The problems of fueling growth: A review of China's energy industry in 2004
14.01.2005 10:14:00 GMT
Shanghai. (Interfax-China) - Sooner or later, virtually all of China's biggest problems come down to energy. For instance, making the poorer regions prosperous and relieving the rural-urban income gap - currently regarded as the country's biggest challenge - will naturally need more economic development, but maintaining the high rates of GDP growth will require the relieving of energy bottlenecks, which will itself rest on the constant construction of new power stations and the unrelenting search for new sources of oil and gas both in China and abroad. This itself creates problems relating to issues such as environmental protection and geopolitical security.
The government target to quadruple the 2000 GDP level by 2020, and thereby create what it describes as the "comprehensive well-off society", requires massive investments in the energy industry and a level of resource consumption that some experts believe to be unfeasible. China, after all, has a population of 1.3 bln people and a level of pollution and environmental degradation that is already severe, even with per capita GDP and electricity consumption rates far below developed nations. Somehow or other, China is likely to play a far bigger role on the international stage in the next few years, whether in the sheer volume of its oil imports, in the continued acquisition of overseas oil and gas fields, in the securing of transportation routes and pipeline networks, or even in the massive growth of CO2 emissions that could see it overtake the US to become the world's biggest polluter.
If the maintenance of social stability in China's impoverished western regions requires more industrial investment and therefore more energy, then the problems once again came full circle in areas of southwestern China last year, when even more poor local communities were faced with demolition and relocation orders in the name of the biggest wave of hydropower construction in history. It was described by some as an "enclosure movement" on China's rivers, orchestrated primarily by the "big-five" state-owned power companies, all of which possess high-level government and Party connections. The government has consistently averred that these sacrifices are necessary in the name of national growth, but there were signs last year of growing unrest, at Pubugou in Sichuan Province, and at the Leaping Tiger Gorge and the Nu River, both in Yunnan Province.
That balance between construction and preservation has usually been settled in favor of the former, but with a new leadership in place, including the former geologist Premier Wen Jiabao, there were some suggestions last year of a change of emphasis. One of his predecessors, Li Peng, was the biggest advocate of the controversial Three Gorges Project, driving it through an unprecedented level of opposition at the National People's Congress in 1992 and remaining its most tireless advocate throughout his term of office. Li Peng still holds significant family connections in the Chinese energy industry, with his son, Li Xiaoping, serving as the head of the Huaneng Corporation, and his daughter, Li Xiaolin, the head of China Power International (CPI).
Wen Jiabao, on the other hand, was said to have actively intervened to suspend construction on the Nu River, and is thought to be part of a group of senior officials calling for a cleaner and greener mode of economic development. Nevertheless, the issues remain unsolved. How is China going to generate the growth required in its western regions? How are its ambitious urbanization programs to be sustained? With developed areas such as Zhejiang, Shanghai, Beijing and Guangdong already suffering severe power shortages at various times over 2004, how can the resources be found to boost industry and standards of living in the rest of the country?
It seems likely that hydropower construction will continue, even on the Nu River, and that the coal resources of Yunnan, Xinjiang, Inner Mongolia and Ningxia need to be developed still further. The government has started to talk about sustainable development, but maintaining growth is crucial, and the same old development patterns continue to be used.
SHORTAGES
It was another year of massive energy shortages, with every major metropolis forced to cope with power consumption restrictions during the peak periods of summer and winter. In Zhejiang, a resource-poor but highly-developed eastern province, many enterprises were forced to install their own power generation equipment during the summer months. Industry in both Beijing and Shanghai were ordered to join a scheme in which their employees were sent on vacation during peak consumption periods and then asked to work at weekends instead.
This was clearly a good time to get involved in the power industry. All of the major power generators were busy constructing plants throughout China, often in collaboration with coal firms or along the many rivers in the southwest. Nevertheless, experts believed that the massive round of power construction was likely to lead to a surplus within two years. After all, a wave of investment during a period of high electricity consumption growth in the 1990s led to a power glut by the end of the decade. This, in turn, led to a slowing down of new construction, which is why the power shortages throughout China have been so severe in the past two years.
