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ENERGY SECTOR DEVELOPMENT AND REFORM IN PRC With Special Reference to the Oil Industry

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Title: ENERGY SECTOR DEVELOPMENT AND REFORM IN PRC With Special Reference to the Oil Industry


1
ENERGY SECTOR DEVELOPMENT AND REFORM IN PRC With
Special Reference to the Oil Industry
  • Presented by
  • Dr. Cherng-Shin Ouyang
  • Research Fellow
  • Chung-Hua Institution for Economic Research
  • 75, Chang-Hsin St.,Taipei, Taiwan
  • 29th September 2008
  • at Economic Department of Moscow State University

2
Part 1 Overview of Chinas Energy Sector
Development Part 2 Reform and Market Opening
3
Chart 1 International Comparison of Energy
Consumption Efficiency, 2006 (toe/10,000 USGDP)
toe ton oil equivalent
source The Industrial Map of China Energy, 2006
4
Chart 2 Energy Consumption / GDP of PRC
(tce/10,000 RMB), 19802005
tce ton coal equivalent
source Chart 1
5
Table 1 Structure of Primary Energy Consumption
Selected Countries, 2005

Energy in Country kind Oil Natural Gas Nuclear Power Coal Hydro Power Total
USA 40.4 24.4 8.0 24.6 2.6 100
Japan 46.6 13.9 12.6 23.1 3.8 100
Germany 37.5 23.9 11.4 25.3 1.9 100
UK 36.6 37.4 8.1 17.2 0.7 100
France 35.4 15.5 5.1 39.1 4.9 100
China 21.1 2.7 0.8 69.6 5.8 100
SourceBP(2006), Statistical Review of World
Energy, http//www.bp.com.?
6
Chart 3 Strategic Oil Reserve (days) Selected
Countries, 2005
source various Author estimate
7
Chart 4 Primary Energy Production and Consumption
of PRC, 19892005
100 million tce
8
Table 2 Economic Growth and Energy Consumption of
PRC, 19812005
Real GDPa (ann. ave.) Growth Rate, Growth of Primary Energy Consumption (ann. ave.)b ,
6th FYP 7.8 6.1
7th FYP 8.0 5.2
8th FYP 12.3 5.8
9th FYP 8.6 1.1
10th FYP 9.5 10.1
arithmetic ave. notes a) 19932004 revised GDP by SSB b) 19992004 revised energy consumption by SSB arithmetic ave. notes a) 19932004 revised GDP by SSB b) 19992004 revised energy consumption by SSB arithmetic ave. notes a) 19932004 revised GDP by SSB b) 19992004 revised energy consumption by SSB
9
Chart 5 Energy Consumption Elasticity (e) of PRC,
19942005
Asian Financial Crisis
Notes 19992005 revised figures normal 1gtegt0
(rest) abnormal elt0 (1998) abnormal
(inefficient) egt1 (2003,2004)
SourceChinese Statistics Bulletin, Chinese
Energy Statistics Bulletin, DRC State Council
10
Table 3 Primary Energy Structure Forecast PRC,
20052050
2005 2020 2050
Total Energy Consumption (standard tce/per person per year) 1.0 2.0 3.0
Installed Power Generation Capacity (1,000 w/per person) 0.3 0.7 1.5
Primary Energy Structure,
Coal 69.3 55.0 40.0
Oil 21.1 22.0 23.0
Natural Gas 2.7 8.0 12.0
Hydro Nuclear Power 6.6 8.0 10.0
Renewable Energy - 7.0 15.0
Total 100.0 100.0 100.0
SourceChinese Academy of Sciences SourceChinese Academy of Sciences SourceChinese Academy of Sciences SourceChinese Academy of Sciences
11
Table 5 Energy Consumption Forecast PRC,
20002020
ERI (forecast) ERI (forecast) ERI (forecast) ERI (forecast) ERI (forecast) ERI (forecast) DOE(U.S.) DOE(U.S.) DOE(U.S.) DOE(U.S.) DOE(U.S.) IEA IEA IEA
Baseline Sustainable Growth Sustainable Growth Sustainable Growth Green GDP Green GDP High High Medium Low Low 2002 2002 2004
