China’s Energy Security needs and the Geopolitics around it - Part 1

 

Part 1 – China’s insatiable demand for energy

Originally published at http://www.uniindia.com/uniindia/article/business-economy/China-s-insatiable-demand-for-energy/2250489.html  

on Dec 1, 2020

China’s growth during the last three decades have been spectacular and unprecedented. As is usually the case, such growth is powered by enormous consumption of energy and there’s a downside to it.

Being a large country with a high population, China has rapidly overtaken other countries in energy consumption. It went past The United States and The EU about 8-9 years ago and is now almost as big as the other two put together. China is also now the biggest CO2 emitter on the planet, bigger than The US and The EU put together.

China’s electricity production was powered by coal and this dirty fuel is the root cause of its environmental pollution problems. China has embarked on a big plan to replace coal by cleaner alternatives over a 25-year period. It has had some measure of success, but even now the share of coal in the national mix is about 65%. China’s total electricity production today is of the order of 1300 Giga watts and it was about 960 Giga watts just 4 years ago. The pace of growth continues to be strong. The problem is therefore not just the mix but also the magnitude. To really tackle the environmental mess, China has to reduce the coal powered production in absolute terms and therefore its share in the mix must come down drastically, not just incrementally.

 

The reason for the dominance of coal is essentially because coal was always available in plenty and mining could be expanded exponentially. However, as with everything else, this resource is finite. In addition, it has made the environment unsustainable for living and therefore the need to cut down has become imperative. China has no choice left in this matter.

The share of coal had peaked at around 79% in 2011 when China embarked on the ambitious plan to rework its energy mix. It has had a lot of success, but the magnitude of the task is so monumental that 9 years on it is still 65% of the mix. This is when China has managed to cut coal usage in absolute terms in a significant manner.

Hydropower is the source that China pursued with vigor in its attempt to diversify the energy mix. It has built large dams and hydroelectric power plants and today, these account for about 20% of the mix. The rise has been phenomenal during the last two decades. However, it creates its own large scale environmental issues, displaces populations and is limited. It has also run its course and is not likely to increase its share. In fact, over the next 10-20 years its share in the energy mix is also expected to fall though in absolute terms it may increase a bit.

Wind power and solar power have been pursued very aggressively and today they account for nearly 10% of the energy mix. It’s indeed been a tremendous achievement to have got to these levels in such a short period. Wind and solar will continue to be very important in the mix, but it’s obvious that other sources (both renewable and non-renewable) are required at scale. Although China already has 48 nuclear plants and is building 12 more, it is time taking and not exactly of the scale required. The capacities described will at best fulfill 3-4% of the energy mix.

The answer to the above is oil and gas, more specifically gas. Natural gas is the cleanest amongst fossil fuels, is available in abundance and best suited to substitute coal. Natural gas is therefore the natural answer to China’s quest for energy during the next 20-30 years. China is already hungry for gas and is getting hungrier. This requirement for gas and China’s attempts to secure supplies is already redefining geopolitics of the globe and will continue to do so. China expects coal’s share to decline to 35% by 2040 and it expects the share of natural gas to be in the range of 15-20%. The current share of natural gas, and the future growth of the energy requirements itself imply that in 20 years the consumption of natural gas is likely to be 10-12 times the current levels. This presents an enormous challenge for China, since it doesn’t have its own production or sources. It must secure sources abroad in a way that its sources are diversified and the threat of supply disruptions are minimized. Most of its geopolitics will be shaped by this core requirement.

The Natural Gas requirements of China

Natural gas is less carbon-heavy than coal when efficiently combusted, emitting up to 60 percent less CO2. China had been producing power from coal without regard to processes. Hence shutting down the less efficient plants and creating natural gas fed power alternatives helps it get closer to its goals of reduced carbon emissions. Further, many of the heating and all of the cooking requirements can be met with Natural Gas instead of LPG or other alternatives. Thus, the big interest of China in Natural Gas. By 2017, China was already consuming nearly 250 billion-meter cubic meters of natural gas, which was over 6% of its total energy consumption. The share of Natural Gas had more than doubled from the levels of under 3% in 2007. China’s target was to reach 10% by this year. It was ambitious and it has probably fallen short. However, it’s still a humungous jump over a 12-13-year period.

The sourcing equation for Natural Gas is challenging for China. As far as coal was concerned it itself was the world’s largest producer and had the world’s 3^rd largest reserve. In the face of its rapidly rising demand it has had to shift some of its sourcing to Australia and Indonesia and even Russia. However, in the mix itself it is largely self-reliant. The magnitude is quite staggering - In 1990, China produced 1.02 billion tons of coal for consumption, needing just 2 million tons of additional imports. By 2009, China’s rising demand drove it to become a net importer of coal, importing 125.8 million tons of coal to meet domestic consumption demand.

The oil and gas sector has seen and will continue to see a much higher reliance on imports as compared to coal. According to a BRITISH PETROLEUM report of 2018, “China’s demand for crude oil outpaces its domestic production. Since 1993, China has been a net importer of crude oil, and in 2017 it surpassed the United States as the largest importer in the world. According to China National Petroleum, more than 70 percent of China’s crude oil supply in 2018 will come from imports”. It is estimated that China’s demand by 2040 will necessitate up to 80% dependence on imports for oil & gas.

There are various estimates of how much demand China would have in the future. Long term forecasts are always tricky. However, the range being presented by authoritative sources such as IEA (International Energy Agency) and others show how big this number is. The current demand is of the order of 240 billion cubic meters. The 2030 demand is projected to be of the order of 425-500 billion cubic meters which is then further likely to reach levels of 650-750 billion cubic meters by 2040. Clearly China needs secure and stable sources. This is the big picture behind China’s moves on the geo-political chess board.

Part 2 - Natural Gas and China