Workers shovel coal, China’s most abundant energy resource, in Datong, Shanxi Province. Coal has been used in China since the fourth century, when it was simply excavated from surface deposits. PHOTO BY JOAN LEBOLD COHEN.
Coal has been used in China since at least the fourth century; the country has been mainly dependent on it as a source of energy since around 1,000 CE. Today China is the biggest producer and consumer of coal in the world. With increasing demand for energy as Chinese industry grows, the country has been investigating and developing other sources: gas liquefaction, hydroelectricity, renewable power, and nuclear power.
Chinese industry requires energy for commercial purposes such as mining and ore processing; iron, steel, and aluminum production; machine building; manufacturing transportation vehicles such as automobiles, rail cars, locomotives, ships, and aircraft; and for producing or processing textiles and apparel, cement, chemicals, fertilizers, consumer products, food, telecommunications equipment, and armaments. Increasingly, as industries shift manufacturing to China—and China has become the world’s factory—there is also an accompanying shift in energy demand. Energy consumption has been growing 1.4 times faster than the gross domestic product (GDP) since 2001, a growth rate that—barring the impacts of the 2008 global credit and financial crisis—has shown no signs of changing. In some provinces the demand for energy outpaces the supply of coal, oil, and other sources of power leading to imposed brownouts to conserve energy. China is confronted by an energy crisis of enormous proportions: its strategic economic goal of quadrupling GDP by 2020 while only doubling energy growth during the same period is clearly in jeopardy.
According to the International Energy Agency (IEA), the total primary energy supply in thousand metric tons of oil equivalent (ktoe) was 1,717,153 in 2005. On this basis the breakdown of supply consists of: coal, 63.4 percent; oil, 18.5 percent; combustible renewables and waste, 13 percent; gas, 2.3 percent; hydroelectric, 2 percent; and nuclear, 0.8 percent. Geothermal and solar supply is a tiny fraction, not reported in these figures.
While energy resources are extensive, they will not be sufficient to keep pace with China’s energy needs. The most abundant resource, coal, has a long history of use in China, including heating buildings and smelting metals—going back at least to the fourth century, when coal was simply excavated from surface deposits. Coal was a leading fuel by the year 1000, a time when settlements in Europe still preferred to use wood and charcoal (a fuel made from wood). Coal dominated energy use in China for the next thousand years and continues to do so: China is the biggest producer and consumer of coal in the world. In 2005 China’s coal consumption surpassed 2.2 billion tons.
Eighty two percent of China’s energy supply comes from coal-fired power plants. Demand for more energy supply reputedly results in the building of a new thousand-megawatt coal-fired power plant every seven to ten days. This reality means that coal industries, rather than petroleum or natural gas industries, have played the most significant role in energy production and industrial development to date. Apart from the economic benefits, however, much of the coal has high sulfur content, creating widespread atmospheric pollution and health problems, particularly in urban areas. In addition, burning coal contributes to China’s carbon footprint.
The dependence on coal, combined with ample known coal reserves, has led to initiatives in coal gasification and liquefaction to replace coal combustion and oil imports. Coal gasification, which appears to be a promising technology, can lead to production of synthetic gas for power, domestic and industrial heat, and clean fuels for transportation and cooking. Coal liquefaction, a more recent technology, involves coal-to-liquid conversion. Two coal liquefaction plants are scheduled to go into production by 2011, though others have been canceled because of concerns about high capital costs.
In the 1960s increasing concerns about the security of the domestic energy supply, as well as market demands for alternatives to coal, led to major initiatives in oil and gas exploration including the development of the famous Daqing oil field in northeastern China’s Heilongjiang Province. While China does not have significant natural reserves of oil, there are significant domestic reserves of natural gas. For example, the west–east natural gas transmission pipeline, four thousand kilometers long, connects gas fields in Xinjiang and Shaanxi with the Shanghai market. This development will contribute to China’s stated goal of increasing natural gas to 8 percent of total supply by 2010. A second west–east pipeline, running 4,945 kilometers from Khorgos in the northwestern Xinjiang Uygur Autonomous Region to Guangzhou (Canton), the capital of Guangdong Province in southeast China, was announced in 2008. Proven oil and gas reserves on the mainland and offshore, however, will not meet increasing domestic demand. China has become and will continue to be a net importer of oil and gas.
Initiatives to develop untapped hydroelectric potential are underway, of which the Three Gorges hydroelectric dam, created by blocking the Yangzi (Chang) River, the world’s third-largest river after the Amazon and the Nile, has been the most controversial. Not only have there been questions about the economics of the project, its costs and benefits but also reservations have been raised on environmental and social grounds. The impacts on the riverine environment and ecology as well as the effects of resettling millions of people away from the location of the reservoir and power stations have been massive.
