Improving energy security needs long-term govt focus

By Lin Boqiang Source:Global Times Published: 2018/5/17 23:38:41

Illustration: Luo Xuan/GT


Energy prices, especially oil and natural gas prices in China, have made a strong comeback after a temporary decrease earlier this year. From January to April, imports of crude oil and natural gas rose 8.9 percent and 36.4 percent year-on-year respectively, while costs were up 32.3 percent and 66.6 percent.

China can't be complacent about energy supplies in 2018, and the nation should make comprehensive arrangements for energy security while striving for energy independence in the long run. In the short term, China may have to expand energy imports and broaden its sources.

Energy demand in China is rising every year. There were 28.87 million vehicles sold in 2017, up 3 percent year-on-year, and only 770,000 of those were electric vehicles. In addition, the Chinese government is determined to cut air pollution by replacing coal by natural gas.

These factors mean oil and gas prices will continue to rise in the near future. Meanwhile, dependence on foreign energy has grown rapidly. A few years ago, analysts expected China's dependence on foreign oil would hit 70 percent in 2030. However, Ma Yongsheng, vice president of Sinopec Group and a member of the National Committee of the Chinese People's Political Consultative Conference, said in March that oil import dependency is already near that figure. Some researchers claim that it was 70 percent in 2017.

Potential risks lurk in the nation's energy import structure. For instance, Central Asia failed to provide the contracted amount of natural gas when China experienced a shortage of the fuel last winter. The US withdrawal from the Iran nuclear deal has added uncertainties to the Middle East, which is China's top oil supplier. Unrest in northeast Myanmar has cast a shadow on the security of Sino-Myanmar pipelines.

China, as a huge country, should work toward energy independence, although it will take time. The way to meet short-term demand is still expanding imports from a variety of suppliers.

Russia has become an important alternative. Crude oil imports from Russia have taken up an increasing portion of the total in recent years, but such purchases require advance planning, some of it involving infrastructure construction.

The US is a potential choice as well. The shale revolution has made it largely self-sufficient. Importing more oil and gas from the US will help with energy diversification as well as a greater balance in bilateral trade. With global oil and gas prices soaring, the US shale oil is becoming competitive.

China started oil purchases from the US last year, but it did not have a long-term plan yet. The main reason is the US oil price needs to remain competitive. Also, shale oil is unlike current grades of heavy crude oil, as it requires a refining process that involves blending with different grades of oil. US shale gas does have a price advantage, but due to infrastructure issues and long shipping distances, this advantage is often wiped out when reaching China.

Deficient infrastructure is a bottleneck for US oil and gas exports, as the country just lifted its oil export ban not long ago. Infrastructure such as pipelines, liquefied natural gas (LNG) terminals and so on are still not sufficiently in place. If China buys natural gas from the US, it has to be transported in the form of LNG on specialized vessels. Facilities are also needed to liquefy the gas and move it to a port. The international competitiveness of US oil and gas prices are directly related to its infrastructure.

Besides, China must keep its strategic oil reserve in mind and build sufficient infrastructure in advance for future opportunities. China could have stocked up oil at better prices. Global oil prices, for example, fell below $30 in 2016, making it a perfect time to buy. Therefore, building more storage facilities can allow China to take advantage of future pricing opportunities to build its strategic oil reserves.

China has sought to diversify its energy imports for the past decade. In that time, it started to build an energy network including pipelines from Central Asia and Myanmar. It has achieved some successes in building four energy import passageways despite problems such as high import dependency. Diversification has made some headway, but not as much as expected. Middle Eastern countries are still the main suppliers of energy to China.

Energy security must be planned wisely, putting the government's will and engagement to the test. The long-term goal should be to limit to a certain level China's dependency on foreign energy, specifically oil and gas. But in the short term, China will have to be more open to the international energy market, increasing and diversifying its energy imports.

The author is dean of the China Institute for Studies in Energy Policy at Xiamen University.


blog comments powered by Disqus