2010 (mill standard tce) 2,150 2,080 2,080 2,080 1,870 1,870 2,090 2,090 1,970 1,840 1,840 1,950 1,950 2,480
2020 (mill standard tce) 3,300 2,900 2,900 2,900 2,470 2,470 3,220 3,220 2,790 2,430 2,430 2,560 2,560 3,170
Annual Ave.,
20002010 5.2 5.2 4.8 3.7 3.7 4.9 4.9 4.2 4.2 4.2 3.5 3.5 4.1 6.4
20102020 4.4 4.4 3.4 2.8 2.8 4.4 4.4 3.5 3.5 3.5 2.8 2.8 2.8 4.6
20002020 4.8 4.8 4.1 3.3 3.3 4.6 4.6 3.9 3.9 3.9 3.2 3.2 3.5 4.6
sourceWorld Bank DRC (2007) sourceWorld Bank DRC (2007) sourceWorld Bank DRC (2007) sourceWorld Bank DRC (2007) sourceWorld Bank DRC (2007) sourceWorld Bank DRC (2007) sourceWorld Bank DRC (2007) sourceWorld Bank DRC (2007) sourceWorld Bank DRC (2007) sourceWorld Bank DRC (2007) sourceWorld Bank DRC (2007) sourceWorld Bank DRC (2007) sourceWorld Bank DRC (2007) sourceWorld Bank DRC (2007) sourceWorld Bank DRC (2007)
sources
Projection
Projection
consumption
12
Table 6 Energy Final Consumption According to
Sectors and Energy Types, 2000/2020
2000 2000 2020 2020 2000 2000 2020 2020
mtce mtce mtce mtce
Agriculture 48.2 5.4 5980 3.13.2 Coal 381.8 42.8 559836 33.729.3
Industry 497.7 55.8 9981345 53.454.2 Oil 297.0 33.3 605827 19.622.8
Transport 137.4 15.4 385503 20.220.2 Natural Gas 27.7 3.1 159157 8.46.3
Residents Commerce 208.7 23.4 463555 22.224.4 Electricity 147.2 16.5 434487 19.622.8
Other 38.3 4.3 148177 7.87.1
Total 892.0 100.0 19052484 100.0 Toal 892.0 100.0 19052484 100.0
Source ERI Energy Consumption Forecast- Baseline and Green GDP Scenarios Source ERI Energy Consumption Forecast- Baseline and Green GDP Scenarios Source ERI Energy Consumption Forecast- Baseline and Green GDP Scenarios Source ERI Energy Consumption Forecast- Baseline and Green GDP Scenarios Source ERI Energy Consumption Forecast- Baseline and Green GDP Scenarios Source ERI Energy Consumption Forecast- Baseline and Green GDP Scenarios Source ERI Energy Consumption Forecast- Baseline and Green GDP Scenarios Source ERI Energy Consumption Forecast- Baseline and Green GDP Scenarios Source ERI Energy Consumption Forecast- Baseline and Green GDP Scenarios Source ERI Energy Consumption Forecast- Baseline and Green GDP Scenarios
year
year
Energy Type
Sector
13
Table 7 Oil and Natural Gas Production
Consumption PRC, 19952006
1995 2000 2000 2001 2002 2003 2004 2005 2006
Oil Oil Oil Oil Oil Oil Oil Oil Oil
Domestic Output (1,000 barrel/day) 2,989 3,252 3,306 3,306 3,346 3,401 3,481 3,627 3,684
Annual growth rate () - 1.2 1.7 1.7 1.2 1.6 2.4 4.2 1.6
Domestic Consumption (1,000 barrel/day) 3,395 4,772 4,872 4,872 5,288 5,803 6,772 6,984 7,445
Annual growth rate () - 6.6 2.1 2.1 8.5 9.7 16.7 3.1 6.6
Balance (1,000 barrel/ day) -406 -1,520 -1,566 -1,566 -1,942 -2,402 -3,291 -3,247 -3,761
Natural Gas Natural Gas Natural Gas Natural Gas Natural Gas Natural Gas Natural Gas Natural Gas Natural Gas
Domestic Output (100 million cm) 179 272 272 303 327 350 410 500 586
Annual growth rate () - 7.9 7.9 11.4 7.9 7.0 17.1 22.0 17.2
Domestic Consumption (100 million cm) 174 238 238 268 286 332 390 470 556
Annual growth rate () - 13.9 13.9 12.6 6.7 16.1 17.5 20.5 18.3
Balance(100 million cm) 5 34 34 35 41 18 20 30 30
years
Source BP (2007), Statistical Review of World
Energy, 2007
14
Chart 6 Imported Oil Dependence PRC, 19652005,