Sources of renewable power—such as biomass, wind, solar, geothermal, and tidal power—are minor in China compared with levels of 3 percent in nations such as Denmark and the United States. Their potential for development, however, is considerable. In recognition of this, the strategic goal for renewable sources is for 15 percent of all energy from wind, biomass, solar, and hydropower energy by 2020, compared with its present 8.5 percent.
Nuclear-power capacity is also expanding. In 2008 there were eleven nuclear-power reactors in commercial operation and another six under construction. Ultimately Chinese authorities seek to be self-sufficient in reactor design, construction, and financing so that they can expand electricity production from nuclear power to 3 percent of total supply in the short term and to 4 percent by 2020.
The shift toward a market economy in energy in China has been fraught with difficulties. National-security concerns over the control of energy supplies and the difficulty of separating government and private enterprise functions in the energy sector represent two overarching challenges at the domestic level. At the international level, the Asian financial crisis of 1997, combined with low prices for oil and coal in the late 1990s, made the economic climate for reforms more difficult at that time. China’s economic reforms since that period have been considerable and include accession to the World Trade Organization in 2001.
The restructuring of the energy industry varies by sector—that is, the type of resource: coal sector, nuclear sector, renewable sector, and so on—with the level of competitio
n significantly less than that in the United States, Canada, and Europe. In January 1994 coal prices were deregulated and gradually allowed to float. This change led to closing thirty-one thousand unprofitable mines in 1999 and another eighteen thousand mines in 2000. Some 420,000 miners were laid off in 1998 alone. Restructuring continues with the planned closure of thousands of small mines, many with poor safety records, before 2010. Mounting opposition from local authorities, however, has delayed the implementation of many closures. Global financial shocks such as the 2008 collapse in credit markets and the prospects of a protracted recession in the United States and the European Union will inevitably lead to less demand for energy by Chinese manufacturers.
The oil and gas industries, like other industries, were once centrally controlled by government. Since the economic reforms of the 1980s, however, state-owned oil and gas companies have been created to increase productive capacity through joint ventures with foreign oil companies. The fact that oil consumption has outpaced domestic production since 1993 has further spurred efforts to increase domestic production. To this end, exploration licenses are now awarded to state-owned (but slightly privatized) companies on a competitive basis to meet national production targets.
The sources of electricity production provide one key insight into the Chinese energy industry. Of the 3.256 trillion kilowatt-hours produced in 2007, about 78 percent was supplied by highly polluting coal-burning plants. The balance came from hydroelectric and nuclear-power industries at about 18 percent and 1 percent, respectively. Other sources, including renewable sources, are not currently significant. The amount of coal used in electricity production is about 24 percent of total coal consumption. Industries such as iron and steel, armaments, cement, and chemical fertilizers also use significant amounts of coal.
The energy reforms that have taken place include the creation of two vertically integrated and publicly traded companies from government-controlled organizations that previously had to serve public-policy and regulatory functions. By creating two “market-based” companies, PetroChina and Sinopec, the Chinese government sought to have greater efficiency in energy production and to prepare the way for the competitive pressures that would arise from greater foreign direct investment in domestic energy projects.
PetroChina was created from the China National Petroleum Corporation (CNPC) in 1999 with 480,000 of its 1.5 million workers. CNPC allocated the majority of its best assets to PetroChina while retaining the excess workforce and welfare obligations. At the outset PetroChina ranked fifth in the world in estimated reserves, produced 68 percent of China’s total oil, operated 3,400 gas stations, and owned pipelines transporting 84 percent of China’s natural gas. A second company, Sinopec (China Petroleum and Chemical Corporation), followed in 2000. This company operates more than 20,000 gas stations, 1,100 bulk-storage facilities, and a number of refineries. A significant aspect of this restructuring has been the dismissal of ‘excess’ staff. A 5 percent cut in employment—attributed to soaring labor costs—was announced in 2008, to take effect over a three year period. Given that staff totaled 1.67 million in 2007, this decision would result in 80,000 people losing their jobs. Although information on downsizing is unreliable, it appears that PetroChina laid off 38,000 employees by January 2001 and that Sinopec has cut its workforce of 500,000 by at least 20 percent.
While privatization initiatives are modest given that the state maintains a majority stake in each company, a growing dependence on foreign oil supplies has led Chinese oil companies to a “going-out” or zou chu qu policy of overseas investments in oil assets since 2001.
China’s reliance on coal has led to serious concerns about energy efficiency and environmental problems and makes the development of less harmful sources of energy a pressing challenge. First, energy production is no longer a simple matter of economic efficiency, narrowly defined. Because energy production can have significant impacts on employment and the environment, capital markets are increasingly required to consider environmental, labor, and human-rights ramifications before they make their investment decisions. Second, environmental problems created by burning coal include acid rain, smog, and greenhouse gases such as carbon dioxide. Each of these problems has specific impacts on the environment and human health. Sulfur dioxide causes acid rain, for example, and damages forests, croplands, and lakes. Smog, made up of particulate matter and sulfur dioxide emissions, covers many cities and affects people’s health. In certain parts of China, the concentration of total suspended particles is two to three times the level specified as safe under World Health Organization guidelines. Carbon dioxide emissions (the main cause of climate change through the greenhouse effect) in China are second only to emissions in the United States. The average American creates 7.5 times more carbon dioxide, however, than the average Chinese.
