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An Analysis of China's Strategy for Future Energy Development

By Li Wei 2015-07-03

Energy issue is of strategic importance affecting China's overall economic and social development that needs systematic planning and far-sighted deliberation. In recent two years, DRC has undertaken a major research project on the strategies for China's mid- and long-term energy development with the involvement of over 70 experts from relevant Chinese and foreign organizations including Shell and Tsinghua University. The research has focused on the situation in the global and Chinese supply of and demand for energy; objectives, principles, and road map of China's future energy development; the controversial energy technologies such as coal chemical, nuclear power, and electric vehicles; key energy consuming areas such as urbanization and transport; energy security and major energy policies. Based on the findings of this research, some basic views have been produced as follows.

I. Energy Sector Is Experiencing a Period of Historical Adjustment and Revolution and Significant Changes Are Taking Place in Energy Technology, Energy Market and Energy-related Geo-politics.

Firstly, the revolution of energy technology is advancing rapidly. The global innovation of energy technology has entered a highly dynamic period featured by multi-point breakthroughs, accelerated application and far-reaching impacts. On the supply side, renewable energy, unconventional gas and oil have seen a phase of large scale application. On the demand side, electric cars and the transforming links of smart power grids are being channeled to market. New breakthroughs in the development of flammable ice and carbon capture and storage (CCS) would hopefully be achieved. Innovation has been prioritized with reinforced efforts in major countries based on their resource endowment, technical capabilities and demand potentials. Technological revolution in energy is triggering industrial revolution and will produce a profound impact on structure of energy supply, mode of production and utilization, industrial organization and regional structure, leading the globe into a new round of industrial revolution.

Secondly, significant changes have taken place in the pattern of energy supply and demand. The exploration and exploitation of unconventional gas and oil have driven the increase in petroleum reserves. The panics of shortage stirred up by the "peak oil theory" have basically vanished. There has been currently a trend that the global center of oil and gas consumption is moving to the east while that of production to the west. In the period of 2010-2030, the newly increased oil demand of China and India is expected to account for more than half of the world total increase. It is anticipated that Latin America would be a new center of oil production while the United States is seeking to be a pricing center for oil and gas. The oil supply side has presented a new development pattern of multi-polarity involving the traditional oil producing areas, Latin America and even the North Polar Regions.

Thirdly, the energy related geo-politics are increasingly complex. The United States has seen substantial progress in its efforts to make America energy independent, leading to even more complex and volatile energy geo-politics globally. While it will never give up its oil interests in the Middle East, the United States is more tough and radical in pushing the democratization process in the Middle East disregarding the constraint of oil issue, resulting in a more unstable international energy market. The rise in the risk of international energy transit lines has posed challenges to China that is thumbing a lift of international energy transit security, making it exposed to the geo-political risks in its surrounding areas, the Middle East and Africa. The shale gas revolution has led to the increase in the supply of LNG on European market and the low priced coal from the United States. Whereas, with the declining share of its natural gas in Europe, Russia has to export its natural gas to East Asia, causing a far-reaching impact on the geo-politics on the Euro-Asia continent.

II. The Next 20 Years Constitute a Period of Opportunity for China to Realize a Revolution of Energy Production and Utilization.

Firstly, the global energy demand is bound to grow continuously and the imbalance between supply and demand will not be fundamentally changed. Based on a model analysis, even though the world has made tremendous efforts to push forward green transformation, the global primary energy demand will reach 1.59 billion tons and 17.7 billion tons of standard oil equivalent by 2020 and 2030 respectively, up by 20.4% and 34.1% over 2010. Emerging economies have composed the main forces driving up the international energy demand. For the period of 2010-2030, the energy demand increments of China and India would take up 33% and 29% respectively of the world's total. From the global perspective, although the development of unconventional oil and gas in North America has improved the regional energy supply to some extent, with countries in South Asia, ASEAN and Middle East stepping up their industrialization process, global energy demand will continue to grow. Therefore, the tight global supply compared with demand will not see a fundamental change.

Secondly, as the Chinese economy is shifting from its high growth to the mid-high, the growth rate of energy demand in China might drop significantly. In the next 20 years, if correct energy strategies and policies were adopted, economic restructuring and industrial upgrading were accelerated while low carbon transportation and green buildings were developed, the energy demand would be controlled at around 5 billion tons and 6 billion tons of standard coal equivalent by 2020 and 2030 respectively. From 2010 to 2020, China's energy demand would grow by 4.8% annually, and grow by less than 1.5% in the period of 2020-2030, which would be significantly lower than the average annual growth of 8.4% in 2000-2010.

Thirdly, China's energy self-sufficiency has generally maintained at a fairly high level, but the dependence on oil and natural gas import has kept climbing while the environmental pressures stemmed from energy exploitation and utilization have continued to increase. If the rapid growth of oil consumption were not controlled, China's oil consumption would exceed 600 million tons by 2020 and 800 million tons by 2030. Furthermore, the dependence on oil import would reach around 75% by 2030 and that of natural gas would also rise speedily, leading to severe challenges to China's energy security. Energy exploitation and utilization have brought about more environmental pressures, with CO2 emission rising steadily. If no control measures were taken, it would pose major challenges to China's socioeconomic development, jeopardizing the well-being of the people in China and in the world. In addition, the use of fossil fuels is the prime emitter of PM2.5, NOX, SO2 and other air pollutants. If the consumption of fossil energy were not controlled, the emission intensity were not cut and the current trend were not contained, the air pollution would reach an unbearable level.

III. Building a Safe, Green and Highly Efficient Energy System Focusing on Transforming the Mode of Energy Development.

In light of major adjustment and reform of the global energy sector and China's efforts to accelerate the transformation of its economic development mode, China's energy strategy should focus on promoting the transformation of the mode of energy development in order to establish a safe, green and highly efficient energy system initially by 2020, with it fledging up by 2030. Approaches to realizing these strategic objectives are categorized into the following six areas: ensuring energy security, prioritizing energy conservation, optimizing energy structure, targeting low emissions, technology-driven development and institutional innovation.

1. Ensuring energy security

Firstly, while stressing the reliance on domestic resources, the development of new energy and natural gas should be intensified to avoid rapid decline in energy self-sufficiency. A certain reserve-production ratio for oil should be maintained to stabilize the domestic production, and coal-to-liquids and coal chemical process should be developed moderately. Secondly, overseas resources should be utilized safely and effectively. The strategic targets to control the reliance on oil and natural gas import should be clearly identified. The oil import markets should be diversified at an accelerated speed to reduce the reliance on oil import from the Mideast and that on oil shipping through Malacca Strait, so as to guarantee the security and safety of oil and gas import. Oil companies from oil-producing countries and multinational oil companies should be encouraged to invest in China focusing on the mid-and-downstream businesses, while Chinese enterprises should be encouraged to invest overseas in the upstream businesses and mid-stream ones such as oil refining. Thirdly, the capabilities of strategic oil reserve and emergency response should be strengthened. Efforts should be made to establish a multi-level petroleum reserve system involving national businesses and social organizations with the participation of various enterprises. And at the same time, the establishment of the trading center for oil futures should be sped up. The storage ratio of natural gas should be enhanced and the safe and stable operations of power system and its shipping routes ensured.

The article was published in China Development Review, No. 2, 2014.

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