China s Quest for Energy and the Sea Power Conflict: At the Nexus of Energy Economics and Geopolitics

Transcription

1 China s Quest for Energy and the Sea Power Conflict: At the Nexus of Energy Economics and Geopolitics Isabella Ruble 1, Hannah Gagarin 1 and Sandro Furlan 2 1) Oak Ridge Institute for Science and Education, USA 2) Eni Corporate University, Italy

2 Overview Introduction Key Facts Economic transition and China s 13 th Five Year Plan Energy market overview and policies Coal Natural gas Oil Strategic goals and geopolitics

3 Introduction China is the single biggest energy consumer in the world and will account for a large share of global energy demand growth over the coming decades. The Chinese economy is transitioning from an industrial investment and export driven one to one that is more driven by domestic consumption. Rebalancing of the economy with quality growth and consumption less energy intensive industries, high-tech, high-value will drive demand going forward To accomplish this step market reforms are needed. We focus on energy market transitions in light of these changes. How is China approaching this energy transition? Are current changes increasing energy security? Developments in the coal, gas and oil sectors: Are current market structures conducive to energy security? Domestic pricing policies? Import policies? What are China s strategic goals? Do these goals align with its economy transitioning to a more sustainable development strategy?

4 Key facts Over the past 15 years strong economic growth led to: Rapid industrialization & urbanization Average annual energy demand growth of 6.2% China s economic growth has since slowed China is: Number 1 in global coal demand (more than 50%) Number 2 in global oil demand (strong import dependence of 60%) Number 4 in natural gas demand (after U.S., EU, Russia) Number 1 in installed capacity for electricity (1 in 4 GW in the world is in China) Number 1 CO 2 emitter in the world

5 China s Five Year Plans The People s Republic of China was created on October 1, A socialist system that led to increasingly bigger needs for energy supplies to serve industrial production (Zhang et al., 2017). The first FYP came into force in the early 1950s Since the 1990s China s domestic energy production is insufficient to meet the entirety of its demand and its import dependency is increasing. The various FYPs following the first one, had different foci, interesting for our topic are especially the first few with the heavy reliance on coal and the 12 th & 13 th FYP. The 12 th FYP is the first to heavily emphasize environmental improvements, while the 13 th FYP develops a new strategy to deal with the change in the growth pattern the country is facing.

6 China s 13 th Five Year Plan Key themes: Innovation Coordinated development Creation of Beijing-Tianjin-Hebei megaregion & Yangtze economic belt Inclusive growth Green growth Targets for air quality, CO2 intensity, reduced soil and water contamination Importance of environmental and resource related aspects in the economy Emphasis on green energy, manufacturing and environmental services Openness One Belt One Road Initiative

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8 China s Total Primary Energy Supply (TPES) amounted to 2973 Million Mtoe in 2015 Total Final Energy Consumption reached 1906 Mtoe in 2015 Agriculture/Fore stry 2% Commercial/Pu blic Services 4% Non-specified 3% Nonenergy use 8% Residential 16% Industry 51% Share of TPES excludes electricity trade ** peat and oil shale are aggregated with coal, when relevant) Transport 16%

9 Coal Consumption Power generation by Fuel in China, % Coal Consumption by End Use, % 1% 10% 19% 47% 5% 64% 49% Gas Coal Nuclear Hydro Other Renewables Residential Commercial Industrial Electric power

10 China is the world s largest producer and consumer of coal MT % of Global Production China % India % US % Australia % Indonesia % Russia % China India US Japan MT % Global Consumption % % % % Russia % so that changes in domestic coal policy or market often impacts the global coal market

11 Coal demand has slowed in the past 5 years due to: Environmental Policies Economic new normal 70,00 Share of fuels in power generation in China, ,00 50,00 40,00 30,00 20,00 10,00 0, Liquids Gas Coal Nuclear Hydro Other Renewables

12 Coal Market Structure & Regulation The coal sector is dominated by state-owned enterprises (SOEs) which are controlled by the government, who dominate the supply chain 3 types- large SOEs, Local SOEs, and Township and Village Enterprises (TVEs) The Central Government is responsible for creating policy and regulation, while provincial and local governments are responsible for implementation Since 2002, pricing is considered market-oriented, and in 2006 thermal coal prices for utilities was fully subject to market pricing

13 Current Policy Issues Facing Coal Pollution Overcapacity in mines leading to financial losses Transportation bottlenecks Coal s relationship to the power sector: Consolidation of small mines to create large mega-mines SOEs are a part of the social fabric SOEs employ a large portion of the population, so that closures often result in wagecutting and unemployment Coal companies employ about 11 people per 10,000 tons of output About 2.3 million miners would face unemployment by 2020 Uncertainties China has increased investment in green technology, including coal-toliquids, coal-to-gas, and coal-to-chemicals Conflicting policies Beijing has invested in many overseas coal projects, bringing in to question China s overall contribution to GHG emissions and reliance on coal

14 Natural gas will be the most important fossil fuel to satisfy increases in energy demand through 2040 Reforms are happening in the upstream and network regulations to support the policies that foster the switch to natural gas. The increase in imports of oil and gas: by 2040, 30% of internationally traded oil will go to china and almost 25% of long-distance traded gas. Infrastructure constraints on gas market growth Pipeline network is constrained, and access to LNG import facilities are limited Gas market reform is tied to reform of other energy sources

