China Overview

China Energy Industry

Energy

Coal

Oil & Gas

Power

China is the world’s second largest energy consumer, second only to the United States. Its energy consumption has been fueled by the burgeoning economic growth over the past two decades. In 2006, China’s total energy consumption reached 2.46 billion tons of standard coal, 9.6% higher than in 2005, and 4.3 times the amount in 1978. Currently, coal remains as the primary energy source in China, accounting for about 70% of the total energy consumed. Simultaneously, as the owner of the world’s top hydro power resources, China has been aggressively expanding its hydro power capacity. Currently, hydro power accounts for about 7% of China energy consumption, double its value in 1978.

Currently, coal remains as the primary energy source in China, accounting for about 70% of the total energy consumed.

Coal

China is the world’s largest producer and consumer of coal and the nation is self-sufficient in its coal production. In 2006, China produced 2.37 billion tons and exported 63.3 million tons of coal. Within the same year, consumption of coal reached 2.39 billion tons, 10.1% higher than in 2005.

China is the world’s largest producer and consumer of coal and the nation is self-sufficient in its coal production.

In terms of industry breakdown, the power sector (including the heat generation industry) is the single biggest coal consumer, consuming more than half of the total amount recorded. Other important coal consumers include the construction materials, iron and steel and chemical industries.

China possesses approximately 2.6 trillion tons of coal in the shallow layers of its Earth (less than 1,000m). The coal reserves in Shanxi, the western part of Inner Mongolia and Xinjiang account for more than 80% of China’s total.

In terms of industry breakdown, the power sector (including the heat generation industry) is the single biggest coal consumer, consuming more than half of the total amount recorded.

In 2006, Shanxi ranked first in terms of coal production and the amount it produced accounted for nearly a quarter of China’s total. All in all, the top five coal production provinces make up nearly 60% of China’s market share. The top five coal production provinces in 2006 were all located in North China and with the exception of Shandong, the rest were inland provinces. The biggest coal production province in the south is Guizhou, which ranked sixth with a production of 118 million tons of coal.

Currently, China’s coal industry remains fragmented, though the concentration of industry resources has been increased dramatically by mergers and acquisitions and the closing of thousands of small mines. In 2006, the market share of the ten largest coal producers saw a 25.6% increase. This is about 10 percentages points higher than in 1990.

As the areas for major coal production and the locations of developed economies do not necessarily coincide, coal transportation has been a bottleneck for China’s growth. Currently, railway transportation accounts for more than half the total amount of coal transported, while incidentally, the transport of coal remains the most important component of railway transportation (about 45% of the total). Yet, there are only two railways (with a total length of 1200 km) dedicated solely to coal transportation. The rest of the coal is transported via rail systems that also cater to the transport of passengers and other cargo. Qinhuangdao in the Hebei province has the most important port for transporting coal via waterways. It is the key gateway for shipping coal to southern provinces such as Shanghai and Guangdong.

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Oil & Gas

Strong economic development and rapid growth of private vehicle ownership has turned China into a giant consumer and importer of oil. Since 1993, China has become an oil net import country. Also, China has replaced Japan as the second largest oil consumer after the United States since 2003. China currently ranks fifth as an oil producer and third as an oil importer globally.

China has replaced Japan as the second largest oil consumer after the United States since 2003. China currently ranks fifth as an oil producer and third as an oil importer globally.

In 2007, China produced 3.74 million barrels of crude oil per day (bbl/d), only 1.2 % higher than in 2006. At the same time, China imported 3.26 million bbl/d crude oil, 12.3% higher than in 2006. While domestic production remains flat, fast growth in imports increased China’s dependence on imported crude oil from 19.3% in 1999 to 47.1% in 2007.

Middle East and Africa are China’s two most important crude oil import source. In 2006, they accounted for 76% of China’s total crude oil imports. Figure 1.5.5 shows China’s oil import sources for 2006.

Domestically, Heilongjiang, a province in the Northeast, is the largest crude oil producing province. In 2006, its production reached 317 million barrels, accounting for 23.5% of China’s total. It should be noted, however, that its oil production has been steadily decreasing. In the same year, Heilongjiang witnessed a 3.4% decrease in oil production. After a few decades of exploitation, Daqing in Heilongjiang (China’s biggest oil field) is facing a serious problem of resource depletion.

Besides Heilongjiang, other important crude oil production provinces include Shandong, Xinjiang, Shaanxi and Tianjing. Tianjing, in particular, depends mainly on offshore oil exploration.

China’s oil industry has undergone major changes in recent years. In 1998, the Chinese government reorganized the two onshore oil and gas producers - China National Petroleum Corporation (CNPC) and the China Petrochemical Corporation (Sinopec Group) into two vertically integrated firms. Before the structuring, CNPC had been mainly engaged in oil and gas exploration and production, while Sinopec Group focused on oil refining and chemicals, and distribution.

Although the two were meant to be balanced, vertically integrated production firms, CNPC specializes in crude oil production while Sinopec is geared towards oil refining.

Although the two were meant to be balanced, vertically integrated production firms, CNPC specializes in crude oil production while Sinopec is geared towards oil refining. Currently, CNPC is China’s biggest oil producer and the Sinopec Group is China’s largest refiner. CNPC accounts for more than 65% of the total crude oil production.

Besides the big two, another major oil company is China National Offshore Oil Corporation (the CNOOC Group), which handles offshore exploration and production. The three groups have packaged their assets in three public-listed companies: PetroChina Ltd, Sinopec Ltd and CNOOC Ltd.

