|Home > Country Analysis Briefs > China Country Analysis Brief||PDF version | PDB version|
The People's Republic of China (China) is the world's most populous country and the second largest energy consumer (after the United States). Production and consumption of coal, its dominant fuel, is the highest in the world. Rising oil demand and imports have made China a significant factor in world oil markets. All information contained in this report is the best available as of May 2002 and is subject to change.
With China's entry into the World Trade Organization (WTO) in November 2001, the Chinese government made a number of specific commitments to trade and investment liberalization which, if fully implemented, will substantially open the Chinese economy to foreign firms. In the energy sector, this will mean the lifting or sharp reduction of tarriffs associated with imports of some classes of capital goods, and the eventual opening to foreign competition of some areas such as retail sales of petroleum products. It still remains to be seen how these commitments will be implemented.
Despite moves toward privatization, much of China's economy remains controlled by large State Owned Enterprises (SOE's), many of which are inefficient and unprofitable. Restructuring of the SOE sector, including the privatization of some enterprises, is a major priority of the government, as is restructuring of the banking sector. Many Chinese banks have had to write off large amounts of delinquent debts from state-owned enterprises. Quarterly earnings at many SOEs are reported to have fallen sharply in the first quarter of 2002, after rising in 2001. It is unclear how much of this is due to changes in accounting practices, as opposed to other factors such as weak demand for exports.
Layoffs have been part of the restructuring of the SOEs, as many were
severely overstaffed. This has created unemployment, and also has
been a burden on the government budget, as the government begins to
provide social benefits which were previously the responsibility of the
SOEs. Large protests against SOE layoffs have taken place in early
2002, including in cities closely associated with the oil and coal
China's real GDP grew by 7.3% in 2001, according to official Chinese figures, down from 8.0% growth in 2000. Real GDP growth for 2002 is forecast at 7.0%. The Chinese government's current Five Year Plan (2001-2005) sets a target of 7.0% real annual GDP growth. Some outside analysts have questioned the reliability of the official data, however.
Inflows of Foreign Direct Investment (FDI) into China in 2001 totalled $46.8 billion, a new record, and data from the first two months of 2002 shows continuing strength. Japan, Taiwan, and the United States are China's most important sources of FDI.
In general, China's trade surplus has been falling in recent years, and imports have been rising. The 2001 trade surplus was $22.6 billion, down from a peak of $43.6 billion in 2001. Imports have been increasing, largely capital goods being acquired to refurbish outdated industrial facilities, but also consumer goods.
China has several territorial disputes with other regional states which are relevant to the energy sector, particularly the dispute over the potentially hydrocarbon-rich Spratly Islands, which are claimed by China, Vietnam, the Phillipines, Brunei, Taiwan, and Malaysia. Another dispute is over the East China Sea, claimed by Japan.
China's petroleum industry has undergone major changes in recent
years. In 1998, the Chinese government reorganized most state owned oil
and gas assets into two vertically integrated firms -- the China National
Petroleum Corporation (CNPC) and the China Petrochemical Corporation (Sinopec).
Before the restructuring, CNPC had been engaged mainly in oil and
gas exploration and production, while Sinopec had been engaged in refining
and distribution. In 1998, the Chinese government ordered an asset
swap which transferred some exploration and production assets to Sinopec
and some refining and distribution assets to CNPC. This created
two regionally focused firms, CNPC in the north and west, and Sinopec
in the south, though CNPC is still tilted toward crude oil production
and Sinopec toward refining. Other major state sector firms in China
include the China National Offshore Oil Corporation (CNOOC), which handles
offshore exploration and production and accounts for more than 10% of
China's domestic crude production, and China National Star Petroleum,
a new company which was created in 1997.
The intention of the restructuring was to make these state firms more like similar vertically integrated corporate entities elsewhere. In connection with this process, the firms have been spinning off or eliminating many unprofitable ancillary activities such as running housing units, hospitals, and other services near company facilities. Massive layoffs also have been undertaken, as like many other Chinese SOEs, they were severely overstaffed. Labor unrest has been reported in early 2002 in several locations with CNPC facilties.
