China's Challenges.

"Uninterrupted but rapid economic growth has forced China to face a host of challenges, all being increasingly serious: a tight supply of coal, oil and natural gas, an energy mix which Chinese experts now call "irrational", heavy pressure from the need of a sustainable system of energy supply, low energy efficiency, and environmental degradation. These all call for new thinking. Dependence on oil has gone out of control.

"From 1993 to 2003, China saw an annual growth rate of oil consumption of 5.11%, while the world's average in the same period was 1.37%. From 1993 to 2003 China's annual supply growth went below 1%. China's dependency on imported oil rose from 7.6% in 1995 to 34.5% in 2003. In 2004, its oil consumption went beyond 300 million tons, out of which 120 million tons were imported, and China's dependency on foreign oil was over 40%.

"China's oil consumption and dependency on imported oil are rising more rapidly than had been forecast. Around 2000, some Chinese analysts forecast that only by 2020 would China's oil consumption have reached 500 million tons and its dependency on imported oil would have exceeded 60%.

"New forecasts show that, if China falls short of effective regulatory policies, its oil consumption will rise to 500 million tons in 2010. If domestic oil supply stays at 200 million tons in 2010, China's dependency on imported oil will exceed 60%. Chinese experts have warned that the country's oil supply will face more serious challenges if 'proper regulations' are not adopted. My question is when will the Chinese energy market be deregulated, since deregulation has been the trend for Asia?

"In the past six years, China's main source of crude oil has been the Middle East. Chinese imports from the Middle East and North Africa have accounted for 70% of China's total crude oil imports. It seems that the CIS will not be a major source of oil for China in the longer run. But China's increasingly heavy reliance on conventional crude oil is both potentially dangerous and environmentally damaging.

"An increase in Chinese LNG imports, accompanied by a gradual decrease in China's oil consumption will be necessary, not only for the country to reduce the oil dependency but also to balance heavy reliance on coal.

"A rapid shift to coal gasification is a strategic necessity for China; this, together with a massive shift to natural gas - a shift through LNG and natural gas to be piped from Russia and Central Asia - will help China obtain a more logical energy mix.

"China is set to fall short of its goal of doubling the share of natural gas in its energy mix by 2010 as the government and local companies shun the resource in the face of rapidly rising global prices. The shortfall could force some cities, such as Shanghai, which have built an energy policy on increased reliance on the relatively clean-burning gas, to re-calibrate their plans and rely more on dirtier fuels.

"The price of LNG landed in China has doubled in the past two years, making it up to four times more expensive than coal in some parts of the country. But in some wealthier coastal cities, which want to reduce pollution in line with government policy and the demands of their own citizens, the price differential is not nearly as high.

"At the centre of growing controversy over China's energy policy and a tight regulatory system which leaves prices out of kilter with global trends is the National Development and Reform Commission (NDRC), the economic planning agency. The NDRC has pressed foreign suppliers of LNG to offer lower contract prices to Chinese buyers in view of the country's potential as a long-term market, but without success.

"Beijing's position has exasperated foreign suppliers, which in the meantime have concluded contracts with South Korean and Japanese buyers for gas once earmarked for China.

"'Why is it that China is willing to pay the international price for every other commodity but it will not do it for LNG?' asked a Shanghai-based foreign energy executive. But China's abundant coal and some supplies of local gas give it alternatives, something not always available to rival buyers in north Asia.

"True, China is not as desperate as South Korea and Japan to get LNG. China can rely on domestic gas and coal. But the real challenge for China is to gasify coal into clean fuels.

"In spite of ambitious plans to build 10 terminals to unload LNG along China's coast by 2010, only two have been finally approved and begun construction, and no new contracts have been signed with suppliers since 2002. The second of these terminals, in Fujian, may be delayed until 2008 over a continuing dispute on price, as will two others in Shanghai and Ningbo, where preparatory work has begun, for the same reason.

"It is said the NDRC is waiting for global prices to come down before they conclude any more LNG supply deals. The NDRC's guidelines for Chinese companies trying to buy LNG on the global market have hampered the industry's expansion.

"The NDRC's four-point plan stipulates that Chinese companies entering into long-term supply contracts for LNG should have equity in the upstream resource, a condition which is difficult to meet in the current environment.

"The global gas story has changed dramatically in the last 18-24 months and it is now a sellers' market. The share of natural gas in China's energy market was about 2.5% in 2005, and had been earmarked to rise to about 6% in 2010 and 10% in 2020".