The decreasing domestic oil production has since driven the three big oil companies to acquire assets overseas. These companies are also paying more attention to natural gas, once only used as feedstock for fertilizer production. At the moment, most of the natural gas reserves are distributed throughout the central regions, northwest regions and coastal waters, while the main regions for natural gas consumption are in the East, where the economy is more advanced.In order to utilize the rich natural gas resources in the Western region, a mammoth project, the “West-East Gas Pipeline”, was developed and constructed. The west end of the 4000 km pipeline is located in Lunnan (in the Tarim Basin) while the east end of the pipeline can be found in Shanghai, the center of the Yangtze River Delta and the most dynamic economic zone in China. The pipeline was completed at the end of 2004 and by the end of 2007, it had transferred a grand total of 28 billion cubic meters (bcm) of natural gas. In 2007 alone, the pipeline transferred 13.7 bcm of natural gas.

As China’s urbanization and industrialization continues, the nation is expected to overtake the United States to become the world largest electricity producer in 2010.

The second West-East pipeline is about to begin construction. It will aid the tapping of rich gas resources in central Asia and is expected to be completed by 2010. The pipeline has been designed to transport a capacity of 30 bcm per year. In addition, imported liquefied natural gas (LNG) has become another alternative energy resource. In 2006, the first phase of the LNG terminal and networks invested in by the CNOOC Group began operations in Guangdong. Currently, there are more than 10 LNG projects that remain in the construction or planning stages. Among the big three, CNOOC Group is the leader in the LNG business. Besides the first phase of the Guangdong LNG operation, there are four other LNG projects under construction and all were invested (or co-invested) in by CNOOC.

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Power

To support its astounding economic development, China has been building up a massive power generation capacity at an accelerated pace. By the end of 2007, China’s power generation capacity reached 713.3 gigawatts (GW), ranking second in the world, and second only to the United States. In a span of six years, China has more than doubled its capacity. Back in 2001, China’s generation capacity amounted to only 338.5 GW. As a result, the serious blackouts that have jeopardized the growth of coastal regions in the past few years have been relieved substantially. By the end of 2007, thermal power generators (predominantly coal-fired) accounted for 77.7% of China’s power capacity while hydro power accounted for 20.4%.

In 2007, China produced 3.26 trillion kWh of electricity, 14.4% higher than in 2006. Due to seasonal factors, the electricity generated by hydro power generators accounted for a smaller percentage of China’s total than their installed capacity. In 2007, they accounted for 15.0% while electricity generated by thermal power generators accounted for 82.9%.

Currently, China’s installed capacity is about 65% that of the United States’ while its production volume is about 80% that of the United States. As China’s urbanization and industrialization continues, the nation is expected to overtake the United States to become the world largest electricity producer in 2010.

At a provincial level, Jiangsu, Guangdong, Shandong, Zhejiang and Henan are the five most important power producers. It is not a coincidence that they are also the five biggest economies in China. Currently, inter-provincial power transmission remains a very small fraction of China’s total and as such, big economies are often big power producers as well. However, fuel transportation poses a challenge to provinces with less coal production, such as Jiangsu, Guangdong and Zhejiang.

China’s power sector was formerly monopolized by the State Power Corporation (SPC). In December 2002, SPC was broken up. Most of its power generation capacity was divided equally among five power producers - China Huaneng, China Datang, China Huadian, Guodian Power and China Power Investment, often referred to as the Big Five.

Simultaneously, power grid assets were transferred over to two newly established entities - State Grid Co, which runs the majority of power networks in China, and the Southern Power Grid Co, which runs power grids in the south.

The dominance of the Big Five has been threatened by four smaller rivals lately. They are China Resources Power (the power generation arm of the Hong Kong-based China Resources Group), State Development & Investment Co. (a national investment holding company also known as SDIC) and Guohua Power (a subsidiary of Shenhua Group, China’s biggest coal producer).

While the booming economy encourages power producers to build up their capacities, China’s power sector has posed the single biggest challenge to the sustainability of China’s economic growth.

While the booming economy encourages power producers to build up their capacities, China’s power sector has posed the single biggest challenge to the sustainability of China’s economic growth. Currently, the aforementioned sector has become China’s biggest energy consumer and its largest polluter. In 2006, the power sector consumed more than half the coal supply, 14.6% of the total amount of electricity and discharged nearly 59.0% of all sulphur dioxide emissions. Additionally, 44.7% of soot was generated by this industrial sector.

To tackle these problems, China has made plans to phase out small and low-efficient generators with a combined capacity of 50 GW in the 11th Five Year Period (2006-2010) at a rate of 10 GW yearly. To be allowed to invest in new projects, power producers are required to phase out a certain percentage of their small units.

So far, China appears to be on the right track. According to the recent reports from the National Development and Reform Commission (China’s major industry policy maker and planner, also known as NDRC), by December 27, 2007, the country had shut down 553 small generators with a combined capacity of 14.4 GW, 43.8% higher than the annual quote. The surging coal prices also aided in forcing power producers to phase out these obsolete small generators to their own interest, as an advanced 600 megawatts coal-fired generator can save up to 30% of the energy consumed by a 50 megawatts generator for each unit of electricity generated. Since 2007, China’s coal market has been fully liberated and power producers are no longer entitled to preferential price treatment.

In addition, China wishes to increase its production of nuclear power and wind power. According to the nation’s plans, by 2020, its nuclear capacity will reach 40 GW and its wind power capacity will reach 30 GW.

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