Oil price plunge gives Beijing breathing space
By Wenran Jiang
Oil and other commodity prices have been declining as major economies of the
world go into a recession, but the Chinese are now more convinced than ever
that their country had very little to do with the sharp climb and subsequent
nose dive of oil prices in the past five years.
World oil price started to climb in a sustainable manner since 2003. After an
average price of US$31 per barrel that year, oil reached its peak in the middle
of 2008 then plunged to $35 at year end. It took only five months for the price
of oil to plummet from $150 to under $40.
Chinese officials and energy company executives instead maintain that China was
a victim of increasing oil prices, and that
a large amount of the country's $1.95 trillion foreign reserves have to be used
to import more than 40% of its daily consumption [1]. While China's intensified
domestic energy development program and its "go-out" strategy were designed to
cope with a prolonged period of high oil prices, the recent drop in the global
energy market has presented new sets of challenges to Beijing's energy
security.
New National Energy Administration
The booming Chinese economy was confronted with a severe energy shortage
shortly after entering the 21st century. Yet the Energy Bureau, under the
National Development and Reform Commission (NDRC), was under-staffed and
overwhelmed by day-to-day administrative tasks. With the worldwide rise of
energy prices, there were growing calls for the Chinese leadership to
strengthen its government institutions to deal with the mounting challenges in
the energy sector. A major study published jointly by the World Bank and
China's State Council (the cabinet) urged the establishment of the Ministry of
Energy [2].
However, the long-anticipated ministry did not materialize in China's overall
"super ministries" reform program last year. Although it has been argued that
an independent and strong energy ministry is crucial to China's long-term
energy security, experts suggest that those with vested interests in the status
quo have sufficient influence to thwart such development.
Among them are the top three Chinese national oil companies and various
government bodies which manage the country's different energy sectors [3]. In
balancing the complex relationships involving many ministries and agencies
regarding energy and resources, the new energy bureaucracy is named the
National Energy Administration (NEA). Under the dual leadership of the State
Council and the National Development and Reform Commission (NDRC), the NEA does
not have full ministry status but is headed by the deputy minister of NDRC with
a ministerial ranking, Zhang Guobao.
This energy management reshuffle not only expanded the administrative scope of
the NEA by absorbing a number of functions from other agencies but is in the
process of setting up nine director-general level bureaus with almost four
times the size of the original Energy Bureau personnel under the NDRC [4].
The new functions of the NEA were re-defined in important ways. First, it will
take more responsibilities for research on key energy issues and macro-control
at the policy level. Second, it will undertake day-to-day supporting duties
assigned by the newly established National Energy Commission, a strategic and
coordinating body that replaced the National Energy Leadership Group. The
latter, established in 2005, was headed by Premier Wen Jiabao and was in charge
of formulating mid- and long-term national plan for energy development [5].
Third, it will emphasize energy conservation, new energy technology and clean
energy development. Fourth, it will take over the management of China's
strategic oil reserves, enhance international energy cooperation, and secure
energy supply. Finally, it will participate in domestic energy price reform
[6].
Domestic policy implications
The most significant sign of NEA's assertiveness was the publication of a
detailed account of China's new strategic thinking on energy authored by Zhang
Guobao, head of the NEA, at the end of 2008. Euphemistically describing the
current energy situation as "opportunities" within "crisis" (wei zhong zhi ji),
Zhang outlined the challenges and opportunities associated with the global
financial crisis [7].
Zhang identified the symptoms of the crisis as the decreasing demand in the
energy sector, such as oil and coal; declining prices of oil, coal and related
products; and the deterioration of operating conditions of energy enterprises
such as electricity generation, petro-chemical and coal plants. These new
developments, as conditioned by the international financial crisis, demand new
thinking and new adjustments. Zhang clearly sees more opportunities, as he
elaborated how China will proceed with a series of new energy policy measures.
First,energy strategy will be in concert with the broader $600 billion stimulus
package that Beijing had already announced. This means boosting domestic demand
and further building up China's energy infrastructure: three new nuclear power
plants ($17.5 billion), the second west-east gas pipeline of 5,300 kilometers
and related projects ($44 billion), plus a range of other coal, electricity
generating and transmission projects.
Second, China will speed up re-structuring its energy mix: expanding large
electricity generating plants while reducing the number of small ones;
re-organizing coal mining by focusing on 13 large national coal mining areas
with large-scale, modernized operations; increasing the share of electricity
generated from nuclear power plants; putting more resources into the renewable
energy development; and encouraging the development of large energy
enterprises.
Third, China sees the recent lower energy and commodity prices as providing
breathing space for the much-needed but complicated on-and-off domestic product
oil price reform. Despite the oil-price fluctuations, the government seems
committed to an "indirect and controlled connection" between domestic and
international product oil prices.
Finally, China is likely to take advantage of low oil prices not only for
importing more oil but also for filling up its strategic petroleum reserves
(SPR), a task that was delayed by the persistence of high energy prices in
recent years. Zhang indicated that China's first phase of SPR, already in
place, has a stockpile capacity of about 100 million barrels of oil, and the
second phase now under construction will accommodate 170 million barrels.
Reuters reported that China was filling nearly 40% of its third strategic
reserve base of SPR Phase I in Huangdao in the last two months of 2008, with
more filling expected for January 2009. State-owned Sinopec and PetroChina have
also been stockpiling their commercial reserves as well. But statistics
released by the Chinese customs show that in both November and December,
Chinese imports of oil decreased substantially.
There is no official confirmation that the first phase of stockpiling has been
completed, but as current regulation stands it would still only meet fewer than
30 days of China's need in case of an import cutoff. In contrast, the United
States and most Western major economies have up to three months of reserve
storage. There are also doubts on the wisdom of rushing to stockpile more oil.
