Market Information

China’s economic growth is based on a foundation of an insatiable hunger for energy. Indeed, the country is the world’s second largest consumer of energy, behind the United States. Much of the power generated in the country comes from coal, some 78 percent, but demand for oil is surging rapidly with consumption increasing by an estimated half a million barrels per day in 2006, amounting to 38 per cent of growth in world demand. Natural gas is also increasing in demand in China with new reserves being found which will increase the proportion the fuel contributes to China's energy demand.

All these resources combine to generate a total of over 400 gigawatts of power annually, much of it coming from these conventional sources but with some also coming from nuclear and hydroelectric power. China is now a huge player in world energy markets but if it is to maintain growth rates of over 10 percent per annum, as it has done for the past two decades, then demand for existing and additional fuel sources is only going to rise.

China is the world’s largest producer, mining almost 2500 tons in 2006, and consumer, over a third of total world consumption, of coal. It has the third largest estimated reserves in the world behind Russia and the United States, with some 126 billion tons of recoverable capacity. The distribution of coal throughout the country is centred in the northern regions and within this it is highly localised in Shanxi province. Other pockets of reserves exist, notably in the south of China but the quality of coal here is such that it can have few practical applications.

Coal

The coal mining industry has recently undergone a massive structural upheaval, with ownership of the mines being aggregated to a handful of large firms. Typically there were myriad types of mine ownership, and to a large extent still are, with village and town mines, local mines, provincial mines and state mines, but these are all fragmented with little or no interconnection between the various types of ownership. But as of February 2006 this was scheduled to change, with the government having set out plans to defragment the industry, creating large corporations with large state holdings, in a move that will mirror the creation of PetroChina and Sinopec in the oil industry.

The move comes amid unacceptable levels of inefficiency in the smaller mines, which suffer from under qualified management, outdated technology and chronic under investment, leading to poor exploitation of resources. In light of this, all small scale mines will be closed by 2015, in accordance with government plans. Until now around 50,000 mines are estimated to have been closed. With larger conglomerates operating in the coal sector it is hoped that investment levels will rise, from both domestic and foreign sources, boosting technology and therefore production and efficiency levels.

In addition, the government wishes to prioritise investment from abroad to reap the benefits of nternational experience, with an emphasis being placed on developing cleaner, environmentally friendly technology. This includes a subsidy of Shenhua Group finalising the development of a coal to liquid plant sometime in 2007, the first of its kind in China.

Oil

For some time now China has been consuming more oil than it produces from its own reserves. It is second only to the United States in its consumption and the third largest net importer of oil behind the US and Japan. Production level is around 3.8 million barrels per day with consumption almost double this at around 7.5 million barrels per day. Total proven reserves were around 18 billion barrels as of 2006.

Most of the oil in China is onshore with only 15 percent being found in offshore deposits. The two northeastern oil fields of Daqing and Shengli together account for over 35 percent of total production in China, with other major deposits found in Xinjiang province, the South China Sea. There are currently huge exploration programmes being undertaken in Sichuan, Gansu and Inner Mongolia by Chinese and foreign firms alike.

Privatised oil companies are a relatively new commodity in China, with the state reorganising its assets into two large state-holding majority firms in 1998. The two companies created were PetroChina and Sinopec, who are also responsible for gas production. A third firm, China National Offshore Oil Corporation was also created, which specialises only in offshore oil production.

The firms are vertically integrated so they have control over the entire supply chain of oil, from exploration and production to the final marketing and selling of the products. Traditionally, these firms have maintained a dominant duopoly in the market, but operating in different areas of the country, with PetroChina in the north and west, Sinopec in the south. The two companies have also tended to focus specifically on different stages of the production chain, with PetroChina concentrating on upstream processes and Sinopec those nearer to the consumer such as distribution.

China Gas

Gas accounts for only a small proportion of total energy production and consumption in China, typically less than 5 per cent, but as demand for power soars, gas is likely to play a greater role in China's energy market. In fact growth in demand is increasing at over 20 per cent annually, doubling the total demand every few years. China consumes around 1.5 trillion cubic feet of gas annually although there are mixed estimates as to how much reserves are in the country. Some reports put the total proven reserves at 83 trillion cubic feet but others are more conservative, placing the figure at around 50 million cubic feet.

Western and northern China contain the largest reserves of natural gas in the country with several smaller pockets existing in other areas of the country, including Heilongjiang province in the northeast. Additional fields are being discovered on a regular basis including a large deposit in Sichuan province in 2006 and another in the South China Sea during the same year.

The reserves are scattered throughout the country often in remote, largely inaccessible areas that can be a considerable distance from major population centres. In the past this has led to what may be deemed an under consumption of gas since the limited distribution infrastructure meant that the gas could only be used in close proximity to a gas field. But investment from large energy companies is likely to expand the range of pipelines and connect distribution networks to the more populous east of the country. A West-East line from Xinjiang province to Shanghai is now a couple of years old and a further pipeline from Sichuan to the East is on the cards.

These pipelines and much of the other infrastructure in the gas industry are, as in the oil industry, dominated by huge conglomerates, namely China National Petroleum Corporation (CNPC), in the guise of PetroChina, Sinopec and China National Offside Oil Corporation (CNOOC). PetroChina is the dominant industry producing over five times as much gas as Sinopec, 1.3 trillion cubic feet versus 222 billion cubic feet, with CNOOC accounting for 142 billion cubic feet (2005 figures). Recent data shows huge increases in year on year production levels which are likely to accelerate when the government redrafts regulatory legislation to cut down on price and tax uncertainties. Although when this will be fully implemented is uncertain.