The three largest Chinese oil and gas firms - Sinopec, CNPC, and CNOOC - all have successfully carried out initial public offerings (IPOs) of stock within the last two years, bringing in billions of dollars in foreign capital. CNPC separated out most of its high quality assets into a subsidiary called PetroChina in early 2000, and carried out its IPO of a minority interest on both the Hong Kong and New York stock exchanges in April 2000. The IPO raised over $3 billion, with BP the largest purchaser at 20% of the shares offered. Sinopec carried out its IPO in New York and Hong Kong in October 2000, raising about $3.5 billion. Like the PetroChina IPO, only a minority stake of 15% was offered. About $2 billion of this amount was purchased by the three global super-majors - ExxonMobil, BP, and Shell. CNOOC held its IPO of a 27.5% stake in February 2001, after an earlier attempt in September 1999 was canceled. Shell bought a large block of shares valued at around $200 million.Several aspects of these stock offerings were very atypical. First, they all involved only minority stakes. Second, they have not given the foreign investors a major voice in corporate governace. The Chinese government still holds majority stakes in all three firms, and the foreign investors have not received seats on their boards of directors. Analysts have generally seen these investments as attempts by the supermajors to gain a foothold in China, which will necessarily involve partnerships with the Chinese majors. Even with the opening to foreign investment envisioned in China's commitments for membership in the WTO, it is still likely that almost all major oil and gas projects in China will involve one of the Chinese majors. The Chinese government stipulated in July 2001 that only CNPC and Sinopec will be allowed to open new retail filling stations prior to fulfillment of China's market-opening commitment in 2004. This is seen as an attempt to strengthen their control of retail sales of petroleum products and ensure that foreign firms will have to partner with one or the other of the Chinese majors to enter the retail market, even after 2004. All three of the global supermajors, BP, ExxonMobil, and Shell, are planning to enter the Chinese retail market in partnership with CNPC, Sinopec, or both.
As a net oil importer since 1993, China's petroleum industry is focused on meeting domestic demand, but it does still export a modest amount of crude oil. The largest export customer by far is Japan, which imports Daqing crude oil to burn directly in electric power plants. As of early 2002, China's exports of Daqing crude oil to Japan were around 50,000 bbl/d, down substantially from export levels during the 1990s.
Most Chinese oil production capacity, close to 90%, is located onshore. One field alone, Daqing in northeastern China, accounts for about 1.0 million bbl/d of China's production, out of a total crude oil production of around 3.3 million bbl/d. Daqing is a mature field, however, having begun production in 1963. It is expected to show declining production in the future, but the discovery of additional small oil-bearing structures at the field and the introduction of enhanced recovery technologies may slow the decline. At China's second-largest producing field, Liaohe in northeastern China, CNPC has solicited proposals from potential foreign partners to help it enhance recovery rates and extend production, though no contracts have yet been signed. In December 2000, regulatory changes were announced which will remove some of the barriers to foreign firms forming partnerships with Chinese oil majors. Government priorities focus on stabilizing production in the eastern regions of the country at current levels, increasing production in new fields in the West, and developing the infrastructure required to deliver western oil and gas to consumers in the East. Offshore development also is a high priority. Chinese officials have said that they expect production in Xinjiang to reach 1 million bbl/d by 2008, but that seems ambitious, given that transportation of that oil to consumers in the East remains a major obstacle.
Recent offshore oil exploration interest has centered on the Bohai Sea area, east of Tianjin, believed to hold more than 1.5 billion barrels in reserves, and the Pearl River Mouth area. Phillips Petroleum announced in March 2000 that it had completed its appraisal drilling of the Peng Lai find in Block 11/05, and would proceed with development. Full scale production at the field is expected to reach more than 100,000 bbl/d by 2004. Shell and CNOOC signed a production sharing contract for exploration in the Bonan area of the Bohai Sea in January 2001. Seismic survey work is taking place, and drilling is scheduled to begin in 2003. CNOOC also signed a production sharing contract with Canadian independent Husky Oil in July 2001 for Block 39-05 in the Pearl River Mouth, near the Wenchang 13-1/13-2 blocks, where Husky Oil and CNOOC already are producing about 50,000 bbl/d. Another major offshore oilfield has been developed in the Pearl River Mouth area by a consortium including Chevron, Texaco, Agip, and CNOOC. The field began production in February 1999. Meanwhile, improvement in Sino-Vietnamese relations has opened the way for oil and gas exploration in the Beibu Gulf (known in Vietnam as the Gulf of Tonkin). China and Vietnam signed an agreement in December 2000 which settled their outstanding disputes over sovereignty and economic rights in offshore areas near their border. The Spratly Islands in the South China Sea also are suspected to hold oil and gas reserves, but the area, as mentioned above, is claimed by several neighboring states.
