Energy security and energy risk management.

Author:Li, Lifan

China is facing serious energy security issues. In recent years, China's energy structure has undergone major adjustments, while qualitative changes have taken place in the form of energy security. This raises a new question for China's political, diplomatic, military, technological, and industrial structures: How to safeguard China's energy security? This paper is intended to analyze approaches to energy imports and bottlenecks of energy development, and proposes that international cooperation, development of new energy sources and improvement in energy efficiency will contribute to resolving the energy crisis, and puts forward policy proposals to achieve China's strategy of peaceful development.

  1. Current Situations of Energy Development: A Case Study for China

    Status Quo of China's Energy Supply and Demand

    China's economic growth rate has far exceeded its available supply of energy. Especially in recent years, China's domestic oil yield continues to decline, creating a serious imbalance between supply and demand.

    The Chinese economy has witnessed double-digit growth in the past two decades, which has driven the demand for oil. Economic growth and oil consumption are soaring. In 2002, China transcended Japan and emerged as the second largest energy consumer, following the United States. As China's demand for energy continues to grow, its domestic oil yield is failing to keep pace. According to recent statistics, China's oil consumption increased by over 55 percent from 1994 to 2000, but domestic oil yield increased by only 11 percent over the same period. From 2002 to 2011, China's oil consumption increased from 223.9 million tons to 458 million tons. From 2002 to 2011, China's oil consumption rate rose from 31 percent to 56 percent. (1) It can be said that in the foreseeable future, imbalance between oil supply and demand will continue to deteriorate.

    In addition, the efficiency of the domestic oil industry is generally low. According to statistics provided by the American scholar Bernard D. Cole, refined oil costs USD 1.50 per barrel in China, and only USD 1.20 per barrel in Western countries. Such high cost partly results in energy waste in China. At the same time, natural gas consumption accounts for only 5 percent of total energy consumption in China, far below the global average of 15 percent. (2) There is great potential for clean energy in China, as well as economic pressures on energy policymakers to develop new energy structures.

    China's Energy Import Channels

    In order to ensure the security of its energy supply, China has expanded its overseas energy import channels. Its energy imports are primarily from the following regions:

    Tier-1 regions: the Middle East. At present, 51 percent of China's oil imports come from the Middle East. (3) This region carries inherent risks; the Palestinian-Israeli conflict and turmoil in Iraq, Afghanistan, Syria and other countries add to regional tensions. Despite the region's great strategic significance for China, the Middle East is a sphere of influence for the United States. Countries of the Middle East generally have few conflicts of interest with China, so China maintains favorable economic and political relations. But it cannot be ruled out that the United States could impose pressure on these countries and block China's energy export channels in the maritime space, including the Mediterranean Sea or the Arabian Gulf.

    Tier-2 regions: Russia and Central Asia. In 1996, then Russian President Boris Yeltsin defined the Sino-Russian relation as a strategic partnership. (4) In May 2014, President Vladimir Putin embraced this strategic cooperation, signing a 30-year contract for natural gas exports to China in the total amount of USD 400 billion. (5) China's oil imports from Russia rely on rail transport at relatively low quantity. However, after a new natural gas pipeline is completed in 2019, it will become a major blood vessel feeding China's energy consumption.

    Energy security cooperation between China and some Central Asian countries has also harvested some fruits. For example, China has signed a number of agreements with Kazakhstan. The China-Kazakhstan Oil Pipeline Project has been completed, estimated to achieve an annual oil supply of 10 million tons per year to China in the initial phase. (6) Four natural gas pipelines between China and Central Asia have undergone groundbreaking and completion and are used for gas transmission. (7)

    Other regions: Africa and South America. In recognition of its growing need for oil and gas, China has invested enormous amounts of money in oil exploitation in West Africa (Nigeria), South America (Venezuela) and other regions. Moreover, initial public offerings and joint exploitation of overseas energy projects have become important strategic components for Chinese energy companies in their quest to "go global." However, the volume of oil produced by these investments remains relatively low.

    In short, China's oil imports face a series of important risks, such as political instability of oil-producing regions and intense competition from other countries, which will need to be mitigated in order to allow for increasing consumption.

    Challenges for Energy Security. With the rapid development of the Chinese economy and faster pace of industrialization and urbanization, energy demand is ever-growing. Establishment of a stable, economical, clean, and safe energy supply system is faced with significant challenges in the following aspects:

    Severe resource constraints and low energy efficiency. China's relative lack of top-quality energy resources restricts improvements in supply capacity. Uneven distribution of energy resources also increases the difficulty of maintaining a steady supply. High rates of economic growth, inefficient energy structures, low levels of energy technology and equipment, and ineffective management result in energy consumption higher than average compared to other primary energy-consuming countries, further exacerbating the imbalance between energy supply and demand. Therefore, it will be difficult for China to meet its increasing consumption demand by relying solely on increasing its energy supply.

    Coal-dominated energy consumption and environmental pressures. Coal is the main source of energy in China. Coal-dominated energy structures are entrenched and difficult to change over a short period of time. Coal production and consumption patterns have significant environmental impacts; coal consumption is not only the primary cause for coal-burning air pollution, but also a main source of China's greenhouse gas emissions. In a global environment of increased political awareness of the dangers of exacerbating climate change, China's reliance on coal also poses significant geopolitical and diplomatic challenges.

    Imperfect market systems and weak emergency response capacity. The Chinese energy market system needs to be improved. Energy price mechanisms fail to fully reflect resource...

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