Energy industries, whether they are publicly or privately owned, have not only to produce more energy from existing natural resources; increasingly they also have to produce energy in environmentally responsible ways. Improving energy efficiency while linking energy production to environmental goals is part of a larger challenge China shares with other nations. Economic efficiency goals have thus become an established aspect of energy strategy. In 2003 China’s energy consumption per unit of GDP was 11.5 times more than Japan’s, 4.3 times that of the United States, and nearly 4 times the world average. The opportunity to reduce the amount of energy and materials consumed is thus enormous. China’s economic efficiency goal, to reduce energy consumption per unit of GDP by 20 percent between 2005 and 2010, was in 2008 the world’s most aggressive energy efficiency target. If China is successful, it will reduce not only the amount of energy required to produce goods and services but also the amount of environmental pollution. As part of this initiative, energy efficiency targets have been set for the thousand largest enterprises that together consume one-third of all China’s primary energy. Benchmarking performance through audits of energy action plans is a key component in measuring whether the enterprises are meeting their energy-saving targets and hence cutting energy use.
The Chinese government’s expectation that GDP per capita will quadruple between 2000 and 2020 poses challenges for the security of energy supply. Rapid economic growth of 8 to 10 percent each year could be thwarted by supply bottlenecks creating energy supply shortages. Whereas 90 percent of the current energy demand can be met from internal supplies, not all the energy required is in a readily available form. This situation is particularly the case for oil, which is mainly imported to fuel transportation vehicles. The imports of crude oil, petroleum products, and some coal are more than twice the exports of the same products and natural gas. Sourcing supplies has thus become a major focus of attention and a diplomatic initiative in its own right. The Persian Gulf, Africa, and Latin America are three geographic areas for future oil and natural-gas imports via maritime shipping. The Russian Federation and central Asia are potential sources of supply for overland pipelines. With regard to coal, when domestic demand is strong, China imports coal from the Association of Southeast Asian Nations and Australia. In many instances, the sources of supply can be interrupted by “pirates,” armed conflict, or trade disputes, suggesting that China needs
to follow a diversification policy to spread the risk of interruptions to supply. A shortage of energy is considered not only a threat to economic development but also a potential threat to social stability and national security. Therefore, China adopted a policy goal to build by 2010 strategic oil reserves equivalent to thirty days’ worth of imported oil.
Another aspect of energy security is the control the Chinese government exerts on oil prices. Setting prices lower than those of the international market creates losses for the Chinese oil-refining industry. For example, government-controlled oil prices in the domestic market might create a shortfall in supply as refineries cut production to avoid the losses that arise in buying oil at international prices only to sell at lower government-controlled prices. Producers and dealers might also hoard oil to gain profits in the case of a rise in domestic oil prices. The benefits to consumers can be viewed not only as subsidies but also as the absence of a signal to change consumption behavior.
As a consequence of a variety of concerns, the pressing energy challenge is being addressed through four approaches: structural adjustment, technical improvement, enhancement of management, and focusing on reform. Structural adjustment involves restructuring the industrial, agricultural, and service sectors, particularly through economic efficiency initiatives and the development of non-energy-intensive industries. Technical improvement refers to accelerated research and development of energy conservation technologies as well as technical transfer of new techniques. Improving energy efficiency through enhanced management involves strengthening legal regulations and standards, and energy efficiency labeling and product certification. Focusing on reform involves examining the role of the energy market in regulating supply and demand through more accurate price signals. It also includes implementing preferential tax policies and incentives concerning energy efficiency.
The twin challenges of increasing energy use and reducing environmental pollution pose a serious policy dilemma for China’s continuing economic development and energy industries, a dilemma that is inevitably a driving force behind significant, though possibly rhetorical, commitments to more renewable energy sources and efficiency gains through technological enhancements.
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Source: Gale, Robert. (2009). Energy Industry. In Linsun Cheng, et al. (Eds.), Berkshire Encyclopedia of China, pp. 704–709. Great Barrington, MA: Berkshire Publishing.
A Samya Oil derrick offshore, on the province of Hainan Island. Market demands for alternatives to coal in the 1960s led to major initiatives in oil and gas exploration, including the development of the famous Daqing oil field in Heilongjiang Province PHOTO BY JOAN LEBOLD COHEN.
Solar collection panels at Beidaihe. China is now making an effort to move toward more renewable energy resources, such as solar power. PHOTO BY JOAN LEBOLD COHEN.
Energy Industry (Néngyuán ch?nyè ????)|Néngyuán ch?nyè ???? (Energy Industry)