With China's expectation of growing future dependence on oil imports, China has been acquiring interests in exploration and production abroad. CNPC holds oil concessions in Kazakhstan, Venezuela, Sudan, Iraq, Iran, and Peru, and Azerbaijan. Sinopec also has begun seeking to purchase overseas upstream assets. The most significant deal thus far is CNPC's aquisition of a 60% stake in the Kazakh oil firm Aktobemunaigaz, which came with a pledge to invest significantly in the company's future development over the next twenty years. While there had been some discussion of a possible oil pipeline from Kazakhstan to China, CNPC has said that it would only be considered if reserves were sufficient and it was economical, which looks doubtful. The Greater Nile Petroleum Operating Company (GNPOC), the Sudanese oil project in which CNPC owns a stake, began exports in August 1999. The CNPC concession in Iraq cannot be developed until United Nations economic sanctions are lifted, at least to the extent of allowing foreign investment in Iraqi oil infrastructure. CNOOC also has purchased an upsteam equity stake in the small Malacca Strait oilfield in Indonesia.
Russia's Far East is seen as a potential source of Chinese crude oil imports. The Russian and Chinese governments have been holding regular discussions on the feasibility of pipelines to make such exports possible. One proposed major project is a $1.7-billion pipeline from Irkutsk to Beijing being backed by Russia's Yukos Oil, which, if developed, could carry 400,000 bbl/d of oil, mainly from the Tomsk region. CNPC and Yukos signed an agreement in July 2001 to carry out a feasibility study for the project, which is due to be completed in mid-2002. An alternative plan, proposed by Russian pipeline operator Transneft, would take Russian crude from both West Siberia and East Siberia via a 1 million bbl/d pipeline to an export terminal at the Pacific coast port of Nakhodka. China would presumably be one of the major consumers of oil from such a project, but it would also give Russia increased access to the Japanese, South Korean, and other East Asian markets.
Downstream infrastructure development in China centers primarily on upgrading existing refineries rather than building new ones, due to current overcapacity. In the late 1990s, the Chinese government shut down 110 small refineries, which generally made inferior quality petroleum products. 62 other small refineries owned by provincial and local governments also are likely to be merged into CNPC and Sinopec in the near future. Another major issue in the Chinese downstream sector is the lack of adequate refining capacity suitable for heavier Middle Eastern crude oil, which will become a necessity as Chinese import demand rises in the mid-term future. Several existing refineries are being upgraded to handle heavier and more sour grades of crude oil.
Chinese officials have spoken of their intention to build a national strategic petroleum reserve, but no formal policy announcement has taken place, and it is unclear whether China would build a government-held reserve of crude oil like the U.S. Strategic Petroleum Reserve (SPR) or make the maintenance of a minimum stock level a regulatory requirement of doing business as a refiner, which is the basis for strategic reserves in Japan and South Korea.
The country's largest reserves of natural gas are located in western and north-central China, necessitating a significant further investment in pipeline infrastructure to carry it to eastern cities. China is planning to build a pipeline, the "West-to-East Pipeline," from gas deposits in the western Xinjiang province to Shanghai, picking up additional gas in the Ordos Basin along the way. Shell was chosen in February 2002 as the lead firm for the project, and Gazprom and ExxonMobil will hold significant stakes. Sinopec also is likely to be added as an equity partner, but only for a 5% stake. Though construction had been scheduled to begin in 2001, it is unclear how long it will take to finalize terms for the contract. Some of the potential foreign partners in the project are reported to have concerns about the $18 billion project's commercial viability, even though letters of intent have been signed with several of the project's intended customers. The concern stems from the possibility that the Tarim Basin gas deposits may provide enough gas for only 20 years of operation, while close to 40 years of operation could be needed to make it profitable, given the massive construction costs. While it is unlikely to happen in the near future, the West-to-East Pipeline eventually could serve as a trunkline which could be extended to receive gas from Central Asia.