Source Chart 1
15
Table 8 Area/Country Concentration Ratio of Crude
Oil Import PRC, 2005/2006
Area 2005 2006 Countries/ Top 10 2005 2006
Middle East 47.2 45.2 Saudi Arabia 17.5 16.4
Africa 30.3 31.5 Angola 13.7 16.2
Europe Central Asia 11.5 13.1 Iran 11.2 11.6
Asian Pacific 7.6 6.6 Russia 10.1 11.0
Western Hemisphere 3.4 3.6 Oman 8.5 9.1
Yemen 5.5 3.1
Sudan 5.2 3.3
Congo 4.4 3.7
Indonesia 3.2
Equatorial Guinea 3.0 3.6
Venezuela 2.9
Total 100.0 100.0 Total 82.3 80.9
Source China Custom Statistics, 2006/07
16
Future Prospect
  • Domestic oil consumption continue to rise
  • Imported oil reaching 50 of domestic consumption
  • Gas consumption expected to increase at two digit
  • Energy/oil security a serious policy concern
  • Future growth likely to be impinged by
    resources and environment constraints

17
Major Strategy Responses
  • Drafting Energy Act (to be promulgated end of
    2007)
  • Unifying energy governing body plan to reinstate
    Energy Ministry (abolished in 1992)
  • To develop renewable and alternative energy
    resources
  • To enhance energy conservation while emphasizing
    clean energy End of 11 FYP to reduce unit output
    energy consumption by 20
  • Global oil hunt coupled with increased
    international cooperation

18
Major Strategy Responses (cont.)
  • To initiate Three-Phase Program in building
    strategic/commercial oil reserve (Target 60
    days of annual consumption)
  • Undertaking comprehensive market-directed energy
    sector reform
  • Overhauling energy (oil) administration structure

19
Evolution of Chinas Oil Market Four Phases
  • I. Pre-reform period (before 1981)
  • Incorporated within national economic plan,
    resources allocation based on overall balance
  • State intervention at various levels of the oil
    sector /government
  • Self-sufficient in oil consumption have surplus
    for export until 1993
  • II. Reform Period (after 1981)
  • 1. Plan market coordination (19811994)
  • Adopting production responsibility System (PRS)
  • Dual pricing allowed above-target crude
    (exceeding 100 mt) and allocated input quota
    conserved be freely disposed at market price
  • Emergence of social entities in oil business
  • Oil futures market set up in Beijing Shanghai
    (1996)

20
Evolution of Chinas Oil Market Four Phases
(cont.)
  • 2. State Domination (19941998)
  • Oil sector reform
  • Production/import subject to state allocation
    plan
  • Abolishing dual pricing
  • Closure of oil futures trading
  • 3. Reform and Opening (1998)
  • Building international linkage
  • Price mechanism adjustment
  • Import liberalization
  • Access to wholesale retail oil products market

21
Main Feature of the Pre-reform Oil Industry
Management System - An Integral Part of the
Traditional Planned Economy
  • Ownership, management, and control entrusted to
    the state
  • The governing body and the governed-state
    enterprises- are intermingled, both represent
    administrative units at different levels of the
    oil industry complex
  • Despite incessant administrative restructuring
    the oil business management system remained
    largely intact
  • Production based on quota within a vertically
    integrated command system resources allocation
    and intra-industry coordination followed
    bureaucratic rules

22
Oil Industry management System Reform Three
Phases
  • Phase 1 (19821998)
  • Bureaucratic organs divorced from Enterprises
  • Phase 2 (19982003)
  • Restructuring and enhancing professional
    management competence of the three state oil
    groups CNPC, Sinopec and CNOOC
  • Phases 3 (2003)
  • Market oriented reform taking place

23
Brief History of the Three State Oil Groups
24
Increasing Flexibility in Domestic Oil Pricing
  • Formation of domestic oil price (particularly oil
    product prices) traditionally fixed and
    regulated by the government to safeguard the
    livelihood of people
  • However, oil as a strategic commodity withstood
    pressure of liberalization until the late 1990s
  • Growing import of crude and spiraling world oil
    price enabled the authority to adopt more
    flexible approach in the shaping of oil prices
  • Since 1998, government-sponsored adjustments in
    the mechanism of oil price formation has
    undergone five stages

25
Major Policy Responses
  • A. 1st Stage (1998,72000,5) Reform Agenda of
    the Crude and Oil Product Prices
  • Pricing Formula lagged floating (by one month)
  • Measures
  • Crude benchmark taking monthly average of
    Singapore, London and Rotterdam quotations as
    the base
  • Oil products pricing crude benchmark premium
    (floating band 58)
  • Oil products retail prices based on import
    prices circulation charges
  • Main drawbacks encourage inventory speculation
    due to predicable (home and foreign) price
    differentials

