GLE's coal-bed methane SOFC testing ...
Excerpted from July 25 2002 quarterly report
... The methane system is designed to
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newswire.ca ... complete report
Here's an example of market opportunities for GLE's Solid Oxide Fuel Cell
The Best of re: Business
China's Energy Industries
This article first appeared in July and August, 2001, editions of re: Business.
by Allan Zhang
China's rapid economic development is creating an ever-growing demand for energy—a demand that is making it more and more dependent on external supplies. In fact, China will soon become a net importer, rather than exporter, of oil—an indication of how far it has strayed from its long-established policy of self-sufficiency. And, these changes can only be amplified with China's imminent accession to the World Trade Organisation. What does the future hold, then, for China's energy sector?
In this article, part of a series about China's role in the global economy, PricewaterhouseCoopers economist Allan Zhang looks at China's energy industry. The series will conclude with a look at China's telecommunications and agricultural industries. ____________________________________________________________
China is the world's second largest energy-consuming country after the United States. It is also the world's largest producer and consumer of coal. In fact, its growing power generation capacity—which reached 314 million kilowatts in 2000—has made the country the second largest power generator in the world.
China has long regarded energy as one of its key strategic sectors—which is why it has been pursuing a policy of self-sufficiency over the past decades. To a certain extent it has succeeded in meeting its own energy needs. In 1997, for example, energy output was equivalent to 1.32 billion tons of "standard coal1." With consumption at 1.42 billion tons, the self-sufficiency ratio was around 93%.
However, as economic growth has quickened, China's policy goals have not achieved the desired results. While China has an abundance of coal—which supplies around 70% of its needs—its oil sector is much less developed, and hydro- and nuclear power together account for only 10% of its energy needs. And because domestic oil production cannot meet the country's energy demands—which have been growing at about 20% annually—China has been a net importer of oil since 1993.
Coal
China's coal sector has been overproducing for a number of years, with production reaching 1.2 billion tons in 1998—one third of the world's total supply. As a result, the government has reduced its production targets and closed thousands of small coal mines that were known for their outdated technology, rampant pollution, lack of safety protection and poor management.
By the end of 1999, coal production had been scaled back to 1.02 billion tons, and 31,000 small coal mines closed.2 The national coal production target for 2001 is 870 million tons, the eventual goal being a reduction of the nation's stocks to below 100 million tons.
But actual production in 2000 ended up at 951 million tons, 55% of which were contributed by the major state-owned coal mines The government's next target is to merge most of its 520 state-owned coal mines into seven major conglomerates, while closing most of the 50,000-strong small-scale and inefficient coal mines.
However, for the foreseeable future coal will remain China's principal energy source. It now provides 76% of China's energy needs, although that proportion is expected to drop to about 60% by 2020.3
Electricity
By 2000, China ranked as the second largest producer of electric power in the world, with the total nation-wide installation capacity of 314 million kilowatts and total generating output of 1,300 million-kilowatt hours. However, due to unbalanced geographical distribution an and arbitrary pricing system, the industry has been suffering from an irrational industrial structure and overproduction.
A typical example is that, while electricity supply glut in the west of the country, there have been severe power shortages in the prosperous eastern coastal regions.
Thermoelectric power accounts for 75% of China's electrical energy generation, and coal represents the bulk of the primary raw material. To enhance energy efficiency rates and reduce pollution, the government has been trying to restructure the thermal power sector by concentrating on building large thermal power plants with capacity of over 300,000 kilowatts, as well as using cleaner forms of energy such as gas-fired, nuclear and hydroelectric power generators.
Meanwhile, all those small power generation facilities producing less than 100,000 kW will be closed down. In 1998, 2.84 million kW was taken off line, and another 1.8 million kW was removed from the grid in 1999. The reliance on coal-powered electric generation will change as a result.
China's electric power sector has been undergoing a market-oriented restructuring. The Ministry of Power and Industry was abolished in 1998, and transformed into a huge national power company—the China State Power Corporation (CSPC)—which will be split into several smaller functional and regional groups later this year. The main objective of the reform is to separate power generation from transmission and distribution, and to increase the industry's overall level of efficiency by introducing new competitive mechanisms.
As the economy grew by over 8% in 2000, China's consumption of electricity has reportedly witnessed double-digit growth in the last year, especially in the transportation, communication, food-and-beverage-service, and public-utility sectors. Power generation in the first quarter of 2001 jumped by another 7% year-on-year. Industry experts estimate that the market may grow by over 5% through 2020.
According to China's Tenth Five-year Plan (2001-2005) adopted in March of this year, the government will spend about U.S. $43 billion on power-grid construction and U.S. $22 billion on power-source construction with the aim of setting up a nationwide grid by 2005. Also during this period, more stress will be put on transmission of power generated in the west to the east and a mutual supply of power between the northern and southern power grids.
