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ENERGY SECTOR DEVELOPMENT AND
REFORM IN PRCWith Special Reference to the Oil Industry
Presented by Dr. Cherng-Shin Ouyang
Research FellowChung-Hua Institution for Economic Research
75, Chang-Hsin St.,Taipei, Taiwan29th September 2008
at Economic Department of Moscow State University
2
Part 1: Overview of China’s Energy Sector Development
Part 2: Reform and Market Opening
3
Chart 1 International Comparison of Energy Consumption Efficiency, 2006 (toe/10,000 US$GDP)
8.77
1.87
1.28 1.19 1.12 1.08 1.02
2.50
0
3
6
9
China U.S. France Germany Japan Italy U.K. World
source: The Industrial Map of China Energy, 2006
toe: ton oil equivalent
4
Chart 2 Energy Consumption / GDP of PRC (tce/10,000 RMB), 1980~2005
2.68
4.02
2.58
2.382.22
2.08
2
1.93 1.75
1.56
1.46
1.41.33 1.3 1.36 1.43 1.43
1
2
3
4
5
1980 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
source: Chart 1
tce: ton coal equivalent
5
Table 1 Structure of Primary Energy Consumption – Selected Countries, 2005
Energy in
Country kind
Oil NaturalGas
NuclearPower
Coal HydroPower
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
Source : BP(2006), Statistical Review of World Energy, http://www.bp.com. 。
%
6
Chart 3 Strategic Oil Reserve (days) – Selected Countries, 2005
169
158
127
9690
8374,5
60
44
30
0
50
100
150
200
Japan US Germany France EU UK Korea Taiwan Singapore China*source: various* Author estimate
7
Chart 4 Primary Energy Production and Consumption of PRC, 1989~2005
10.2 10.4 10.5 10.711.6
12.313.1
13.9 13.813.2 13.0 13.0 13.5
14.8
16.8
20.3
22.2
9.7 9.910.4 10.7 11.1
11.912.9 13.3 13.2
12.4
10.9 10.7
12.1
13.9
16.0
18.5
20.6
8
12
16
20
24
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
能源消費總量 能源生產總量Domestic energy consumption
Domestic energy production
100 million tce
8
Table 2 Economic Growth and Energy Consumption of PRC, 1981~2005*
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) 1993~2004: revised GDP by SSB b) 1999~2004: revised energy consumption by SSB
9
-0.52
0.72
0.96
1.701.64
0.46
0.65 0.62
-0.09
0.17
0.44 0.45
-1.00
0.00
1.00
2.00
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Chart 5 Energy Consumption Elasticity (e) of PRC, 1994~2005
Asian Financial Crisis
Notes: 1999~2005: revised figuresnormal: 1>e>0 (rest)abnormal: e<0 (1998)abnormal (inefficient): e>1 (2003,2004)
Source : Chinese Statistics Bulletin, Chinese Energy Statistics Bulletin, DRC State Council
10
Table 3 Primary Energy Structure Forecast – PRC, 2005~2050
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
Source: Chinese Academy of Sciences
11
Table 5 Energy Consumption Forecast – PRC, 2000~2020
ERI (forecast) DOE(U.S.) IEA
Baseline SustainableGrowth
GreenGDP
High Medium Low 2002 2004
2010(mill standard tce) 2,150 2,080 1,870 2,090 1,970 1,840 1,950 2,480
2020(mill standard tce)
3,300 2,900 2,470 3,220 2,790 2,430 2,560 3,170
Annual Ave., %
2000~2010 5.2 4.8 3.7 4.9 4.2 3.5 4.1 6.4
2010~2020 4.4 3.4 2.8 4.4 3.5 2.8 2.8 4.6
2000~2020 4.8 4.1 3.3 4.6 3.9 3.2 3.5 4.6
source:World Bank & DRC (2007)
sources
consumption
Projection Projection
12
Table 6 Energy Final Consumption According to Sectors and Energy Types, 2000/2020
2000 2020 2000 2020
mtce % mtce % mtce % mtce %
Agriculture 48.2 5.4 59~80 3.1~3.2 Coal 381.8 42.8 559~836 33.7~29.3
Industry 497.7 55.8 998~1345 53.4~54.2 Oil 297.0 33.3 605~827 19.6~22.8
Transport 137.4 15.4 385~503 20.2~20.2 NaturalGas
27.7 3.1 159~157 8.4~6.3
Residents &Commerce
208.7 23.4 463~555 22.2~24.4 Electricity 147.2 16.5 434~487 19.6~22.8
Other 38.3 4.3 148~177 7.8~7.1
Total 892.0 100.0 1905~2484 100.0 Toal 892.0 100.0 1905~2484 100.0
Source: ERI: Energy Consumption Forecast- Baseline and Green GDP Scenarios
year
Sector
yearEnergy Type
Table 7 Oil and Natural Gas Production & Consumption – PRC, 1995~2006
1995 2000 2001 2002 2003 2004 2005 2006
Oil
Domestic Output(1,000 barrel/day)
2,989 3,252 3,306 3,346 3,401 3,481 3,627 3,684
Annual growth rate (%) - 1.2 1.7 1.2 1.6 2.4 4.2 1.6
Domestic Consumption(1,000 barrel/day)
3,395 4,772 4,872 5,288 5,803 6,772 6,984 7,445
Annual growth rate (%) - 6.6 2.1 8.5 9.7 16.7 3.1 6.6
Balance (1,000 barrel/ day) -406 -1,520 -1,566 -1,942 -2,402 -3,291 -3,247 -3,761
Natural Gas
Domestic Output(100 million cm)
179 272 303 327 350 410 500 586
Annual growth rate (%) - 7.9 11.4 7.9 7.0 17.1 22.0 17.2
Domestic Consumption(100 million cm)
174 238 268 286 332 390 470 556
Annual growth rate (%) - 13.9 12.6 6.7 16.1 17.5 20.5 18.3
Balance(100 million cm) +5 +34 +35 +41 +18 +20 +30 +30
years
Source: BP (2007), Statistical Review of World Energy, 2007
14
Chart 6 Imported Oil Dependence – PRC, 1965~2005, %
44.7
27.3
7.0
1.2
-22.6
-39.1
-24.1
-12.8
-8.7
-2.8
-50
0
50
1965 1970 1975 1980 1985 1990 1993 1995 2000 2005
Source: Chart 1
15
Table 8 Area/Country Concentration Ratio of Crude Oil Import – PRC, 2005/2006Area 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 riseImported oil reaching 50% of domestic consumptionGas consumption expected to increase at two digitEnergy/oil security a serious policy concernFuture 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 resourcesTo 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
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
Major Strategy Responses (cont.)
