The relentless juggernaut
The predictions for Chinese energy demand growth are good news for energy firms – but very bad news for the environment. Derek Brower reports
IN CASE the world did not believe it before, it should now: China's economic growth threatens to dwarf any of the measures taken by the international community to mitigate climate change – or to keep oil prices and demand for energy from spiralling out of their control.
Take 10 people near you and find out where their socks were made: three pairs are likely to come from one town in China, Datang; 90% of all cigarette lighters are made in Wenzhou; 40% of the world's ties come from another nearby town. With larger consumable goods, the trend becomes more pronounced, because China is the world's industrial powerhouse. As it goes through its own industrial revolution, the country is soaking up whatever energy it can secure.
This is the key to the dilemma facing energy markets and anyone concerned about climate change. Chinese industrial performance gives the country a trade surplus of $180bn a year – and it is growing. That is helping quickly to drag millions of agrarian peasants out of poverty, giving them electricity and, a little more gradually, transportation based on the internal combustion engine.
A burgeoning middle class in the cities has an even more rapacious demand for energy – and the luxury items it supports. Sales of sports-utility vehicles have increased by almost 75% this year, says China's National Association of Passengers Vehicle Manufacturers. Sports cars are also coming. In 2004, Maserati sold 42 cars to the Chinese market; last year, it took orders for another 120; and now it wants to start selling its latest ultra-sports car, the GranTurismo.
The second consequence of the trade surplus is that China can afford to buy the energy it needs. However expensive a barrel of crude might appear to Western consumers, China – 28% of whose energy imports are used to produce more goods for export – is still able to make a profit on the energy it imports. And imports of oil, gas and coal are set to rise. Indeed, so strong is Chinese demand for the last of those hydrocarbons that this year the country switched from being a net exporter of coal to a net importer.
In its latest World Energy Outlook, the International Energy Agency (IEA), forecasts that by 2030, China's demand for primary energy will grow from 1.742bn tonnes a year (t/y) in 2005 to 3.819bn t/y in 2030. Heavy industry will drive the growth, the IEA says, and by 2010 the country will have overtaken the US as the world's largest consumer of energy.
Breaking it down by fuel type shows how reliant China will remain on the two dirtiest fossil fuels, coal and oil. The IEA says coal consumption will grow rapidly in the near term, boosting its share of primary energy demand to a peak of around 66% in 2010. By 2030, it will have fallen – but only to around 63%. The power sector will account for more than two-thirds of this incremental demand.
China will add more than 1.3 terawatts of new generating capacity by 2030 – equivalent to one reasonably sized power station every three days and more than the entire capacity of the US. Last year alone, China added 105 gigawatts of capacity – an unprecedented rate of increase, says the IEA. Most of the new capacity is coal-fired.
Meanwhile, oil consumption will grow from 6.7m barrels a day (b/d) in 2005 to 11.1m b/d in 2010 and 16.5m b/d in 2030, averaging 3.7% a year. That will also mean a rapid rise in oil imports. In 2005, they amounted to 3.1m b/d, but by 2030, the total will hit 13.1m b/d – as much as all of the EU-27 states combined. By comparison with coal and oil, gas' market share will remain very low. It was 2% in 2005, estimates the IEA, but will grow to just 5% by 2030.
There are some imponderables. One is whether Beijing will wish to continue on the trajectory of development that is causing so much damage to its environment. According to the World Bank, 16 of the world's 20 most polluted cities are Chinese and smog kills 0.75 million people a year. Policy could change that. As Didier Houssin, director of oil markets and energy preparedness at the IEA points out, tighter efficiency standards for air conditioners and refrigerators in China to 2020 could, on their own, wipe out the need to build a Three Gorges dam – another project wreaking ecological devastation.
Another question is the effect of oil prices on Chinese demand. Although the IEA makes market assumptions, it is reluctant to speculate in any real way about what a deepening financial crisis in the West or a sustained period of crude oil above $100 a barrel might do to world demand. Houssin admitted to Petroleum Economist last month that the IEA had not given much thought to the prospect of demand erosion in China.
In the meantime, for foreign companies targeting China, the potential growth of the energy sector is a boon. The country has around 100 refineries (not even the IEA knows the exact number), giving capacity of about 7.5m b/d. But it will need more, especially as the IEA predicts the transport sector's share of oil demand will grow from 35% in 2005 to 55% in 2030. The agency says another 460,000 b/d will come on stream by 2012 – more than half of it built by Sinopec and about a quarter by PetroChina. The latter says it will spend $22.5bn in the next five years to keep capacity growth at around 5%.
Up to 2030, capacity will be more than adequate to meet demand, provided the targets are met, says the IEA. The National Development and Reform Commission, in charge of energy planning in China, has already told refiners to stop exporting products needed for the domestic market. Meanwhile, the government's recent decision to increase fuel prices by 10% might weaken demand growth to some extent, say analysts, but it also signals to refiners hurting elsewhere in the world that China's market could be even more attractive than before.
There has already been interest from producers. Earlier this year, the government approved direct foreign investment in refineries for the first time, rubber-stamping a $3.5bn deal between ExxonMobil, Saudi Aramco and Sinopec to triple the capacity of a refinery in Fujian to 240,000 b/d by 2009. The two foreign companies will also be permitted to market and distribute their products. Sinopec has another venture with Aramco to build a 200,000 b/d refinery in Qingdao, due on stream next year, and a third with Kuwait's KPC for another 200,000 b/d plant at Nansha.
