The Dragon's skepticism
Beijing may focus in the near term on making the current system more efficient rather than taking definitive steps toward transitioning to sustainable energy

The oil price war, which began at the end of 2014, initiated the decline of the entire oil industry, and China, India and other consumer countries have benefitted from lower crude oil prices. China, for example, imports approximately 7 million tons of crude oil every day; so whenever oil prices drop $10, the country saves CNY 400 million. In the future, the Asian region will continue to develop energy sources, with the result that the previous model of "competition for energy in East Asia" will weaken. Cooperation in the energy industry in northeast Asia or in the entire continent offers important opportunities for funding and resources. Natural gas consumption is increasing in most Asian countries, but many gas fields are located in remote locations, and for this reason  Iran find itself in a uniquely advantageous position. If Iran manages to rapidly enter the Asian natural gas market, the prospects for cooperation between Asia and the Middle East will increase.

The effects of the global economic crisis on China's development

#China must adapt to the international #economic situation, to the new features of the #energy market

The slowdown in the growth of China’s GDP has not only affected the performance of the entire country’s real economy but has also caused turmoil in global financial markets. In the first quarter of 2016, the increase in China’s GDP was 6.7 percent, down from 6.8 percent in the fourth quarter of 2015, and such a low increase had not been recorded since the first quarter of 2009. The growth rate of China’s GDP for the whole of 2015 was 6.9 percent. Until the development of China’s industrial manufacturing sector, there had been a positive trend, although the use of raw materials, machines, and other factors were equally high.  In contrast, with the slowdown of the national economy, imports from Chinese companies have started to decline. In April this year, Chinese imports fell by 10.9 percent, to $127.2 billion, a significant drop of 30.6 percent when compared with the peak of March 2013. The decline in Chinese demand has contributed to the decline in exports in international markets. The phenomenon is particularly evident in the Chinese energy sector, since crude oil imports account for 6 percent of the country’s total imports. According to data from the Energy Information Administration, crude oil imports from OPEC account for 58 percent of total Chinese crude oil imports. Of these, most come from Saudi Arabia, amounting to 16 percent. Following the collapse in prices, the proceeds of Saudi Arabia’s oil industry have seen a sharp decline, forcing the government to make cuts to public spending. Currently, with the Chinese economy’s transition towards the tertiary sector, the growth in energy demand is in decline overall. Added to this are the research and development of renewable energy sources worldwide, which will further increase crude oil consumption in China. Beijing is also promoting the diversification of import sources,  a further challenge for oil producers in the Middle East. The country has already replaced its supply from Sudan, Iran and Syria by boosting its oil trade with Russia. In the future, the share of crude oil imported from Saudi Arabia, Angola and Oman will be reduced to some extent, always to Russia’s benefit. Although the lower oil prices could encourage a significant increase to China’s consumption, in the first quarter of 2016, Saudi exports to China increased by only 7.3 percent. In the future, OPEC member countries and non-OPEC countries such as Russia, Kazakhstan and Iran will continue to compete with each other for Chinese market share. With the start of 2016, China increased its imports of cheap energy from Iran, further influencing the international crude oil market, and the competition for the Chinese market could undermine the cohesion of OPEC countries.

The oil and gas industry countries in China and abroad are taking steps to adapt to the new situation and address the serious problem of the prolonged fall in international oil prices. Their actions include "complete programs to optimize resources, reduce costs and increase efficiency," by lowering the cost of supplies through the revision of contracts, reducing staff to control labor costs and fees for executives, and initiating programs to improve production efficiency. At the same time, in order to cut costs and improve efficiency, the industry’s foreign companies are implementing the "second use" of oil fields, effectively reducing the decline in productivity of old oil fields, increasing the recovery rate in the concession period and aiming for maximum production efficiency. Prospecting activities abroad focused on highly efficient oil fields, and ongoing oil and gas research lead to many new discoveries. Foreign companies in the oil and gas industry initiate cooperation projects, which minimize the work required, the prospecting period, and the extent of the research.  Exploration is focused on the rapid exploitation of oil fields, such as those in Africa, and the number of high-risk geological projects is being reduced, especially as regards investment projects in the Middle East. To lessen the volatility of international crude oil prices, Chinese energy companies (mainly CNPC, SINOPEC and CNOOC) have launched the "Go Out Policy" strategy, by increasing mergers with and acquisitions of foreign energy companies. In 2015, CNPC boasted over 90 oil & gas cooperation projects in over 30 countries and has supported projects for new gas pipelines between Iraq and Central Asia and between China and Myanmar. The SINOPEC group operates in 27 countries worldwide, with 53 cooperation and investment projects in the six major oil and gas field regions: Africa, America, Middle East, Russia, Central Asia and Asia-Pacific. It is also cooperating with Russia’s Rosneft in two oil and gas fields in Russia, with a 49 percent stake in the companies. CNOOC’s foreign activities account for 39 percent of the company’s assets; its oil and gas production for abroad accounts for 42.3 percent of this total and the company has signed 206 cooperation agreements with 79 oil companies in 21 countries and regions.

