal fields in the South. On an overall basis, China’s crude production is projected to grow slowly, reaching around 3.8 million b/d by 2020.

China’s oil trade patterns have changed dramatically over the past two decades. The country’s crude and product exports peaked in the mid 1980s but have since declined. In the meantime, imports of crude and to a lesser extent, products, have increased rapidly. China has become a net overall oil importer since 1993. In 2002, China’s gross oil imports exceeded 2 million b/d while the net imports reached nearly 1.7 million b/d.

As domestic production continues to lag behind demand, China’s net oil import requirements are expected to surge to 4.1 million b/d in 2015 and 5.3 million b/d by 2020. At 5.3 million b/d, China’s projected oil imports by 2020 is roughly about half of U.S.’s net oil imports at present. As a result of these imports, the role of the Middle East, which is already important, will be rising significantly.

5. Elements of China’s Energy Security Policy

Because of the continuous rise in oil imports and price volatility in the global oil markets, energy security has become a big issue since the late 1990s. In China’s 10^th five-year plan, which is currently under execution and covers the 2001-2005 period, energy security is mentioned for the first time and ensuring energy supply security is considered by the government as a precondition for implementing the overall energy strategy. The government continues to make it a priority for relying on domestic energy supply and stresses that coal still be the major fuel for China over the next five years. The government also calls for increasing links with international energy markets, establishing strategic petroleum reserves, diversifying sources of energy imports, developing alternative fuels to oil, and adopting more energy conservation technologies.

On an overall basis, China’s energy security policy is still being formed. The main elements of the policy are the following: (1) Diversify the sources of energy imports, increasing the share of oil and gas imports from Russia and Central Asia; (2) Enhance overseas investments by state oil companies; (3) Broaden ways of trade to avoid transactions risk; (4) Increase the investment in oil and gas infrastructure and open more channels to imports; (5) Establish government-controlled strategic petroleum reserves; (6) Adjust energy consumption and production structures and reduce dependence on oil through coal gasification, liquefaction, and development of nuclear power; and (7) Actively participate in the formation of a regional community and establish a regional energy security system.

6. Concluding Remarks

China’s primary commercial energy consumption is dominated by coal but the importance for natural gas is rising rapidly while the share of oil is steady. China is currently a net energy importer, and the import dependence, represented by rising oil imports, has been growing.

Over the next fifteen years and beyond, China will continue to rely on coal to support its basic energy needs but coal’s share is expected to decline. The rapidly increasing oil and gas demand, coupled with flat domestic oil production growth and limitations on gas production, will lead to rising oil and gas imports and therefore pose serious challenges to China with regard to its energy security. How China copes with the rising energy imports and formulates its energy security policy will have profound impacts on the overall energy and economic developments in the country as well as Asia and the world as a whole.

Author’s note: references and sources of information are available upon request.