Natural Gas
To make the country more energy efficient, and combat pollution caused by the burning of coal, the Chinese government is vigorously promoting the use of environment-friendly natural gas, which currently accounts for only 2.3% of China's energy consumption.
The government is now developing preferential financing, pricing regulations and tax policies to encourage investment in natural gas. In fact, natural gas has been listed as one the key industries for development in China's 10th Five-Year Plan. And the National People's Congress is also considering an amendment to the Law on Prevention and Control of Air Pollution, which would require a shift from coal to natural gas in cities falling below certain air-quality standards. (Given the seriousness of China's air pollution, this amendment would probably apply to many cities across the country.)
China is rich in natural gas. According to the latest official appraisal, China has a total potential reserve of 38.4 trillion cubic metres, and current proven reserves stand at 2.06 trillion cubic metres, located mostly in the remote western inland provinces.
The government is planning to create four natural-gas-producing zones—Sichuan-Chongqing, Shaanxi-Gansu-Ningxia, Xinjiang and in the South China Sea—within the next 15 to 20 years, each with a projected annual production rate somewhere between 10 billion and 20 billion cubic metres.
At present, annual production stands at around 20 billion cubic metres. However, the government is striving to double its national production capacity to 40 billion cubic metres by 2005, and to triple the use of natural gas by 2010. Currently, China only consumes 23 billion cubic metres of natural gas and the level of per capita natural gas ownership is extremely low. But according to the plan, consumption should increase to 7% to 8% of the total primary-energy volume by 2010 and reach 111 billion cubic metres by 2020.
To achieve this goal, as well as resolving the problem of developing and utilising of natural gas, the Chinese government has opened a number of strategic projects to foreign investment, including Guangdong's liquefied natural gas (LNG) project, which will transmit natural gas from the resource-rich west to energy-starved east, and the development of natural gas in the East China Sea.
Other new efforts include a just-completed 900-km gas pipeline running from northwestern Shanxi province to Beijing. And construction of a 680-km pipeline from the southwestern city of Chongqing to Wuhan—China's first joint pipeline project with a foreign company—should be completed by the end of this year. Also under study is a proposal for a US$10 billion pipeline to tap the Russian gas grid in Siberia.
The Guangzhou LNG project, an experimental project approved in 1998, is located on the Dapeng Peninsula in the Dapeng Bay of Shenzhen, with initial investment of U.S. $604 million. It should get underway in 2005 and reach first-phase scale in 2006, using imported LNG to support the surrounding cities in Guangdong Province. BP-Amoco won the bid for the 30% reserved for foreign investors. Meanwhile, production work has been accelerated in the East China Sea, where large gas reserves have been found.
The largest project by far, though, is the U. S. $2.4 billion 4,200-km pipeline carrying gas from fields in the Tarim Basin of Xinjiang Uygur Autonomous Region to Shanghai. When it is finished in 2007—a target date, incidentally, that most foreign energy experts consider overly optimistic—officials estimate that it will provide 12 billion cubic metres of natural gas a year for industrial and civilian use.
Given the scale and difficulties of the project, the Chinese government has been encouraging foreign investment and has instituted a number of new policies to attract foreign investors. This special treatment allows for a majority foreign stake in every stage of the project, including upstream gas exploration, pipeline construction and management, and downstream distribution networks. Some global oil giants have expressed keen interest.
Oil/Petroleum
China is a large oil producer, ranking 5th in the world's petroleum output during the 1990s. But, it is also a large consumer. China's petroleum production recorded its first decline, however, in 1999, with output at 160.2 million tons, 2.4 million tons less than in 1998. Despite the government's encouraging measures, production in 2000 failed to see much improvement. In the meantime, demand, driven by strong economic growth, reached 200 million tons in 2000, creating a shortage of 1 million barrels per day.
As a result, the country has been importing record amounts of crude oil: 36.6 million tons in 1999, and over 70 million tons in 2000. Taken together this accounts for a quarter of the country's total oil supply.
China's petroleum experts believe that if Chinese companies make no major oil discovery or significant technological breakthroughs, imports may eventually supply over 50% of the country's oil needs, making China much more dependent than ever on the international market. The International Energy Agency (IEA) estimates that China will become a major world importer of oil products. From now to 2020, the volume of oil imports will probably increase by 26%, to reach 400 million tons a year—or 8 million barrels a day.
This prospect clearly worries Chinese policy makers and their concerns were further heightened by the recent surge in world oil prices. The government has now decided to set up a "strategic oil reserve system," just as the U.S. did in the mid-1970s. The project, with a pre-established scale to be completed by 2003, is expected to provide an initial 8 million-ton scale reserve. But, securing the project fund of nearly U.S. $3 billion in time won't be an easy task for the cash-starved government and designated state industries.