If Iran manages to rapidly enter the Asian natural gas market, the prospects for cooperation between Asia and the Middle East will increase

Renewables: Beijing's new passion

Moreover, following the climate conference in Paris, China continues to pursue "South-South Cooperation" projects. The country has signed a bilateral memorandum of understanding with Egypt and Iran and has begun a program that donates material and ecological and sustainable devices to various countries. Also, in the period 2016-2017, it will continue to organize courses related to climate change by providing training centers in developing countries. In the meantime, the "Chinese Fund for the South-South Cooperation on Climate Change" has already started. Through the training of staff on climate monitoring, this fund promotes green technologies in underdeveloped countries, in the islands, in African countries and in other developing countries. In order for the great Chinese energy transformation to be realized, it is essential that China controls the production of electricity from coal and improves the regulatory framework on energy efficiency by optimizing its policies to the "level of demand." By 2025, China will have to improve its subsidies policy by gradually reducing funding for fossil fuels, increasing incentives for renewable energy consumption, establishing reasonable quantitative indicators for amounts, and managing the efficiency of renewable energies. At a later stage, between 2025 and 2035, the country will have to strengthen and enhance its objectives related to the amount of renewable energy, further promote the development of sustainable energy, and, in areas where conditions are particularly favorable, reach an electricity supply of at least 60 percent from renewable energy. In the third stage, between 2035 and 2050, it will be necessary to continue to promote the development of renewable energy, strengthen and improve energy efficiency standards, and apply low-carbon green technologies on a large scale. This is how the great energy transformation will be achieved in China. Clean energy devices represent one of the main directions for the development of energy equipment. The full exploitation of special construction funds for energy creation, of the investment fund for the advanced manufacturing industry, and of the national venture capital fund for emerging industries will support the research, industrialization and improvement of conditions for producing essential technologies.

The technological level and competitiveness

By 2020, the energy equipment production industry will become a new driving growth factor for Chinese industry. The technological level and competitiveness of electrical equipment and of other high-tech sectors will ensure international leadership, leading to the formation of groups of manufacturing businesses with the ownership of intellectual property rights and characterized by greater competitiveness.

The decisive development of the "energy transition" focused on alternatives to fossil fuels and the reduction of carbon emission, thanks to renewable energy sources already at the center of many national energy policies. In China, however, the current conflict between the "need" and the "economic feasibility" of the development of renewable energies, the obstacles to this development created by interest groups for traditional energies, and the disagreements on the development path make a program for replacing fossil fuels with renewable energy difficult to effect. There has always been a paradox in the country regarding energy transition. On the one hand, there is an emphasis on the development of renewable energy at a theoretical level, and policies continue to be introduced to support renewable energy.  On the other hand, there are questions about how to change the existing energy system and to what extent the national energy structure, focused on coal, will be able to accept the challenge, and when the country will cease to provide subsidies for natural gas.

Changes to policies are a subject of enormous resistance and pressure, and the obstacles to reform are as follows:

1 - The issue of China’s energy transition is managed by various ministries and commissions, and each ministry autonomously establishes, within its area of competence, priorities, orientation and times. The trend and effects of the policies relating to the energy transition are not subject to any macro-level analysis or scientific assessment. Numerous policies have been introduced, and there are many problems related to the energy transition, but no ministry is able to come forward to correct and resolve the situation.