Price liberalisation for petroleum products has already attracted Shell back to the sector – the major pulled out of a joint venture with China National Offshore Oil Corporation to develop the Huizhou refinery at the end of last year, leaving its only involvement in China's refining sector as a stake in one naphtha cracker in Nanhai. But now Shell and Dow Chemicals want to join the $5bn Nansha development.
Whether both firms become involved, however, remains to be seen. Local reports say KPC, which first invited the two companies, is now thought to prefer BP to Shell. That would be a blow to the Anglo-Dutch firm. Its head of downstream, Rob Routs, has spoken of the Nansha development as a potential "beachhead" for expansion in China.
For Middle Eastern producers, China's growing market will provide an outlet for their oil for decades. Locking the suppliers into refinery deals – Aramco, for example, is thought to have agreed to supply heavy and sour crudes to the plants it is involved in – will also help secure China's supplies.
Another boost to refiners is the car market. John Waterlow, an analyst at Wood Mackenzie, a consultancy, says the number of privately owned cars on the road rose from 4.2m in 1995 to 21.3m in 2005 (the most recent reliable statistic). And the market shows no sign of stopping, says Waterlow. In population terms, that represents growth of 17 cars per 1,000 people in 2005 to more than 100 per 1,000 in 2020. By 2010, he expects 53m cars on the road; by 2015, 97m and by 2020, 150m. The IEA is even more bullish. It says the total vehicle fleet (different from Wood Mackenzie's figures, which relate just to privately owned vehicles) will grow to 270m by 2030.
Compared with the US – where there are already 230m privately owned cars on the road (almost one per person, compared with one for every six people in China by 2030) – those statistics remain modest, suggesting the possibility of considerable upside as China's GDP increases, even if the growth in the country's car market is already racing ahead at more than twice the rate of GDP growth, says Waterlow.
Cracking the Chinese market has not been easy – locally assembled cars account for 96% of the market, says the IEA. Chinese manufacturers also do a good line in Volkswagen (VW) and Toyota copies – a trend those companies, two of the largest foreign operators in the market, will find hard to stop unless they are willing to fight a battle for scale. They sell for at most half the price of the models they copy.
The answer is to have local partners and plants in the country. Toyota and VW, among others, have both. And the forecast growth makes them confident. Toyota's sales in China from January to August were up by 76% on the same period in 2006. It expects 8.7m cars of all kinds on the road by year-end -- growth of 18%. It has almost 400 Toyota dealers in China and 23 for its premium Lexus brand.
VW, meanwhile, has reversed a decision not to build any more plants in China and says rapidly rising sales could force it to add new production capacity. "By 2010, we'll need additional capacity and we are discussing this with our partners," Winfried Vahland, president of the company's China unit, said recently. Production will be up to 1m units this year, says VW, making it the biggest foreign car producer. It wants to increase its market share from 17% to 20%.
But what amount to opportunities for refiners, oil exporters to China and car companies will only contribute to China's other big industrial products: pollution and emissions. While developed nations' per-capita pollution rates remain far higher than China's, and will continue to do so, the country will this year become the world's biggest emitter of carbon dioxide, a competition with the US no-one wanted it to win.
The IEA says emissions growth to 2015 will be 5.4% a year. From 2015 to 2030, it will grow by 3.3% a year. Those statistics will worry politicians in developing nations who have set stringent emissions targets for their own countries. If anyone doubted whether the solution to the problem has to be global, it can only stem from delusion.
Unfortunately it looks no closer to being found. Chinese plans to add so much coal-fired generation capacity by 2030 will dwarf any efforts "to build wind farms in the Outer Hebrides", says Dieter Helm, an Oxford academic. And to ask China not to develop in the same way and at the same pace as the developed world once did (and which put the atmosphere in such a dangerous position in the first place) is morally questionable.
The price is not right
But the problem is not just connected to the scale of Chinese plans. According to Klaus Gretschmann, head of energy at the European Council, greater efficiency in energy use in the developed world may end up having no effect on climate change. Gretschmann argues that steps to increase efficiency will reduce demand for dirty fossil fuels in the West – but will only lower the price of coal and oil and prompt more demand in countries where the same efficiency measures have not been taken. If the West wants to stop China spoiling the world's atmosphere, oil and coal must become expensive enough to stop the country's demand from growing.
Does that mean Westerners should get back in their SUVs and leave the household lights on? No, says Stephen Benians, of EPAA, a Brussels-based energy consultancy. There is a difference between the need for Californians to heat their swimming pools and for Chinese farmers to have electricity in their village for the first time.
The solution could lie in technology – especially carbon sequestration – that the West should provide free to developing countries to help mitigate the problem. It might be expensive, but so are the alternatives. Those are issues that must be discussed this month at the UN's latest climate-change conference.
If the previous conferences are anything to go by, it will not achieve much. And meanwhile, the world economy will continue to rely on China's industrial prowess to provide it with cheap goods, spreading growth and keeping inflation down. China will continue to seek the energy it needs. If climate change keeps you awake at night, find a reliable pharmacist.