China announced a discovery of a major gas field at Sulige in the Ordos Basin in the Inner Mongolia Autonomous Region, adjacent to the Changqing oilfield, in 2001. While the field is still under evaluation, recent unofficial reserve estimates cited in the trade press put reserves in the range of 16-21 Tcf, substantially more than was assumed when the discovery was first announced. Some natural gas from from the Ordos Basin is likely to be put into the West-to-East Pipeline, which was to run through the area in any case, and help make it economically viable. A pipeline was completed in 1997 between the Ordos Basin and Beijing, and a second pipeline is planned in the near future, as demand for natural gas in Beijing, Tianjin, and nearby Hebei province already is outstripping the capacity of the original pipeline.
Another proposed pipeline project would link the Russian natural gas grid in Siberia to China and possibly South Korea via a pipeline from the Kovykta gas fields near Irkutsk, which hold reserves of more than 50 Tcf. The cost of the project has been estimated at $12 billion, and a feasibility study is underway. The pipeline would have a planned capacity of 2.9 billion cubic feet per day (Bcf/d), of which China would likely consume about 1.9 Bcf/d and South Korea 1 Bcf/d. The main South Korea gas company, Kogas, formally joined the feasibility study in November 2000. The main foreign backer of the project is BP, which owns a 30% stake in Rusia Petroleum , the license holder for the Kovykta gas field. The project faces some hurdles, however, as it would involve South Korea becoming dependent on gas supplies routed through China and North Korea. The project seems to have made little progress in the last year, due to tensions on the Korean peninsula and possibly Chinese expectations of additional domestic supplies for northeastern China based on the large new natural gas find in the Ordos Basin. It is not clear that the project would be economical if it is not extended to South Korea.
Aside from these huge projects, other pipelines are being developed to link smaller natural gas deposits to other consumers. A pipeline was completed in early 2002 linking the Sebei natural gas field in the Qaidam Basin with consumers in the city of Lanzhou. Another planned project would link gas deposits in Sichuan province in the southwest to consumers in Hubei and Hunan provinces in central China at an estimate cost of $600 million.
One major hurdle for natural gas projects in China is the lack of a
unified regulatory system. Currently, natural gas prices are
governed by a patchwork of local regulations. The Chinese government
is in the process of drafting a new legal framework for the natural gas
sector, which has become an urgent priority to reassure Shell and other
potential foreign investors in the West-to-East Pipeline that there will
be a stable regulatory environment.
Offshore gas projects also are becoming a significant part of China's gas supply. The Yacheng 13-1 field, developed in the mid-1990s, has been producing gas for Hong Kong and Hainan Island since 1996. The Chunxiao gas field in the East China Sea, being developed by China National Star Petroleum, is also expected to become a significant producer within the next decade. The company puts the field's reserves at more than 1.6 Tcf. Another area where where exploratory drilling is planned is the Xihu Trough, in the East China Sea about 250 miles east of Shanghai.
Imported liquefied natural gas (LNG) will be used primarily in China's southeastern coastal region. Guangdong province already has launched a project to build six, 320-megawatt (MW) gas-fired power plants, and to convert existing oil fired plants with a capacity of 1.8 gigawatts (GW) to LNG. In March 2001, it was announced that BP had been selected to build China's first LNG import terminal, to be located near the city of Guangdong. BP will take a 30% equity stake in the project, with CNOOC holding 31% and the rest held by local firms from Guangdong and Hong Kong. Proposals for supplies of LNG to the terminal were received in May 2002 from three potential suppliers, RasGas of Qatar, Shell's Northwest Shelf LNG project in Australia, and BP's planned Tangguh LNG project in Indonesia. A second LNG import terminal is planned for Fujian province, to be completed in 2005 or 2006.