2 - The current reform of the energy system does not reflect the orientation and needs of the energy transition. The problem involving the failure to open the market in the Chinese energy system, based on poor distribution efficiency, is extremely serious. The vigorous promotion of greater openness is already the goal and requirement of energy system reform.

3 - The traditional energy giants (i.e. the various interest groups) cannot pursue the advancement and processes of the energy transition. The traditional energy giants are of course the key players in the energy transition, but the direction and progress of the transformation cannot be dictated by the electrical companies and by other traditional fossil fuel giants, as they can derive economic benefits from slowing down the transition process. Only if the transformation is led and pursued by the state, with the adoption of framework laws and policies in support of energy transition, will it be possible to prevent the advancement and pace of the energy transition from being dictated and undercut by the traditional fossil fuel giants.

4 - Investments in the energy sector must go beyond the pursuit of "short-term effects" or the "change of pace but not of substance." The energy system of the next 50 years depends on today’s investments. The global economy is, overall, unstable: economic recovery seems a utopia and, at this stage, further investment seems unfeasible. Current investments in the energy sector must meet the needs of the energy transition, and errors can not be allowed.  Otherwise, in the future, the costs of the energy system transformation will be much higher.

Although the direction of the energy transition is similar in every country, the availability of energy resources and the political structure change and determine the differences at a national level. Therefore, it is necessary to pay attention to the development problems of the transition to renewable energies in China:

First, there is a huge gap between the need and the urgency of the development of renewable energies and the economic feasibility of the transition. The plans of use and energy transition are a product of market competition. Currently, the transition to renewable energies, on a global level, is taking place in the wake of the new international guidelines that require China to address climate change and the policies on "carbon emissions" approved by the western countries. The replacement of fossil fuels with renewable energies is taking place in an environment that still has great potential for improving the efficiency of fossil fuels.  Since the replacement of high-density energy with a low-density energy for "decarburization" is able to grow the economy, there must be clear differences between developed and developing countries in terms of transition levels and rate of efficiency.

By 2020, the energy equipment production industry will become a new driving growth factor for Chinese industry

The reform of the current energy systems

Moreover, is the reform of the current energy systems capable of acquiring new "suitable" features in terms of the development of renewable energies? The large-scale production, consumption and transport of traditional fossil fuels are closely related to the high energy density, storage possibilities and uneven distribution that characterize them, while the wide distribution, low energy density and impossibility of storing wind and solar energy will ensure that local production and consumption models represent the best choice. In China, the current energy systems, fully corresponding to the features of fossil fuels, cannot consciously transform into energy systems adapted to the features of renewable energies, since traditional energy companies often voluntarily hinder this process in favor of their own short-term interests.

Still, how can we scientifically define an indexing system for the new energy sources? The definition of energy indicators is a complex scientific and political process. China needs to assume clear assessment criteria, especially for investments in clean energy.  It is necessary to understand that the actual value of the investment in renewable energy must not exceed the cost. It is also necessary to pay attention to political objectives, that is, external dependence. Also, as regards the physical indicators of efficiency, the physical efficiency is lower than that of developed countries, and in many cases the energy savings will not be reasonable. The same applies to the indexing system.

Finally, there is no single type of renewable energy, such as hydropower, wind power, solar power or biomass, that has the potential to become the main energy source. The transition to renewable energies requires the combination of many different elements. The technological features of the various types of renewable energies are not exactly the same: hydropower is essentially compatible with the current energy systems; wind power and solar power are more suited to a wide distribution of low-power systems; while biomass can be distributed or centralized. In order to bring these energy exploitation technologies into a "new" organic energy system, a large number of complex technical, organizational and institutional issues still need to be addressed.

As a responsible major power, China must adapt to the international economic situation, to the new features and changes of the energy market, by reducing costs and the loss of interest deriving from the energy transition. This transformation will bring with it some collateral damage, but the gradual introduction of new energies will open up the path to a revolution and profound changes for the entire Chinese industry, and will encourage the emergence of innovative sectors and modern production processes.