28 October 2011

China’s Energy Security: Perception and Reality

Guy C.K. Leung,China’s Energy Security: Perception and Reality,” Energy Policy, 39.3 (March 2011): 1330-37.


China, now the world’s second-largest economy, is worried about energy security, which underpins the core objectives of Beijing and the political legitimacy of the Communist Party of China. The purpose of this study is to explore certain popular myths about China’s energy security. The study consists of six parts. After the introduction, it formulates the obscure concept of “energy security” and attempts to contextualize it with “Chinese characteristics.” Then it explicitly points out that the largest driver of oil demand by China as the “World’s Factory” is transport instead of industry. Next, it explores the effectiveness of transnational pipelines as a measure of energy security and explains why they are less effective than many observers have previously assumed. Furthermore, it investigates the global expansion of Chinese national oil companies and questions their actual contribution to energy security. A few concluding remarks then follow.

Research highlights

► Oil is the form of energy that has produced most of China’s energy insecurity. ► Transport sector, rather than industry, is the largest driver of China’s oil demand. ► The contribution of oil pipelines to China’s energy security is smaller than many assumed. ► Acquisition of oil reserves abroad cannot necessarily guarantee China a supply of oil that is more reliable and less expensive. ► Energy security is a means; it is not a goal.

Keywords: China; Energy security; Oil

Article Outline

1. Introduction

2. Conceptualization of energy security with Chinese characteristics

3. Actual drivers of China’s oil demand

4. Overstated effectiveness of China’s transnational oil pipelines

5. Contribution and impacts of Chinese NOCs’ global expansion

6. Concluding remarks



1. Introduction

The People’s Republic of China (PRC), home to 1.3 billion inhabitants with 44,000 births every day, passed Japan in the second quarter of 2010 to become the world’s second-largest economy. Sharply weaker overseas demand amid an unfolding global economic crisis hastened China’s economic slowdown in late 2008; yet the country has managed to maintain its staggering growth in Gross Domestic Product (GDP): 9.6% in 2008 and 8.7% in 2009, the fastest among “the BRIC countries.”

Despite shining performances on economic development since the 1978 economic reform, which unleashed China’s productivity, the country ranks 89th on the list of Human Development Index (HDI), behind many developing countries like Turkmenistan (87th), Colombia (79th), Georgia (74th) and Iran (70th), according to Human Development Report 2010 (UNDP, 2010). Hence, in 2007 Beijing’s leaders set themselves a target of quadrupling per capita GDP by 2020, in search of a “harmonious society.”

Regarded as one of the fastest growing world’s great powers, China is at the center of any debates on international energy governance. While a country’s economic size tends to reflect its energy demand, China’s appetite for energy is unsurprisingly mammoth, with its Primary Commercial Energy Consumption (PEC) amounting to 3066.5 million tons of coal equivalent (Mtce) in 2009, up 5.2% year on year. In other words, China’s energy needs, currently the second-largest worldwide, are larger than those of the other BRIC counterparts combined. Reportedly, China has accounted for nearly three quarters of world energy demand growth in recent years.

China’s fuel mix is largely dependent on coal, but, as will be discussed at greater length in the coming section, oil is the form of energy that has produced most of the insecurity of Beijing’s leaders over ensuring energy supplies. Oil has not traditionally taken up a dominant proportion in China’s fuel mix; it accounted for 17.9% of the country’s total commercial energy needs in 2009, with coal occupying 70.4%, primary electricity 7.8% and natural gas 3.9%. Yet given the brisk oil demand and stagnant oil supplies, China has been increasingly reliant on foreign oil. China became a net importer of oil in 1993 when 7.5% of its oil consumption had to be imported. In 2009, China’s oil demand reached 408.3 million tons (Mt) and import dependency of oil – the percentage of net imports over total demand – reached 53.5%.