26
Major Policy Responses (cont.)
  • B. 2nd Stage (2000,62001,10) Price Setting
    Mechanism Reform
  • Pricing Formula lagged floating (by one month)
  • Measures
  • Crude benchmark reverting instead to Singapore
    monthly average price of oil products as the base
    for official price adjustment
  • High frequency in price adjustment 17 times in
    total
  • Main drawbacks ditto

27
Major Policy Responses (cont.)
  • C. 3rd Stage (2001,112005) based on
    Notification of the State Planning Commission
    for tying to International Price and for Oil
    Products Price Adjustment
  • Pricing Formula lagged floating (by one month)
    combined with partial enterprise pricing autonomy
  • Targeting instead to the monthly (weighted)
    average oil products price of Singapore, New
    York and Rotterdam according to the weights
    60, 20 and 20
  • Asymmetrical targeting lifting domestic prices
    when weighted average goes up but resisting
    downward adjustment the other way round
  • Enterprises granted some flexibility in retail
    trade at self-made prices
  • Main drawbacks
  • Oil product prices trend upward but remain
    sluggish compared to crude price rises
  • Lagged floating distorts resource allocation and
    consumption behavior
  • Price gaps encourage export thus aggravate
    shortages at home

28
Major Policy Responses (cont.)
  • D. 4th State (2006 ) Continue to raise domestic
    prices accompanied by the implementation of
    loss-compensating policy packages and compulsory
    profit tax on crude producers
  • Abolishing direct linkage with foreign
    benchmark prices resorting to indirect
    linkages
  • Introduce four compensating measures
  • Establishing inter-industry redistributing
    mechanism in realigning profits and losses of
    up- and down- stream enterprises, i.e. between
    crude and oil product suppliers
  • Establishing horizontal price-coordinating
    mechanism to even out the negative impacts of
    distorted price spectrum
  • Establishing mechanism for subsidizing
    agriculture, utilities of public interest and
    socially weak groups
  • Introducing (redistribution) financial mechanism
    in taxing windfall gains (threshold for ultra
    profit tax 40US/b)

29
Major Policy Responses (cont.)
  • E. 5th State (2007,1 ) Begin to implement
    ltMeasures for Regulating Oil Marketgt and
    ltMeasures for Regulating Oil Products Marketgt
  • Suppressing time gap arising from delayed foreign
    market targeting aim at synchronizing price
    setting
  • Targeting oil futures and shifting to three
    anchors Brent, Dubai and Minas

30
Dilemma in Official Pricing PoliciesObjectives
  • In principle, gradually tying domestic oil price
    to international benchmark is the right step
    because it may
  • Rationalize allocation of resources,
  • Ensure that industries delivering tradable and
    non-tradable stand on equal footing, and
  • Obviate suboptimal resources diversion abroad

31
Dilemma in Official Pricing PoliciesConsequences
  • Price Perversion (????) yet due to
    disproportionate and retarded price movements of
    oil products, crude distributors (upstream on the
    intra-industry chain) benefit from rises in
    international oil prices and able to reap huge
    profit, while refineries and oil products
    distributors suffer both from the controlled
    floating band and the delayed cost-plus
    transfer to final consumers
  • Efficiency v.s. Egalitarianism Current price
    setting mechanism evokes contradiction in
    macroeconomic goal-fulfillment. There is an
    inherent, textbook-type trade-off between the
    pursuit of efficiency in energy use and ad hoc
    egalitarianism (including control of
    inflation). Upon the inception of the 5-stage
    price adjustments, the above-mentioned drawbacks
    remain, though less conspicuous than it would
    otherwise have been

32
Dilemma in Official Pricing PoliciesConsequences
(cont.)
  • Heated debate over both the speed and
    dimension of continued price reform
    (liberalization) is going on all the time in
    China (predominantly at the academic level)
  • Socialism with Chinese characteristics implies
    that gradualism still outweighs radicalism in
    seeking to converge to international practice in
    the pricing policy of oil business.