19
Evolution of China’s Oil Market –Four Phases
I. Pre-reform period (before 1981)Incorporated within national economic plan, resources allocation based on overall balanceState intervention: at various levels of the oil sector /governmentSelf-sufficient in oil consumption: have surplus for export until 1993
II. Reform Period (after 1981)1. Plan & market coordination (1981~1994)
Adopting production responsibility System (PRS)Dual pricing allowed: above-target crude (exceeding 100 mt) and allocated input quota conserved be freely disposed at market priceEmergence of social entities in oil business Oil futures market set up in Beijing & Shanghai (1996)
20
Evolution of China’s Oil Market –Four Phases (cont.)
2. State Domination (1994~1998)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 (1982~1998)Bureaucratic organs divorced from Enterprises
Phase 2 (1998~2003)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
General Oil Administrative Bureau of State Fuel Industry Ministry
1950, 4
Oil Industry Ministry
1955, 4
State Fuel-Chemical Industry Ministry
1975
Oil Industry Ministry
1978
China National Petroleum Corporation / 中國石油天然氣總公司
1988, 9
China National Petroleum Corporation / 中國石油天然氣集團公司 (CNPC)
1998, 7
China National Off-Shore Oil Corporation - CNOOC
1982, 2
China Petroleum and Chemical Corporation- Sinopec
1983, 7
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 peopleHowever, oil as a strategic commodity withstood pressure of liberalization until the late 1990sGrowing import of crude and spiraling world oil price enabled the authority to adopt more flexible approach in the shaping of oil pricesSince 1998, government-sponsored adjustments in the mechanism of oil price formation has undergone five stages
25
Major Policy Responses
A. 1st Stage (1998,7~2000,5): Reform Agenda of the Crude and Oil Product PricesPricing Formula: lagged floating (by one month)Measures:
Crude benchmark: taking monthly average of “Singapore, London and Rotterdam” quotations as the baseOil products pricing: crude benchmark + premium (floating band: 5%~8%)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 (2000,6~2001,10): Price Setting Mechanism ReformPricing 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 (2001,11~2005): 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 autonomyTargeting 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 roundEnterprises granted some flexibility in retail trade at self-made pricesMain drawbacks:
Oil product prices trend upward but remain sluggish compared to crude price risesLagged floating distorts resource allocation and consumption behaviorPrice 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 producersAbolishing “direct” linkage with foreign benchmark prices; resorting to “indirect” linkagesIntroduce 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 suppliersEstablishing horizontal price-coordinating mechanism to even out the negative impacts of distorted price spectrumEstablishing mechanism for subsidizing agriculture, utilities of public interest and socially weak groupsIntroducing (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 <Measures for Regulating Oil Market> and <Measures for Regulating Oil Products Market>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 Policies—Objectives
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 Policies—Consequences
Price Perversion ( 價格倒掛 ): 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 Policies—Consequences (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
Period Measures
Jan. 1,2004
A. Import Tariff Reduction
Crude Oil 0%
Gasoline 9%→5%
Lubricant 9%→6%
Kerosene, Diesel, Fuels
6% (unchanged)
Jan. 1,2004
B. Lift Import Quota
Crude Oil Import quota of non-state enterprises raised from 9.52 mill ton in 2003 to 10.95 mill ton
Oil Products Import quota of non-state enterprises raised from 5.30 mill ton in 2003 to 6.10 mill ton
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 thanDec. 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
Table 9: Time Schedule of Oil Market Opening
Source: Dan Shi (2006), Report on Market-Oriented Reform of china’s Energy Industry, pp.224-225.
35
Summary and Evaluation
In 2005, China’s energy self-sufficiency stands at 92.2%, a noticeable improvement over the year 2000 (78.5%), notwithstanding the deteriorating trend persists since the breakeven year—1992. China’s 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 leadership’s 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.