Whereas domestic oil production has increased slowly – climbing from 138.3 Mt in 1990 to 198.8 Mt in 2009 – China’s oil consumption has grown rapidly from 114.9 Mt in 1990 to 408.3 Mt in 2009, yielding an average annual growth rate of 7.0%. The stagnation in oil supplies stems from the aging of China’s oil fields, particularly those in the northeast. Daqing oilfield, for instance, discovered almost half a century ago in the northeastern province of Heilongjiang, remains the country’s biggest oil field, currently accounting for about one-fifth of China’s total crude output. Its production has fallen from a peak of 56 Mt in 1997 to a new low of 40 Mt in 2009. It is widely believed that China, now the world’s fifth-largest crude producer (EIA, 2010), is unlikely expand its crude outputs significantly: In 2006, the director of the Department of Development Planning for the China National Petroleum Corporation (CNPC) stated that China’s oil output is only expected to increase from 179 Mt in 2005 to 199 Mt between 2006 and 2020, with output starting to fall in 2021. Estimates from various sources suggest that China’s import dependency will rise to 60–80% by 2020.

On the other hand, although China has also started to import more coal and natural gas, these fuels have hitherto posted far smaller challenges on the country’s energy security than oil does. China’s predominant dependence on coal, albeit the resultant environmental hazards, is strategically helpful in maintaining the country’s unusually high degree of energy self-sufficiency. While coal provides the bulk of China’s energy needs, China is able to supply the bulk of its coal needs, thanks to its relatively abundant endowment. China does not really lack coal; yet more than 90% of its coal reserves are found in the interior (primarily in the northern provinces of Shanxi, Shaanxi and Inner Mongolia) and must be transported long distances to the demand centers along the coast. This clogs the railway system, and in many cases, it is cheaper or faster for coastal consumers to acquire coal – of higher quality – by imports. Unsurprisingly, the country became a net importer of coal in 2009, with net import volume increasing to 103 Mt. But one should note that even though this might be a big business to world coal suppliers, this was never earth-shattering to China’s energy balance, considering its small proportion in total coal demand—3020 Mt in 2009. In fact, due to its availability and large reserves in many countries (and hence good market balance), coal is not regarded as close as politicized or strategic commodity as oil.

Furthermore, Beijing has fewer worries about importing natural gas than importing oil. Despite the fact that the chasm between domestic demand and supplies is widening, Beijing has been confident in filling this gap. China began to import natural gas in 2006 when the first Chinese Liquefied Natural Gas (LNG) receiving terminal in Guangdong Province began operations and the country became a importer of natural gas a year later. In 2009, China produced 83 billion cubic meters (Bcm) of natural gas but it consumed 87.5 Bcm. Thus, its need to import natural gas increased. Three reasons, however, account for the fact that natural gas remains a secondary concern in comparison to oil security. First, the role of natural gas in the Chinese energy economy is small, as indicated by its small role in the fuel mix. Secondly and more importantly, Beijing has recently successfully landed some long-term contracts and the future supplies secured are enough to fill the supply–demand gap in the near future. It is estimated that China will need to import 40–80 Bcm each year by 2020, and China has already procured a total of 30.6 Bcm of LNG supply based on long-term contracts and over 30 Bcm of pipeline gas from Turkmenistan. This also suggests that Beijing will have enough time to secure additional imports of natural gas, a luxury not found when it comes to oil balance management. Thirdly, natural gas has various substitutes as a fuel for many of its main uses, especially for electricity, which can be generated by coal, renewable energies or even oil, whereas oil, particularly as a transport fuel, is much less substitutable.

This study selects and investigates certain popular myths of China’s energy security, with emphasis placed on oil. It consists of six sections. After the introduction, Section 2 formulates the obscure concept of “energy security” and attempts to contextualize it with “Chinese characteristics.” Section 3 explicitly points out that the largest driver of oil demand by China as the “World’s Factory” is transport instead of industry. Section 4 explores the effectiveness of some China’s transnational pipelines as a measure of energy security and explains why they are less effective than many have previously assumed. Section 5 investigates the global expansion of Chinese national oil companies and questions its actual contribution to energy security. Section 6 presents a few concluding remarks. …