Zhou Dadi, former director-general of NDRC's Energy Research Institute, agues
that there is no consensus on what should be the right amount of SPR a country
should hold. As the cost of storage is high and the utility is low, China may
not need to have a huge SPR.
Impact on go-out strategy
Speculation that China's move to stockpile more oil for its SPR may drive up
oil prices has not materialized. In fact, the US Department of Energy also
announced in early January the addition of 12 million barrels to its own SPR
due to low oil prices, and so far the market has not responded with any clear
trend either [8].
China is also working hard on a number of pipeline projects that began last
year. China and Russia reached an agreement last year that a Russian oil
pipeline will be built to China's northeast. But most notable is the beginning
of the construction in July 2008 of a natural gas pipeline starting at the
border of Turkmenistan and Uzbekistan, running through Uzbekistan and
Kazakhstan, and finally connecting with China's second phase of West-East
Pipeline in the northwestern Xinjiang Autonomous Region.
This ambitious project has gone through multi-year, multi-country negotiations
with large Chinese investments. The first component is the 1,818km, $7.3
billion pipeline outside China, in Uzbekistan and Kazakhstan; the second is a
natural gas production-sharing agreement that will satisfy part of the
pipeline's capacity; and the third part is a second west-east gas pipeline
inside China [9].
This project is important to China's overall energy strategy in many ways.
First, it will increase the share of natural gas in China's overall energy mix
(currently at 2.8% in contrast to the global average of 23%). Second, it will
reduce China's growing dependency on the Mideast and African energy imports
(currently at over 80%) [10]. Third, the use of natural gas will decrease the
use of coal, thus reducing the country's overall greenhouse gas emissions.
What is less clear is how Chinese energy companies will re-adjust their
acquisition activities in other parts of the world given that they, like other
companies, have all been caught off guard by the sharp decrease in oil prices
in recent months. The dilemma facing both the Chinese energy policy makers and
large Chinese oil companies today is exemplified by Sinopec's recent purchase
of Tanganyika Oil, a Canadian company with its main assets in Syrian oil blocks
[11].
When Sinopec International Petroleum Exploration and Production Corporation,
through its wholly owned Mirror Lake Oil and Gas Co Ltd, offered about $1.8
billion to acquire Tanganyika Oil last September, the oil price was hovering
around $90 per barrel. But by December, the price had dropped to about $40. Yet
there was no revision of the deal and both the State Council and NDRC went
ahead with the required government approval.
Many see such a commitment, especially in the face of large financial losses,
as a move for the sake of credibility. Others, one of whom is the chairman of
China's State-owned Assets Supervision and Administration Commission, question
the wisdom of putting so much money abroad without immediate benefits when
there is so much need for cash in dealing with the domestic economic downturn.
Yet others, represented by China Petroleum and Chemical Industry Association,
view the purchase as a healthy long-term investment in the expectation that the
oil price will go back up again in the near future.
The latter camp seems to have the upper hand. Only days after the Tanganyika
acquisition, Sinopec reportedly offered $130 million to Urals Energy, a
London-listed oil-producing company with a Russia focus. The price tag is
supposed to be five times higher than the firm's market value, and the news
also generated a 100% increase in the shares of Urals Energy.
Nevertheless, such debates demonstrate that China's energy policymaking process
is far from being a monolithic bloc. Chinese officials, business leaders and
their foreign counterparts are all exploring the implications of China's
"go-out" strategy at the moment of economic crisis and oil price uncertainty
[12].
Notes
1. "China Sees 1st Annual Growth Slowdown in Forex Reserve in 10 Years", China
Daily, January 13, 2009; "China to be the world's second largest oil consumer",
China Chemical Reporter, November 26, 2003.
2. Noureddine Berrah, Fei Feng, Roland Priddle and Leiping Wang, "Sustainable
Energy in China: The Closing Window of Opportunity", Washington DC: World Bank,
2007.
3. "New China Energy Ministry Unlikely in 2008", Platts Oilgram News, February
1, 2008.
4. Jing Fu, "Energy Management Reshuffle Starts", China Daily, July 7, 2008.
5. "China Sets up National Energy Leading Group", People's Daily, June 4, 2005.
6. Author's interviews in Beijing, November 2008. See also, Tong Chunhui,
"Guojia Nengyuan Ju ‘Sanding' Fangan Gongbu, Yi Xinmianmao Yidui Xinxingshi"
(National Energy Administration's "three assignments" made public: Facing new
situation with new setup).
7. Zhang Guobao, "Dangqian de Nengyuan Xingshi: "Wei" Zhong zhi "Ji" (The
current energy situation: "Opportunities" within "crisis"), The People's Daily,
December 29, 2008.
8. "US DOE to Restart Purchasing SPR Oil in 2009," Reuters, January 2, 2009. 9.
Wang Zhen, "China-Central Asian Pipeline: Implications for China's Energy
Security", Geopolitics of Energy, August-September 2008.
10. Author's own calculation based on data from Chinese Customs.
11. "Sinopec Buys out Canadian Oil Company", China Daily, December 26, 2008.
12. Based on the author's observations as the organizer of the 4th Canada-China
Energy and Environment Forum in Beijing in November 2008. And the author's
surveys of Chinese press, interviews with Chinese officials and business
leaders in the past few months.
Wenran Jiang is a professor of political science and director of the
China Institute at the University of Alberta, and a senior fellow at the Asia
Pacific Foundation of Canada. He is the editor of the forthcoming book,Fueling
the Dragon: China's Energy Demand and Its Implications for Canada. The views
expressed in his publications are his own and do not reflect the institutions
with which he is affiliated.
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