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Energy Crisis Looms Over China

By Eva Cheng

30 May, 2004
Green Left Weekly

As a quick fix for China's worsening energy problems, in the first nine months of 2003 the country imported US$50 billion worth of energy resources and raw materials, mainly oil — 49% more than the same period in 2002 — according to the December 8 People's Daily.

With the price of oil hitting almost US$42 per barrel on May 18, China's energy import bill is set to blow a major hole in the country's fiscal account. China's oil imports have soared 35.7% during the first quarter of 2004, to 30.14 million tonnes. Oil imports grew 31.2% in 2003.

But the financial burden is only part of Beijing's worries. An unreliable energy supply could seriously jeopardise China's ability to maintain its recent role as the “factory of the world”, based on low-cost manufacturing.

A campaign started in 1999 to close down China's numerous small, highly polluting and dangerously operated coal mines (small- and medium-scale mines produce much of China's coal, which accounts for 66% of the country's energy consumption) was sure to spell trouble.

Towards the end of last year, when winter fell, coal for heating in China's freezing north ran short. A regional drought had already undermined the power supply in many provinces that rely on hydro-electric power. Twenty-one of China's 28 provinces and autonomous regions were forced to ration electricity supplies, even hitting the crucial coastal export belt, including Guangdong, Fujian, Zhejiang and Jiangsu provinces, as well as major cities like Shanghai. In 2002, electricity rationing was applied in 12 provinces.

In December, most factories in Hangzhou, in Zhejiang province, only had access to power for four days a week. Blackouts became the norm. Many factories resorted to in-house generators for power, which mostly run on diesel. Soon diesel supplies also ran out.

However, this has not deterred rampant speculative investment, which has worsened energy shortages further. For example, new investments in iron and steel plants skyrocketed by 107%, and cement works by 101% during the first quarter, compared to the same period for 2003.

In its first quarter monetary report for 2004, China's central bank warned that the 35.5% increase in fixed assets for the quarter was already greater than the rise in 1992-93, the last overheating wave. The bank added that there were too many excessively large new projects, which were creating “irrational structural” consequences.

With the northern summer fast approaching, China's precarious power supply capability will be further strained. The deputy chairperson of China's State Electricity Regulatory Commission, Song Mi, expects China's electricity shortage in 2004 to be 20 million kilowatts, double the 2003 figure, according to a Xinhua News Agency article on April 6.

The sharp rise in oil prices makes things worse. China increasingly depends on oil, especially imported oil, to meet its energy and industrial needs. Some 21% of its primary energy consumption come from oil, and 36.1% of its oil needs were imported in 2001.

Alternatives to coal
China's energy problems didn't emerge overnight. The country is rich in coal, so after the 1949 revolution China overwhelmingly relied on coal for power generation — 94% in 1953.

The discovery of a major oil reserve in Daqing, in north-eastern China, in the late 1950s brought much needed diversity, helped by smaller offshore oil finds in the 1970s. Coal's share of China's primary energy consumption had dropped to 71.8% in 1975. However, following aggressive oil exports that followed the Chinese Communist Party's “open door” economic policy launched in 1978, the country's coal dependence had risen to 75% in 1990.

Pollution caused by coal extraction and consumption was so serious, and acid rain so rampant, that in 1998 China accounted for seven of the world's 10 most polluted cities. The need to reduce coal dependence was not in doubt, but the problem was the lack of an affordable and clean alternative.

Hydro power has been a major focus of alternative energy development due to China's abundance of rivers. The US$22 billion, 18.2-gigawatt Three Gorges Hydro project began construction a decade ago but is not due to be completed until 2009. Another hydro project, twice the size of the Three Gorges project is on the drawing board, but will probably take even longer to complete.

Hydro-electricity accounted for 21.2% of China's electricity generation in 1990, but that ratio slipped to 18.5% in 2001. Overall, hydro power accounted for 2% of China's primary energy consumption in 1995 and that ratio will not change dramatically shortly.

Natural gas is another alternative. Its production grew in the 1960s and '70s after the discovery a major gas field in Sichuan province in China's remote west. But the sector's growth has lagged due to the cost of delivering it to the population centres in the east. Still, construction of a $18 billion, 4200-kilometre pipeline began in 2002 to bring gas from Xinjiang in the west to Shanghai.

Another 4000 km pipeline is being built to bring offshore gas from Hainan Island to the southern and eastern coasts. Construction could take 15 years, so natural gas' contribution to China's overall energy consumption (2% at present) will not significantly increase for some time.

In 2001, China embarked on two infrastructure projects necessary to start importing liquefied natural gas. Beijing has contracts to obtain LNG from Australia and Indonesia, but its facilities won't be ready until 2009 and 2011, respectively.

Scramble for oil
In the absence of immediate alternatives to coal, oil is of critical importance for China. China's dependence on oil imports is on the rise. Between 1990 and 2000, oil's share of China's primary energy mix increased from 17% to 21%. Production in Daqing, which supplies half of China's oil needs, is declining, while other fields, including those offshore and in the remote west, where extraction is difficult, are not coming along adequately.

China became a net oil importer in 1993. Recently, it overtook Japan to become the second-biggest oil importer in the world, just after the US. Its dependence on oil imports is expected to rise to 50% by 2010.

Moreover, nearly 60% of China's oil imports come from the Middle East and have to be shipped through the Malacca Strait, a strategically vulnerable bottleneck that China, unlike the US, does not have the military capability to defend.

This vulnerability explains why Beijing has been working overtime to diversify its sources of oil imports, with priority given to Russian and Central Asian sources.

Beijing knows that Washington's bid to control the Middle East is also aimed at controlling the critical oil supplies of its economic competitors, such as China and Western Europe.

Oil monopolies from the imperialist countries are also more than willing to make things worse for China. BG, a British group, agreed to sell its 16.67% stake in a Kazakhstan oil joint venture to two Chinese state oil companies for US$1.2 billion. But in May 2003, ENI of Italy, Exxon of the US, Total of France and Anglo-Dutch Shell collectively exercised their rights as existing shareholders to buy that stake in order to block out China.

China has been obtaining oil from Russia via train but this is expensive and only allows limited supply. China's bid to build a pipeline to access east Siberian oil has been frustrated. Beijing has been competing with Japan to obtain Moscow's blessing for two alternative pipeline proposals. China's proposed route is 2400km and will cost $2.5 billion. Ending at Daqing, it will serve the Chinese market only.

Japan's proposal is 3900-km long and will cost two to three times the cost of the Chinese route, but it is backed by $7.5 billion worth of Japanese finance. The pipeline is to end in the port city of Nakhodka, on Russia's far-east coast and theoretically can serve markets other than Japan.

Beijing thought it had virtually sealed the deal when Russian President Vladimir Putin signed a communique on China's proposal in May 2003 in Moscow. China's President Hu Jintao travelled there for the signing.

Though yet to be officially confirmed, Reuters quoted a Japanese official on March 23 as saying that Japan has won the deal. Japan proposes to build an even longer pipeline to accommodate a branch to Daqing.

From Green Left Weekly, May 26, 2004.
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