China's rising demand for oil and pipelines has worldwide implications

Pipeline & Gas Journal, May, 2005 by Gordon Feller

Last year was pivotal for energy as the world experienced an important wake-up call to the significance of China to global markets and prices. This was likely only the beginning of many years of such importance.

One reason why China's soaring demand for oil and other commodities took many by surprise is that few had determined whether China should be viewed as a competitor or as a market, and whether its recent growth was part of a short-term phenomenon or the beginning of a pronounced long-term trend. These considerations relate to the economic and security concerns of all nations.

Bottleneck

The recent growth in energy demand is part of a long-term trend though there will be fluctuations. China is now the chief economic driver of Asia, leading Japan out of its economic doldrums of just a few years ago. This has many observers worried about a "hard landing," sooner or later. Clearly, energy could be a bottleneck or factor in any eventual slowing of China's economy.

China's rapid economic expansion makes it one of the largest energy-consuming nations with demand growth continuing to surge. Its energy consumption is a major influence in world energy markets today, affecting the availability and price of energy resources. Foreign governments as well as world oil, gas, coal, and power industry officials are trying to respond to China's emergence as a new and increasingly decisive player in energy markets. Meanwhile, China's rapidly growing consumption, increasing imports, supply shortages, and difficulties integrating fully into the global energy market are adding pressures on its leaders to ensure that the growing thirst for energy does not interfere with a robust economy.

Coal Is King

Coal comprises roughly 70% of China's energy mix and will remain the most dominant energy source for several decades. Coal also accounts for 70% of China's power production.

Significant infrastructure constraints exist in the coal sector which place an increased strain on power production, and if left unresolved, could hobble the future economy of China. The rapid growth in electricity demand due to increased manufacturing and residential use has been difficult as shown by power shortages in 75% of its provinces in recent years, often prompted by lack of coal. The International Energy Agency estimates that $100 billion worth of investment will be needed in China by 2025 to revamp the coal industry.

If coal problems persist or worsen, Beijing could be forced to dramatically increase emphasis on nuclear and imported oil and gas options to meet long-term energy requirements, possibly raising concerns about reactor safety and Chinese reliance on Persian Gulf energy.

Most Chinese power plants are coal-fired and since coal will likely remain the primary power source for decades to come, air quality will not improve noticeably. China may overtake the U.S. in carbon dioxide emissions by 2020, which poses difficulty for the world because China as a developing country is exempt from reducing greenhouse gas emissions under the Kyoto Protocols.

Going Nuclear

As part of China's efforts to develop new energy sources, particularly forms that do not have to be transported through shipping lanes, officials are trying to develop the world's most aggressive nuclear power program. China wants to develop 24 to 32 nuclear power plants by 2020 but the process is costly and each plant could take more than 10 years to build.

As for oil, China accounted for nearly 40% of growth in world oil demand from 2000 to 2004. China's demand is 6.4 million b/d, surpassing Japan to become the second-largest oil consumer behind the U.S. China's consumption is rising faster than any other nation, rising 300,000 barrels b/d annually.

Despite being a large producer of oil, Chinese production is likely to stay flat in the future, leading to high import growth from the Middle East. To help counter increasing reliance on foreign oil, Beijing demands that its oil companies participate in international exploration and production activities. Chinese oil companies are listed on foreign stock exchanges and have made acquisitions in Indonesia, Australia, Central Asia, and Africa.

In November 2004, China signed a $70 billion oil deal with Iran to develop oil fields and LNG. The MOU calls for China's state-owned Sinopec to purchase 250 million tons of LNG from Iran over the next 30 years.

Passenger Cars

The Chinese have found a new love in the passenger car with Beijing encouraging auto purchases and industry development. In 2003, China's purchases of new cars rose by 75% although growth slowed last year to 20%. If China follows a South Korea or Taiwan model of vehicle demand growth, it may add another 145 million vehicles by 2020, some experts say. Transportation accounts for about 35% of Chinese oil consumption, but that could soon consume half of all oil use, which is similar to global patterns of consumption.

Rapid energy growth in China is causing dramatic implications worldwide in terms of commodity markets and prices, and within China, that growing thirst is creating a new sense of urgency and energy insecurity. How Beijing deals with that issue will affect all of the world's economies.