An Important Strategic Issue of the Economic Development of China:

Oil Security

Dr. Sizhi Guo ( Shishi-KAKU )

Energy Strategy Department

The Institute of Energy Economics Japan

Objectives of the study

Since the 1990s the economy of China has been in a state of continuous high growth. Chinese energy consumption has also greatly changed, such as, coal consumption has decreased significantly and oil consumption has increased rapidly. At this time domestic petroleum product (supply) could not meet the demand so China had to depend on the importation of oil. At present China has become the third largest oil consuming country, after America and Japan in the world. And in the following decade (2001-2010), the Chinese economy is expected to maintain steady annual growth of 7-8percent. Therefore, if the Chinese economy sustains high growth, oil consumption is expected to increases steadily. Under these circumstances, the one most important strategic issue is how to respond to oil supply security concerns based on expected increase in the dependency of oil consumption as a function of economic growth. (In recognition of this situation), this study analyzes and discusses the situation that china is facing in relation to the oil security and the strategic policies required to safeguard oil security

Influence of oil on energy supply and demand with economic growth

Due to high economic growth in the 1990s, the consumption of primary energy has increased greatly. During the period 1991-2001, consumption of primary energy has changed largely. Primary energy consumption increased from 694.5 million tons of oil equivalent (hereinafter referred to as “TOE”) in 1991 to 839.7million TOE in 2001. From the energy-consumption structure in China coal consumption has recently been decreased and sluggish, while oil and natural gas consumption is increasing steadily. Therefore major changes have taken place in the energy consumption structure of China, especially with relation to oil and gas, increasing (from 17% and 2.0% in 1991 to 28% and 3% in 2001), and with coal’ s share dropping (from 76% to 62% during the same period). As Chinese economic development continues, total energy consumption is expected to continue to increase. Especially, the increase of oil and its consumption share is expected to continue, with the consumption share of coal expected to continue decreasing into the future.

To meet these future increase in consumption, increases in oil imports is, as it can not be met through domestic production alone.

China became a net oil importer in 1993. Since then oil imports have grown rapidly up. Net oil imports reached 13.9million metric tons in 1996, from9.9 million metric tons in 1993, increasing on average 12% every year.

In 2001 net oil imports reached 81.71 million metric tons accounting for one third of oil consumption. During the period 1996 –2001, net oil imports % have increased by 50% annually. According to some estimates, the upward tendency for oil imports is expected to escalate in future. China will face an oil shortage of 155-187million metric tons in 2010, and 240-295million metric tons in 2020 accounting for 46.3-52.3% and 55.8-62.1% of total oil consumption at these times.

Oil consumption in China has greatly grown, from 117.9 million TOE in 1991 to 231.9 million TOE in 2001, a 96.7%, increase−brought about by economic development, income increase and motorization of the society. (China targeted GDP growth rate in 5 years is 7% higher rate, will be possible). A 7% or higher rate for the next 20 years is expected. As a result, the oil demand is expected to increase steadily along with this economic growth.

On the other side, with the maturity of major (Daqing, Shengli, Liaohe) onshore oil fields, domestic production of crude oil in China, which amounted to 153 million tons, is progressing at a rate an average growth rate of 1.6 % annually since 1991. The major onshore oil fields that account for 70% of the domestic production have stagnated in term of crude production rise. At present crude oil production at other oil fields, particularly offshore and the western inland fields have increased. According to the latest projections, crude production is increasing in the other fields (offshore fields, Tarime Basin etc.) but declining or leveling off at the major fields, and is expected to continue in the future. Crude oil production output as a whole in China is expected to reach 0.17 billion tons, subsequently leveling off or slightly increasing in pace.

Therefore to correspond the state and demands, China has considerably increased oil imports, which have risen by 669% compared with 1991,to 81.7 million tons in 2001, particularly the crude oil side, which rose by 909%, to 60.3 million during the same period. Amongst crude oil imports, those from the Middle East have reached 33.9million tons, accounting for 56.2% of crude oil imports.

In summary after 2001 Chinese oil imports are expected, to continue rising under the circumstances of the oil demand with economic’ s continuous growth and domestic crude oil production conditions as stated above.