China's coal industry has had a serious oversupply problem in recent years, particularly in the late 1990s, and the government has begun implementing major reforms aimed at reducing the oversupply, returning large state-owned mines to profitability as a prelude to possible future privatization, and reducing mine accidents. Large state-owned coal mines had experienced buildups of unused inventories in the mid-to-late-1990s, and many were operating at a financial loss. A large number of small, unlicensed mines also have added to the oversupply. In 1998, the government launched a large-scale effort to close down the small mines. Many small coal mines have been closed, and the effort is continuing. As a result of the closures, depressed local coal prices have started to recover, and combined with cost-cutting measures, some of the large-scale mines returned to profitability in 2000. It has become clear, however, through much anecdotal evidence, that not all of the "closed" mines have actually ceased operation, and the recent revision to the Chinese State Statistical Bureau's production and consumption figures appears to reflect this. China also is increasingly seeking export markets for its coal as a way of dealing with its surplus production. According to figures published by the Chinese government, China's net coal exports for 2001 rose by 46% from the previous year. Japan and South Korea are the primary markets, and China is beginning to emerge as a serious competitor to Australia for Japanese coal imports. India also has been importing modest quantities of Chinese coal.
Over the longer term, China's coal demand is projected to rise significantly , roughly doubling by the year 2020. While coal's share of overall Chinese energy consumption is projected to fall, coal consumption will still be increasing in absolute terms. Several projects exist for the development of coal-fired power plants co-located with large mines, so called "coal by wire" projects. Other technological improvements also are being undertaken, including the first small-scale projects for coal gasification, and a coal slurry pipeline to transport coal to the port of Qingdao. Coalbed methane production also is being developed, with recent American investors in this effort including BP, Texaco, and Virgin Oil, which was awarded a concession for exploration in Ningxia province in January 2001. Texaco is the largest foreign investor in coalbed methane, with activities in several provinces. Coalbed methane production is expected to reach 0.4 billion Tcf by 2010.
In contrast to the past, China is becoming more open to foreign investment in the coal sector, particularly in modernization of existing large-scale mines and the development of new ones. The China National Coal Import and Export Corporation is the primary Chinese partner for foreign investors in the coal sector. Areas of interest in foreign invesment concentrate on new technologies only recently introduced in China or with environmental benefit, including coal liquefaction, coal bed methane production, and slurry pipeline transportation projects. Over the longer term, China plans to aggregate the large state coal mines into seven corporations by the end of 2005, in a process similar to the creation of CNPC and Sinopec out of state assets. Such firms might then seek to pursue foreign capital through international stock offerings.
China has expressed a strong interest in coal liquefaction technology, and would like see liquid fuels based on coal substitute for some of its petroleum demand for transportation. The first pilot coal liquefaction plant is planned to be operational in coal-rich Shanxi in late 2001. Shell also signed an agreement in December 2001 for a coal gasification project in Yueyang in Hunan province, which is to replace naphtha as a feedstock for a large fertilizer plant.
The largest project under construction, by far, is the Three Gorges Dam, which, when fully completed in 2009, will include 26 separate 700-MW generators, for a total of 18.2 GW. Plans were announced in March 2002 to reorganize the Three Gorges project into the China Three Gorges Electric Power Corporation. The corporation is expected to seek capital through an equity offering open to foreign investors, similar to those already carried out by the major Chinese oil companies, in 2003.
Another large hydropower project involves a series of dams on the upper portion of the Yellow River. Shaanxi, Qinghai, and Gansu provinces have joined to create the Yellow River Hydroelectric Development Corporation, with plans for the eventual construction of 25 generating stations with a combined installed capacity of 15.8 GW. Seven of these stations are either under construction or currently in operation.
Most of the major developments taking place in the Chinese electricity sector in 2002 involve nuclear power. Several nuclear projects are under construction, with the involvement of Russian, French, and Canadian firms. The first generation unit of the Lingao nuclear power plant in Guangdong province began commercial operation in May 2002, with a capacity of 1-GW. The second 1 GW generating unit is expected to begin operating in March 2003. An additional 600-MW generating unit at the Qinshan nuclear power plant in Zhejiang province began operation in February 2002, and another 600-MW unit at the same site is scheduled to begin delivering electricity in late 2002.