15 China natural gas consumption in 2017 amounted to Bcm Non-energy use (chemical/petroche mical) 9% Commercial and public services 10% Industry 36% Residential 29% Transport 16%

16 Natural gas market & pricing Heavily regulated at all stages of the supply chain Foreign companies enter only as service providers or in joint ventures with one of the big three Shale is regulated differently, with bidding rounds and opening to private companies About 50% of gas sold is so without any price intervention: LNG, shale gas, coalbed methane and synthetic gas, gas bought directly from the NOCs by industrial customers A movement towards gas to gas pricing is more likely than a movement toward some market based pricing indexed on other fuels

17 LNG market developments in 2017 Environmental agenda by the government 15% increase in gas demand 46% increase in LNG imports from 2016 China is now the second largest LNG importer Pressure from spot gas especially from spot LNG on contracted LNG Focus of NOCs and non-nocs after the shortage during the past winter: Need to increase natural gas infrastructure for better regional connectivity and increased storage capacity (NOCs) Citygas distributors want to secure supplies and max profit by looking for LNG on the global market (faster approval process for LNG terminals and TPA is a plus (Non-NOCs) The Future of LNG markets In 2017 the government focused only on gas but in the coming years clean coal will be another driver, slowing down a bit the demand growth for gas which will however remain strong (7-8%).

18 China: 7 th largest oil producer accounting for 4.5% of world oil production in 2016 Oil production is dominated by the NOCs (90% market share) Private companies are only present in oilfield services Foreign companies limited to some production sharing in offshore Exists the need to attract more investment into the sector the big companies have cut investment by 40-60% since the start of the decline in oil prices in Subsidy reform for refined petroleum products started in the early 2000 and reflect international prices since 2009 but there are a lot of direct transfer programs to vulnerable groups and for professional uses (taxis, farms, etc.). The government aims to phase out subsidies to fossil fuel production and rely more on market forces

19 Oil and security of supply WEO forecast shows that China s oil demand will increase from 11.5 mb/d in 2015 to 15.5 mb/d in 2040 while domestic production will further decline. China s oil import dependence will increase through Oil demand (million barrels per day) Net imports (million barrels per day)

20 Oil and security of supply In its quest for oil security: Invest in overseas oil producing assets (direct or loan for oil) Equal to 3 mb/d Change in strategy now by investing in countries on the OBOR Increased stocks of oil (30 days of imports or 245 mb in 2016) further increases are planned. More oil deliveries by land to reduce dependence on sea deliveries and issues related to various straights Kazakhstan-China pipeline Myanmar-China pipeline

21 Oil and security of supply import diversification by origin and route (Source: WEO)

22 The China island Priorities Integrity of the Country Sea Power and disputes China and geopolitics Socio-economic and demographic context From exporter to importer South must support North West must supply energy Military expenses + infrastructure + welfare vs. Debt

23 Stability means the South must subsidize the North Geopolitical Priorities for China: Protected by the North and Buffer States Internal Integrity + Coast Security + Han China BEFORE the British and Opium War China was Unified AFTER: the Coast join International Trade Regionalism, Separatism, War Lords

24 Sea Power Trade needs safe sea routes and logistics (Harbours) Safe sea routes necessitate a reliable, credible Navy, which needs: Time(20 years) Logisitics Budget

25 1) PIREOUS GR 2) PORT SOUDAN 3) DJIBOUTI 4) LAMU KE 5) GWADAR PK 6) KARACHI PK 7) COLOMBO SL 8) HANMBANTOTA SL 9) MARAO MAL 10) ILES COCO MYA 11) SITTWE MYA 12) CHITTAGONG BGL 13) DARWIN AUS ARCHIPEL PARACEL ARCHIPEL SPRATLEYES

26 X 2,65 SOCIO-ECONOMIC AND DEMOGRAPHIC CONTEXT

27 Gansu:7000 RMB SHANGAI:52000 RMB Conclusions (key variables) GEOPOLITICS: SEA POWER CHINA vs USA ECONOMY: SUBSIDIES + EXPORTS vs CONSUMPTION ENERGY: INVESTMENTS (REN+ NUCLEAR) + IMPORTS

28 Key takeaways China faces enormous challenges in reconciling mutually conflicting goals: For example, China s economic transition from export oriented to consumption driven is colliding with the geopolitical imperative to preserve the country s unity. The need to satisfy energy consumption growth is in contrast with the decarbonization process, if, for socio-economic reasons, the role of coal should stay prominent. Reforming energy pricing policies is crucial in order to have a consistent framework where actors can find their role to achieve demand side management-, and the security of supply goals. The dimension of investments in energy supply and the strategic investments in the military deterrent budget (especially for its navy) can hardly live together with the giant public debt.

29 Sources Koleski, K., 2017 IEA Annual Outlook, 2018 EIA, 2017 WEO, 2017 BP 2017 Statistical Review Report on China's Involvement in Coal-Power Plants GEI China. China is massively betting on coal outside its borders -even as investment falls globally CNBC China LNG Market Profile IHS. Zhang et al., 2017