But China could greatly expand its oil production. China has proven oil reserves of at least 20.3 billion tons, and the government aims to increase petroleum and natural gas output to 300 million tons a year. The Tenth Five-Year Plan calls for expanding offshore exploration, stabilising onshore production, setting up overseas ventures, and pushing ahead with natural gas pilot projects. Meanwhile, the country's refining capacity will also be expanded to produce sufficient quantities of high-grade fuels to meet the booming domestic demand.
The Energy Industry After WTO Accession
Though details of negotiations on China's WTO accession are yet to be released, the Chinese government has, according to what has been announced so far, already committed itself to a number of important concessions that will have far-reaching effects.
Tariffs
Tariffs on industrial products, for instance, will be reduced from an average of 25% to 9.4%—and as low as 7% on U.S. priority products. And, by January 2005, average chemical tariffs will be reduced by more than 50%.
China has agreed to eliminate such major non-tariff trade barriers as product import and quota licensing, as well as the authorisation of business operations. The government has also said that it will gradually lift its import quotas over a five-year transitional period following the country's entry into the WTO. Restrictions in place this year will be relaxed immediately.
Distribution
Within five years of WTO accession, China will allow foreign companies to engage in wholesale services in crude oil and processed petroleum products. Foreign companies will also be permitted to offer retail services in processed petroleum and crude oil products within three years of accession.
State trading monopoly
China has agreed to open the crude and processed oil sectors to private traders. Companies will no longer have to deal exclusively with state importers when shipping oil into China. Exclusive rights to import petrochemicals—which are still being maintained—will eventually be revoked.
In fact, China has already told the European Union (EU) that 4 million tons of petroleum products and 10% of crude oil imports can be handled by private companies.
Other commitments
China has also agreed not to apply or enforce export performance, local content and similar requirements as a condition of importation or investment approval. And, the government has pledged to apply all taxes and tariffs uniformly to both domestic and foreign businesses.
Challenges and Opportunities in the Energy Sector
The Chinese oil industry—which has enjoyed the protection of high tariffs, as well as high domestic prices and strict quota and licensing protections—is likely to face increased foreign competition, drain of qualified personnel to foreign rivals and a more complicated environment for market development in the days following WTO accession.
What's more, these changes will probably have the greatest impact on China's smaller petroleum and petrochemical companies.
In 1999, the sales revenues of China's petroleum and petrochemical companies reached 700 billion yuan (US$84.6bn), accounting for over 10% of the revenues of all of China's state-owned enterprises (SOEs). And together, the country's two largest oil companies—CNPC and SINOPEC—accounted for nearly 30% of China's total profits from SOEs.
The High Cost of Success
But, these achievements came at a high economic cost: China's petroleum and petroleum products are now much more expensive than comparable foreign products—50% more expensive, in fact, while domestic refined oil prices are approximately twice those of international prices. Once the door is opened to foreign competition, China's oil refining and petrochemical industry will undoubtedly see its domestic market share decline.
According to a recent report, foreign petroleum and petrochemical producers control 20% of China's processed oil market, 25% of the lubricating oil market, 50% of the liquefied gas market, 52% of the synthetic resin market, 53% of the synthetic fibre market and 44% of the synthetic rubber market. After WTO accession, foreign companies will undoubtedly increase their market share even further.
The competitiveness of China's petrochemical industry has also been hampered by other factors. The industry is at a technological disadvantage compared to foreign competitors and has to rely on imports for key petrochemical technology and equipment. Production is low and the variety of products restricted. Plus, petrochemical enterprises are also burdened by heavy debt—like many Chinese SOEs in other sectors.
China's tariff on crude oil now sits at a mere 1%, and lowering this rate to zero will not greatly affect the domestic market. However, domestic supply will not be able to meet rising demand and the country's oil imports will doubtless increase over the coming years. The result, of course, is that China will become more dependent on foreign oil.
Foreign Investment
More importantly, a greater degree of foreign participation in domestic oil distribution will be allowed. Up until now, distribution rights were restricted to Chinese enterprises, but the government has now relaxed those rules, in anticipation of WTO entry. According to government plans, the retail and wholesale markets of refined oil will be opened to foreign companies in one or two pilot cities in 2001.
Also, foreign companies, jointly involved in oil well development with domestic oil enterprises, will be allowed to sell crude oil and natural gas directly in these pilot cities.
Meanwhile, restrictions on oil and natural gas exploration by foreign interests will be relaxed. For example, foreign companies, when engaged in joint exploration, will no longer required to give preference to using Chinese equipment, human resources and services. Other protective legal devices such as requirements for mandatory technology transfer have been revoked.