33
Market Opening in Sphere of Circulation
  • Meet WTO market opening time frame transient
    phase expires on December 11, 2006 for domestic
    and foreign oil products distributors/retailers.
  • Trade liberalization curtailing import tariff
    combined with loosening of quota limitations

34
Table 9 Time Schedule of Oil Market Opening
Period Measures Measures
Jan. 1, 2004 A. Import Tariff Reduction A. Import Tariff Reduction
Jan. 1, 2004 Crude Oil 0
Jan. 1, 2004 Gasoline 9?5
Jan. 1, 2004 Lubricant 9?6
Kerosene, Diesel, Fuels 6 (unchanged)
Jan. 1, 2004 B. Lift Import Quota B. Lift Import Quota
Jan. 1, 2004 Crude Oil Import quota of non-state enterprises raised from 9.52 mill ton in 2003 to 10.95 mill ton
Jan. 1, 2004 Oil Products Import quota of non-state enterprises raised from 5.30 mill ton in 2003 to 6.10 mill ton
C. Trade Services C. Trade Services
No later than Dec. 11, 2004 -Oil Products Retailing -Gas station each foreign enterprise may own and operate up to 30 gas station foreign entities are allowed to expand their business only as minority stake holder in a Chinese-owned enterprise
No later than Dec. 11, 2006 -Wholesale Trade -Wholesale trading rights in crude and oil products opened to foreign investors
Jan. 1, 2004 D. Transport, Warehousing Social Services -Chinese entities deprived of the right in maintaining controlling interest in piers which are opened to all carriers -Foreign investors are encouraged to undertake construction of habour infrastructure, oil and gas pipeline, reservoir, as well as pier terminals
Source Dan Shi (2006), Report on Market-Oriented
Reform of chinas Energy Industry, pp.224-225.
35
Summary and Evaluation
  • In 2005, Chinas energy self-sufficiency stands
    at 92.2, a noticeable improvement over the year
    2000 (78.5), notwithstanding the deteriorating
    trend persists since the breakeven year1992.
  • Chinas energy efficiency raised by a factor of
    2.8 in the last 25 years energy consumption
    elasticity remains volatile on annual basis
    which contradicts the FYP configurations (real
    GDP growth surpasses growth of primary energy
    consumption by a wide margin, except for the 10th
    FYP which is negative Table 8)
  • Aggregate primary energy imbalance would have
    been worse by now if the authority failed to
    carry out reform and to push for investment in
    the energy sector.

36
Summary and Evaluation (cont.)
  • Domestic energy supply-gap has many origins
    structural, institutional, administrative, etc.
    price, quantity and quality represent the three
    dimensions to which the various causes of
    supply-gap reduce - given the vigorous growth
    induced demand for energy among them quality
    is a hybrid notion.
  • Statistical aberrations the observed low energy
    efficiency of China after the new millennium may
    be exaggerated (due to currency undervaluation)
    much as the unusually low e prior to the new
    millennium (energy consumption figures yet to be
    revised).
  • According to ERI forecast, there are three growth
    scenarios up to the year 2010 and 2020
    baseline, sustainable growth, and green GDP
    based on the 11 FYP projection, unit output
    energy consumption be reduced by 20 while per
    capita GDP doubled in year-2010 (base year,
    2000).

37
Summary and Evaluation (cont.)
  • According to ERI projection, the share of
    transport in energy consumption pattern will
    expand from 15.4(2000) to 20.2(2020) on the
    sources of energy use, both coal and oil are
    projected to decline by around 10, while natural
    gas, electricity and others (renewable
    alternative) to increase substantially over the
    same period (Table 6). Both projections appear
    to be realistic and theoretically attainable in
    view of the record of Chinese leaderships
    competence on target-fulfillment.
  • Oil faces serious supply bottleneck more than any
    other energy sources largely because domestic
    production of oil is stagnating for years, its
    import dependence is growing and, worse still,
    international oil prices are skyrocketing beyond
    imagination.
  • Dating from the early 1980s, the oil sector has
    undergone three-phase system reform involving
    administration, market structure, company
    management and the price mechanism.

38
Summary and Evaluation (cont.)
  • Generally speaking, system reform of the oil
    sector is on the right track, but there are still
    formidable obstacles lying ahead.
  • State-enterprises CNPC, Sinopec and CNOOC,
    radically transformed and listed on the Hong Kong
    and New York Stock Exchange by now CNPC and
    Sinopec face perpetual conflicts of interest
    between (a) the government and the oil industry
    they represent, (b) themselves as holding
    companies and the many subsidiaries / branches
    they control, and (c) their crude producing units
    and the down-stream refining/distributing chains
    they sit on.
  • Incomplete Reform Perfection of the oil pricing
    system and market opening partly alleviate the
    supply shortage and the potential negative impact
    on the economy but they are inadequate. More
    thoroughgoing system reform and coordinating
    measures aimed at correcting the primary energy
    imbalance are called for in the future.
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