Much of the power shortages were in fact caused by the coal shortages. There were bottlenecks on China's highways, which led to a relaxation of the laws related to overloading vehicles and the granting of special priority passes to coal transportation companies. Power companies themselves were beginning to sign long-term coal supply deals with mining firms, and more and more power plants were being built near the pits in order to eliminate transportation worries.
MARKET IMBALANCES
Still, many of the problems could be attributed to the growing conflicts between the coal and power industries, which came to a head at the National Coal Procurement Conference at the end of the year. Contracts signed at the conference are known in China as "planned coal", and power firms are supposed to be able to secure more favorable prices than they would when buying on the market. However, the coal companies are naturally reluctant to sell low when they can earn much more money at a period when prices are relatively high.
Coal prices are set according to market conditions, but the power firms themselves are forced to remain within the pricing limits set by the National Development and Reform Commission (NDRC). With the authorities intent on guaranteeing electricity supplies, particularly during the peak periods, many power stations actually found themselves operating at a loss in 2004.
Similar problems affected China's oil retailers, trapped as they are between the rock of the government price regulators and the hard place of the market. With international oil prices racing up but with retail prices throughout China still set by the NDRC, which remained reluctant to make the necessary adjustments, many were operating at a loss throughout the year. Similarly, China Aviation Oil (of which, more anon), as well as the jet fuel units of Sinopec and CNPC, all lost hundreds of millions of RMB over the course of the year. The price of imported oil exceeded the retail price, which had been fixed by the NDRC at a low level in order to shield domestic airlines from the global oil price hikes.
CHINA ON THE INTERNATIONAL ENERGY SCENE
In December, the Foreign Affairs spokesman, Liu Jianchao, told reporters that energy was the most important area of cooperation between China and foreign countries, and indeed, desperate for oil and gas, China was doing deals across the globe over the year, usually led by senior Chinese government figures.
Emboldened by the success of the China National Petroleum Corporation (CNPC) in the war-ravaged nation of Sudan, where output has continued to improve despite chaos and violence in much of the country, the Chinese President, Hu Jintao, conducted a tour of four African countries in February. The industrial delegation that accompanied him talked about increasing their presence in Egypt, Gabon, Nigeria and Algeria.
Cooperation with Venezuela also continued to develop, with President Hugo Chavez visiting Beijing in December to oversee the signing of a range of energy cooperation agreements between the two countries, including offshore exploration. Venezuela also expressed its desire to boost oil exports to China. Oil-rich Middle Eastern countries were also anxious to improve cooperation with China.
With its growing dependence on oil imports, China is naturally anxious to boost energy security. Work on building up the nation's strategic oil reserves began this year. Meanwhile, a number of proposals to ease China's reliance on the vulnerable Malacca Straits were voiced over the year, with Thailand and Burma offering to allow the construction of a pipeline running through the countries from the Indian Ocean coast all the way to Kunming in southwestern China.
Finding sources of oil closer to home proved a difficult task however. By the end of 2004, it became clear that the proposed pipeline from Siberia to Daqing in northeastern China had been abandoned in favor of the route to the far eastern coast, serving the Japanese market. The Russian side continues to talk about its desire to build a "branch" of the pipeline to China, but most experts regard such a concession to be a pipe dream, at least in the short term.
The rivalry with Japan did not end with the conflict over Russian oil. As Interfax has been reporting throughout the year, China's controversial natural gas concessions in the East China Sea have angered the Japanese government, which claims that many of the fields lie partly or wholly in its own exclusive economic zone (EEZ).
Japan believes that the natural demarcation between the two countries in the East China Sea is a "median line". China, on the other hand, says that the proper boundary should lie further east, abutting the Okinawa Trough. Regardless of the dispute, China has proceeded with exploration and development in the area, claiming that all its work is being conducted in undisputed territory. Japan responded this year first by sending in military surveillance aircraft, and then by demanding detailed coordinates of China's gas fields in the area. China has not yet complied.
