China: Maximising domestic energy production: but at what cost?

Early October saw an article appearing in the Chinese press which made me think that I had stepped back in time or was having a bad dream. The thrust of the message was that the Chinese government’s focus on energy efficiency and energy conservation was of only marginal significance, and that the country should rather speed up the extraction of its primary energy resources in order to support continued economic growth and energy independence. So contrary to current government policy was the tone of the text that I asked myself whether this was a spoof article, or does it represent the view of a radical group within government, or does it indicate that the government is changing its mind over its energy strategy. 

The article seemed to draw its inspiration from the recent discovery of the large Nanpu oil field, in the Bohai Gulf, which probably holds several hundred million tonnes and possibly more than one billion tonnes of oil. Whilst this may indeed be a very spectacular discovery and will greatly boost the profits of PetroChina, it by itself can only make a minor contribution to China’s current annual consumption of 350 million tonnes, which is set to double by 2020. The Nanpu field lies in  a very narrow strip of unexplored very shallow water around Bohai. The probability of many more discoveries of this size is quite low.


This and other future discoveries of oil may indeed allow China to continue to keep its level of oil production rising at a rate of 2-4% per year for many more years than was previously expected. But with consumption rising at 5-10 % per year, and imports now accounting for 50% of the country’s oil demand, the idea of ‘oil independence’ is a non-starter, at least not until the nation’s transport system is running on a fuel other than oil – and this is unlikely to happen for another 20-30 years.


The article seems to recognise that the extraction of coal, oil and gas cannot grow in an unlimited manner, for the rate of growth of energy demand is so high and the national reserves are finite. But, the article declares, the answer lies in alternative or renewable energies. The article then quotes the government’s plans for wind and solar  power and biofuels, each of which can make a only modest contribution to total energy needs. The one which the article emphases is hydro-electricity. Indeed a scan of the recent official literature concerning the development of China’s power sector shows that the government plans to press ahead with the construction of a number of new large dams in order to raise the total hydro capacity from 117 GW in 2005 to 190 GW in 2010, and to 290 GW by 2020. The article in question fully endorses these plans.


This emphasis on large scale hydro-electric dams and its inclusion under the heading of ‘renewable energy’ would be considered by some as highly controversial. For more than twenty years it has been recognised that large dams carry high external costs and high risks, and thus most environmentalists do not include them in the category of ‘renewable energy’ The external costs take the form of environmental and social costs both upstream and downstream of the dam. The larger the population in the affected areas, the larger these costs, and this excludes any consideration of the impact on natural habitats, biodiversity and wildlife. The risks are two fold. The first set of risks relate to the difficulties in assessing the future magnitude of these external costs and in the ability of the government to manage them. The second set of risks relate to scale of the future benefits to be derived from the dam. For example, silting may be more rapid than anticipated, natural disasters may threaten the stability or longevity of the dam, and changing rainfall patterns may reduce the flow of water.


Another report issued just two weeks before the article under discussion highlighted the problems related to the Three Gorges Dam. Setting aide the long-standing tension caused by the need to relocate more than one million inhabitants, landslides and pollution are already causing considerable more damage then ever expected, with serious consequences for those living around the new and expanding lake. In the words of the report, this project risks becoming an environmental catastrophe if adequate preventive measures are not taken.


Given the scale of these problems with the Three Gorges dam, a project which has been under careful planning and close central government scrutiny for many years, it is difficult to see justification for rushing ahead with the construction of a number of further large dams. Indeed, there is clear evidence that local populations and national environmental groups are becoming more active in their resistance to such projects, not least because of the experience of the Three Gorges dam.


The article also touts the benefits of biofuels and liquid fuels derived from coal. In principle, these fuels have great potential, but again they carry large external costs, at least using current technologies. Only with a new generation of technology can biofuels and liquid fuels from coal make a substantial impact on China’s demand for transport fuels at an acceptable cost. Indeed, in the case of coal, there is a real concern about the scale of China’s coal reserves. Official statistics say that the country’s coal reserves will last more than 50 years at current rates of consumption. But as coal use continues to rise, the reliability of the reserves statistics will be tested. Further, the costs of exploiting these reserves and of transporting the coal to the place of use will continue to rise, making imported coal more competitive in the coastal regions. Indeed the early months of 2007 saw China becoming a net importer of coal for a short period.


So, what of the claim that China should seek for energy independence and that accelerated exploitation of domestic resources should lie at the heart of national energy policy? China’s dependence on foreign energy supplies grows year by year. It has been a net importer of oil for nearly 15 years and became a net importer of gas in 2006. The possibility remains that imports of coal exceed exports in the near future. In this respect China is becoming like most developed countries. It is becoming integrated into the international markets for energy products. These markets, like all markets, bring benefits and have risks. Yes, by all means seek to raise domestic energy production, but not at any cost. Rather energy importing nations, including China, should focus their attention and their investment on constraining rising energy demand and on managing the risks of import dependence and their vulnerability to disruptions in supply. And, yes, there will be an important role of new energy technologies, but only when they have been developed to a stage when the external negative impacts have been greatly reduced.

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