A major issue for China's electric power industry is the distribution of generation among power plants. China's stated intention eventually is to create a unified national power grid, and to have a modern power market in which plants sell power to the grid at market-determined rates. In the short term, though, traditional arrangements still hold sway, and state-owned power plants which have government connections tend to have a higher priority than independent private plants. Additionally, some private plants with "take-or-pay" contracts, which provide for guaranteed minimum sales amounts, have had trouble getting the provincial authorities running the local grids to honor those terms.
In the short term, oversupply and uncertainty are likely to reduce foreign investment in China's power sector. In the longer term, though, growth in electricity consumption is projected at 5.5% per year through 2020. The largest gainer in terms of fuel share in the future is expected to be natural gas, due largely to environmental concerns in China's rapidly industrializing coastal provinces. If a truly competitive market for electric power develops as planned, the Chinese market may once again become attractive to foreign investment. At present, foreign direct investment is allowed only in power generation, but loan financing has been obtained for some power transmission projects.
The Chinese government is in the early stages of formulating a
fundamental long-term restructuring of their electric power sector,
embodies in the National Power Industry Framework Reform Plan promulgated
by the State Council in April 2002. As with many other countries reform
programs, generating assets are to be largely separated from transmission
and distribution. The State Power Corporation (SPC) will divest most
of its generating assets (though retaining about 20%), and then be split
into regional transmission and distribution companies. Electricity prices
will still be regulated, but there are likely to be major changes in
tarriffs and the overall regulatory structure for electricity pricing. The
process is at an early stage, and many of the details remain to be worked
China is a non-Annex I country under the United Nations Framework
Convention on Climate Change, meaning that it has not agreed to binding
targets for reduction of carbon dioxide emissions under the Kyoto
Protocol. While the Chinese government is concerned with its
environmental problems, it tends to be more concerned with local problems,
such as particulate matter and sulfur dioxide emissions. Thus, it is
undertaking efforts to lessen emissions of pollutants such as sulfur
dioxide and nitrogen oxide, through improved pollution controls on power
plants as well as policies designed to increase the share of natural gas
in the country's fuel mix, particularly around major metropolitan
Statistical note: All data reported here exclude Hong Kong, a former British colony which reverted to China on July 1, 1997.
* The total energy consumption statistic includes petroleum, dry
natural gas, coal, net hydro, nuclear, geothermal, solar, wind, wood and
waste electric power. The renewable energy consumption statistic is based
on International Energy Agency (IEA) data and includes hydropower, solar,
wind, tide, geothermal, solid biomass and animal products, biomass gas and
liquids, industrial and municipal wastes. Sectoral shares of energy
consumption and carbon emissions are also based on IEA data.
Sources for this report include: Asia Pulse; Coal Week
International; Dow Jones Newswire; Economist Intelligence Unit; Financial
Times; Oil and Gas Journal; Oil Daily; Petroleum Economist; Petroleum
Intelligence Weekly; South China Morning Post; U.S. Commerce Department;
International Trade Administration -- Country Commercial Guides; U.S.
Energy Information Administration; DRI/WEFA Asia Economic Outlook; World
For more information from EIA on China, please see:
Links to other U.S. Government sites:
The following links are provided solely as a service to our customers, and therefore should not be construed as advocating or reflecting any position of the Energy Information Administration (EIA) or the United States Government. In addition, EIA does not guarantee the content or accuracy of any information presented in linked sites.
China's Embassy in the United
If you liked this Country Analysis Brief or any of our many other Country Analysis Briefs, you can be automatically notified via e-mail of updates. You can also join any of our several mailing lists by selecting the listserv to which you would like to be subscribed. The main URL for listserv signup is http://www.eia.doe.gov/listserv_signup.html. Please follow the directions given. You will then be notified within an hour of any updates to Country Analysis Briefs in your area of interest.