Analysts have said that Japan has started to adopt a more confrontational approach to China on the issue, partly because of fears of being shut out of a northeastern energy market, because of lingering "historical problems" and suspicions between the two countries, and because Japan, like China, is itself extremely dependent on foreign energy sources.
However, over the year, China did at least make progress in its efforts to import oil from its western neighbor, Kazakhstan. Furthermore, the deal to import liquefied natural gas from Australia was finally signed near the end of last year after long negotiations.
OTHER HIGHLIGHTS
The scandal that hit China Aviation Oil late last year may be indicative of nothing more than the general lack of expertise among the senior Party-recruited staff of China's listed enterprises. The Singapore-listed subsidiary of the China Aviation Oil Holding Company in Beijing was found to have lost more than USD 500 mln following a long bout of misguided derivative trading. The pattern was familiar to anyone with a passing knowledge of Barings Bank, the last scandal to rock the Singapore financial community. Chen Jiulin, CAO's chief, fell into the well-known gambler's trap, trying to cover company losses by making a series of bigger and even more dangerous bets. Restructuring plans for the company are now being considered, and Chen seems likely to face a spell in prison.
The West-East Pipeline began delivering natural gas from the Tarim Basin to Shanghai homes this year. Earlier in the year, the operator, PetroChina, finally ditched its foreign partners, including Shell, ExxonMobil and Gazprom, in the belief that it could go it alone on the ambitious cross-country pipeline. Many remained skeptical about the depth of the downstream market and the competitiveness of Xinjiang gas vis-a-vis the supplies in the East China Sea, but PetroChina is so optimistic about demand that it is now openly discussing the possibility of building a second pipe, running alongside the first.
In October, Interfax was the first to report on the outbreak of violence at Hanyuan County in Sichuan Province, where construction of the Pubugou Hydropower Plant was about to kick off, and where the local government stood accused of conniving with the electricity giant, the Guodian Corporation, to reduce compensation payments to a bare minimum. Hydropower development throughout southwestern China had been criticized throughout the year, with Fan Xiao, an expert with the Sichuan Geological Prospecting and Development Bureau, telling Interfax that the communities uprooted by the impoundment of reservoirs and construction of dams were invariably moved to worse conditions and faced a bleak future. The problem, he said, was that the local people were never part of the decision-making process, and their interests were hardly taken into account by local governments anxious to see development and power firms anxious to increase capacity.
Two large-scale coal mine accidents in October and November drew further attention to the perils in the industry, where overproduction and lack of regulation still prevails. On October 20, an explosion at the Daping coalmine, run by the Zhengzhou Coal Group in Henan Province, killed 146, then a five-year record. Alas, it did not take long for the record to be broken. On November 28, an explosion at the Chenjiashan coalmine in Shaanxi Province killed 166, and government inspectors were soon to discover that a fire had been raging at the mine for almost a week, and that the mine administrators continued to order workers into the mine even after they had expressed their reservations about its safety facilities.
The ongoing Russian drama involving Yukos had a number of repercussions for China this year. Not only was Yukos chief executive Mikhail Khodorkovsky one of the most vocal supporters of the pipeline to China, his company was also China's major Russian supplier. By late September, with Khodorkovksy in jail and Yukos itself facing protracted investigations and backdated tax bills, that supply of oil was suspended. CNPC's importing unit, ChinaOil, was considering suing Yukos in order to force it to resume the supplies or pay compensation, but by the end of the year, all the talk was of the possible involvement of CNPC in the auction of Yuganskneftgaz, Yukos's main production unit. On the weekend of the auction, a CNPC delegation was in Moscow, holding talks on cooperation with Gazprom. In the end, Gazprom made no bid at the auction, leaving it to a mysterious holding company called Baikal Finance. Baikal was in turn sold to the state-owned Rosneft, which is involved in merger talks with Gazprom. If all that sounds very complicated, then consider the role of CNPC. Both Russian President Vladimir Putin and his Energy Minister, Victor Khristenko, have expressed the hope that CNPC can play some sort of role in the management of Yuganskneftgaz.
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