China efforts to secure oil supply as stable total energy supply

Due to the massive expansion of oil demand and oil imports that are expected to continue, China is devising diverse security strategies and actions to secure oil and energy supply.

(i) The foundations for a constant oil supply must be firmly established by further increasing national strength. (ii) In so far as no negative impacts on the nation’s economic development or life standards are produced, the national economy’s dependence on oil must be alleviated or reduced, and commitments to energy conservation and alternative energy development and promotion must be enhanced. (iii) Efforts must be made to facilitate dialogue between producing- and consuming countries by positively promoting international energy cooperation. (iv) After getting WTO membership, reforms of the oil industry are being pushed forward and eventually, in pursuit of liberalization of the domestic oil market, alliances with major oil companies and producing countries will be tightened. (v) Diversification of energy supply is being advanced. This includes not only diversification of use of such energies as oil, coal, natural gas, nuclear, hydro and wind power, but also diversification of oil import sources, transport sources and systems, pipelines and the like. (vi) Elaborated resource utilization strategies must be implemented. Namely, domestic energies at home and abroad are being put to rational use from the standpoint of comparative advantage, so that energy from abroad can help China keep its domestic crude oil production at 50% of domestic crude oil consumption for as long as possible. (vii) CNPC, SINOPEC, CNOOC advancing to overseas upstream direct investment in order to target overseas equity crude oil of 15-25 million tons by 2005. (�G) By positively building up a national strategic oil stockpiling system, and introducing legal, administrative and financial measures, a commercial stockpiling system of the oil industry will be created to supplement national stockpiles.

China is actively looking into the energy supply security actions, particularly in oil side policies as below. First, China has acquired 10 million tons of equity crude oil as of 2001 by investing in overseas upstream oil from the mid-1990’ s. Furthermore, in order to encourage steady and diversified import sources of Middle Eastern and Russia crude, etc. China has been enhancing its relationship with oil producing countries ( major Middle Eastern countries ,Russia ,central Asian countries ,etc.), since the end of the 1990’s. Thirdly, China has been promoting domestic crude oil production through developing west fields and offshore fields and EOR in eastern fields to target at 15-25 million tons in 2005. Finally, as important measure of oil security strategic, China has tried to create a national strategic oil stockpile system to create oil stockpile capability of eight million cubic meters by 2005.

A view of oil security in China

Even though China depends on imports, oil supply has increasingly been becoming a noticeable problem in conjunction with economic growth, oil supply problem be unable to put obstacles in the economic higher growth in future.

This is mainly due to the factors facts stated below.

(�@) Oil security strategies and actions in China as discussed above are practical With getting WTO membership as a turning point, Chin has positively been entering into the international economic society to join in competition and in cooperation with foreign countries. While the development of China is very attractive to oversea investors, it is necessary for China to co-operate with various countries (including crude oil producing countries). (�A)A powerful economy is the important basis for China penetrating into global the market to acquire crude oil and products. China has achieved rapid economic growth since it opened its door to foreign investment and reforms in 1978. In the past 20 years, China has held a economic growth rate 10% annually, with its GDP ranking seventh in the world. Therefore, China is capable of entering into the international market for resources and products. (�B) Crude oil and natural gas reserves in the world are expected to be sufficient enough to correspond to worldwide demand. In particular, with research and development in the oil industry, the cost for E&D (exploration and development) will decrease to degree. (�C) China is able to pay foreign exchange for oil imports .Since 1993 oil and petroleum product imports haven’t as yet imposed considerable pressure on foreign exchange payment. Even though in 2000 oil imports and crude oil prices rose greatly, China’s oil and petroleum product imports only accounted for 5% of foreign trade volume, and as yet has not brought about an unbalance to Chinese trade. According to projections from the State Development Planning Commission, the rate of increase oil imports will be higher than the growth rate of total foreign trade in China, brought about by an expected increase in world crude prices. However that will not cause damage of China’ s balance of payments, due to oil importation costs being less than 6% of the expected export revenues in China. (�D) Crude oil in China is expected to reach 0.2 billion tons in 2020, according for half of the projected demand then. However, it is expected that domestic production will be able to satisfy most and necessary demand when oil imports are interrupted by an unexpected event.