China Promises Measures to Improve Energy Security

An analysis by Michael Lelyveld
china-sinopec-gas-lines-puyang-henan-province-jul31-2016.jpg Chinese workers of China Petroleum and Chemical Corp. (Sinopec) install pipes at a natural gas gathering station in Puyang, central China's Henan province, July 31, 2016.

After years of downplaying the country's dependence on energy imports, China's government has pledged to take steps that "will ensure energy security" this year.

In a report last month to China's annual legislative session, China's top planning agency promised a range of measures to improve energy security, but it set no quantifiable targets.

"We will ensure energy security," the National Development and Reform Commission (NDRC) said broadly in its report to the National People's Congress (NPC).

"We will make steady progress in developing the production, supply, storage, and sales systems of coal, petroleum, natural gas, electricity, and petroleum reserve bases, and better regulate the operations of energy companies," the NDRC said.

"We will improve our contingency plans in response to major changes in supply and demand at home and abroad, ensuring an overall balance of supply and demand and the stable operation of our markets," the agency told the NPC.

The reference to contingency plans was not explained.

But the listing of energy security among the government tasks for 2020 appears to elevate the issue to a new level of concern after years of warnings that China has become increasingly reliant on imports, particularly of crude oil.

Last year, China's oil imports averaged 10.1 million barrels per day (mbpd), climbing over 9 percent. Domestic output rose less than 1 percent to 3.8 mbpd, according to official data, making the country dependent on foreign supplies for 72.6 percent of its oil.

So far this year, the import dependence ratio has remained virtually unchanged despite the upheavals in China's economy due to the COVID-19 crisis and the rout of world oil markets triggered by the Saudi Arabia-Russia price war.

China's reliance on natural gas imports has been following a similar track, reaching 43 percent of supplies in 2019, although the ratio has dropped to about 40 percent with a 10-percent rise in domestic production through April.

Gas imports suffered a steep slowdown in growth to 1.75 percent in the first five months of the year as buyers tried to delay pipeline deliveries and divert shipments of liquefied natural gas (LNG) during the pandemic lockdown.

Hardly any solutions

While the inclusion of energy security in the NDRC work report may reflect recognition of China's vulnerability, the agency offered little in the way of solutions beyond a list of previous plans.

"It's an interesting emphasis this year on energy security," said Michal Meidan, director of the China Energy Program at the Oxford Institute for Energy Studies.

"It reads to me like a call to beef up domestic production of all energy sources, as well as enhance the flexibility of supply systems, which refers mainly to storage capacity," she said.

"I think the relatively vague wording now opens this up to a lot of lobbying by various interest groups as they seek financing for a number of projects throughout the value chain," Meiden said.

Among the promised reforms, the NDRC said it would build a "national unified electricity market," upgrade coal-fired power plants and take steps to make non-fossil fuel sources "the major contributor to energy consumption growth."

Notably absent from the agenda was any specific mention of supporting increased investment for "equity" stakes in oil and gas projects outside China's borders. The government has previously argued for years that diversity of supply and equity oil investments were major strategies for ensuring energy security.

Given the slump in world petroleum markets, China's government appears to have lost interest in the costly "go out" policy for foreign oil development that it launched over two decades ago.

"We will continue to support petroleum and natural gas exploration and exploitation," the planners said without clarifying whether investment should continue abroad.

Also missing from the menu was any consideration of conservation as a means to limit the growth of energy imports. Efforts this year seem to be devoted to economic recovery and the revival of consumption.

The government appears to be making the case that those goals can be achieved without making energy security worse.

The agency also touched on the goals for reorganizing China's pipeline networks without referring specifically to spinoff and merger plans that were thought to be imminent.

"We will pick up the pace in developing oil and gas transmission pipelines and reserves projects, improve pipeline operation mechanisms, and encourage the opening up of pipeline facilities to all eligible users," the report said.

The government cited the same goals in December when it announced the formation of the China Oil & Gas Pipeline Network Corp., known as PipeChina. The new monopoly, established after years of negotiations, was intended to include the pipelines and other infrastructure assets of all three of China's national oil companies (NOCs).

Chinese workers walk along an offshore oil engineering platform in Qingdao, eastern China's Shandong province, June 1, 2016.
Chinese workers walk along an offshore oil engineering platform in Qingdao, eastern China's Shandong province, June 1, 2016.
The grand plan

Earlier this month, the business website Caixin Global reported that the government would require the NOCs to hand over management of 10 of their LNG terminals to the new PipeChina, but talks on the asset transfers have dragged on for months with little reported progress.

The point of the grand plan is to promote third-party access to pipelines, which the NOCs have effectively barred. With better access, independent exploration and production will follow, enhancing China's energy security, or so the theory goes.

But China's domestic oil output has been stuck at the same level for years, suggesting that third-party access will do little to solve the problems of difficult geology and high production costs. At current world prices, the NOCs have been losing money on every barrel they produce.

China's major energy security strategy remains increased storage capacity, allowing it to buy when international oil prices are low and guard against potential disruptions.

This week, China defied reports over the last two months suggesting that it had run out of available storage for both crude and oil products as it posted record imports of 47.9 million metric tons of crude in May, the equivalent of nearly 11.3 mbpd, according to Reuters.

Unlike the Western members of the International Energy Agency (IEA), China maintains secrecy over its oil storage capacity, commercial inventories and Strategic Petroleum Reserve (SPR), frequently taking the market by surprise with buying sprees.

Last September in a rare disclosure, an official of China's National Energy Administration (NEA) said the country had about 80 days' worth of import coverage in its SPR, slightly less than the 90-day standard for IEA members.

Reuters estimated the volume to be about 788 million barrels, based on 2019 import rates.

Available storage capacity for natural gas is thought to be far more limited, causing the NOCs to declare "force majeure" in March to suspend imports, citing circumstances beyond their control.

But building more storage capacity for gas is likely to be a lengthy process, S&P Global Platts commodity news service said in a report last month. Industry sources estimated that new storage would come on line in two to three years.

"Storage construction is a very capital intensive business. Without a liberalized market and a summer/winter spread to incentivize private investment, no money-driven stockholder will invest in storage," one trader said.

Third-party access

Investment would also require third-party access to pipelines, the same issue behind the stalled pipeline merger plan.

"Otherwise, you will not be able to use your storage," Platts quoted the trader as saying.

The constraints on gas imports could hold down the growth of import dependence temporarily, but the improvement is likely to be artificial, doing little for China's energy security.

"The increase could slow, but the trajectory, especially if oil and LNG prices remain depressed globally, will still be higher imports as the government continues to liberalize the sector and allows non-state actors to buy directly from the market," Meidan said.

This week, the IEA released its annual report on the global gas market, forecasting that China would cement its position as the world's largest gas importer during the next five years.

Over the period from 2019 through 2025, China will raise its combined imports of pipeline gas and LNG from 134 billion cubic meters (4.7 trillion cubic feet) per year to 210 billion cubic meters annually, the IEA said.


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