Not surprisingly, foreign oil giants, such as Shell, BP Amoco and Exxon Mobil, are investing heavily in China's retail processed oil market. And filling stations have become a major battlefield. Both Chinese and foreign companies want to grab a larger share of this potentially enormous market. Currently there are about 90,000 gas stations across the country—compared with 187,000 filling stations in the U.S.—but foreign companies together control only about 300 stations nationwide.
However, since China's processed oil distribution network is rather weak, foreign companies may be able to gain market share by leveraging their technological and financial advantages.
In the natural gas sector, China has said that it will reduce its tariffs to zero upon WTO accession. How meaningful a commitment that is remains to be seen, since the country has yet to import LNG or piped gas from foreign countries. However, to encourage production and conversion to natural gas, the government will have to open more downstream projects to foreign investors and allow freer price competition between fuels. Moreover, it has a lot to do by way assuring foreign investors of the existence of large end-users.
The focus of China's coal industry—at least for the foreseeable future—is on increasing economic efficiency, reducing pollution and enhancing integrated applications. New efforts to upgrade technology have been made, including pilot projects on coal liquefaction, coal gasification and coalbed methane transportation.
And, in an attempt to reduce production and transport costs, the government has encouraged the building of large thermoelectric plants at major mining facilities. Finally, the government is trying to greatly increase coal exports, which currently run at around 30 million tons per annum.
New and Renewable Energy
China also possesses rich resources in new and renewable energy (NRE). According to CERS (China Energy Research Society), China's recoverable hydropower energy sources total 378 GW (1GW equals 1 million kilowatts), only 11% of which has so far been tapped.
The country has recoverable wind energy sources of 254 GW, geothermal sources equivalent to 463 billion tons of standard coal, and tidal energy sources of more than 20 GW. China's utilisation of NRE stands at a very low level—about 3 million standard coal equivalent, or just 0.2% of total energy consumption.
However, China plans to expand its consumption of NRE to 2% of total energy consumption by 2015, the equivalent of 43 million tons of standard coal. This will generate US$8 billion of business by 2015 in areas such as power generation, gas and hot water supply and equipment manufacturing, according to projection by the State Development Planning Commission. Meanwhile, China expects to increase its nuclear power capacity to 20 GW by 2010.
The Tenth Five-Year Plan places a high priority on energy efficiency, with the government calling for a substantial increase in foreign investment and the application of new technologies to increase efficiency. In fact, China's energy strategy has been undergoing significant changes. There is a new emphasis, for instance, on natural gas exploration both offshore and in the western provinces.
According to CERS, coal production will shift westward to Shaanxi, Heilongjiang, Guizhou provinces and the western part of Inner Mongolia. Hydroelectric power development efforts will be focused on the upper reaches of the Yellow River, and the middle and lower reaches of the Yangtze. Oil exploration will focus on the oil fields of Daqing, Shengli and in the western part of the country. Natural gas exploration will be concentrated in Sichuan, Gansu, Ningxia and Xinjiang.
Western China will thus become the strategic centre for the country's energy industry—a development partially attributable to the government's grand plan for the development of China's backward western provinces.
Changing the Future
China's power sector is also undergoing significant restructuring.
According to the draft plan, all provincial power bureaus will be eliminated and the responsibility of managing the power sector will be shifted from the government to professional institutions. Independent trans-regional power companies will be nurtured by separating power plants from power grids and forcing the plants to access power grids at competitive prices.
The power delivery network, currently under control of local governments, will gradually sell its power-generating business plants to privately owned power-producing firms.
Clearly, the ultimate aim is to loosen the states' monopoly and allow free market mechanisms to kick in. But, the government still has a lot to do to restore the confidence of foreign investors, many of whom chose to leave after the government guarantee on investment returns was cancelled in 1998, following the establishment of the State Power Corporation of China.
Nonetheless, with further relaxation on investment restrictions, China's rapidly growing energy industries will offer a great range of opportunities for foreign companies.
For instance, according to figures recently released by the government, total installed power generating capacity will expand to 390 GW by the year 2005 and 600 billion yuan (US$72.46 billion) will be invested during the Tenth Five-Year (2001-2006) Plan period in building up the national grid system. During the whole process, foreign companies will surely have a large role to play.
Footnotes
1. When calculating total energy production, the Chinese statistical method is to convert all data into SCE (standard coal equivalent), which is calculated on the basis of data on average coal consumption in generating electric power in the same year. Return to Article
2. Source: State Coal Industry Bureau. Return to Article
3. Source: China Coal Research Institute. Return to Article
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Allan Zhang is a senior Asian economist in PricewaterhouseCoopers' Macroeconomics Unit in London. He is concurrently the director of the London-based China Business Centre.
pwcglobal.com ... original report |
