ISSN 2330-717X

China’s Security Risks Rise As Energy Problems Mount – Analysis


By Michael Lelyveld

It seems that nearly everything that could go wrong has gone wrong for China’s energy security following a decision to ban coal-fired heating in northern cities and switch to natural gas.

Under a joint government and municipal action plan last March, 28 northern cities were told to stop burning coal for heat this winter to avoid another “airpocalypse” smog crisis in Beijing.

But final orders for switching to gas or electricity came from the Ministry of Environmental Protection (MEP) only in late August, allowing little time for making connections by the start of the winter season on Nov. 15.

Thousands of homes, public facilities and some power plants were left without heat or fuel until Dec. 4, when the MEP acknowledged the government’s mistake in an “extra urgent” notice that allowed coal-fired heating to resume.

In the meantime, spot prices for liquefied natural gas (LNG) soared to record levels.

Xu Bo, a senior analyst for the research arm of state-owned China National Petroleum Corp. (CNPC), estimated that the fuel switching initiative could add 20 billion cubic meters (bcm), or nearly 9 percent, to the country’s gas demand, the official Xinhua news agency said.

As sudden shortages swept through the region, northern Hebei province next to Beijing stopped approving coal-to-gas conversions until more gas could be found, Bloomberg News reported on Jan. 29.

The combination of gas shortages and backtracking on the coal ban rippled through China’s energy markets as inventories ran low at coal-fired power plants.

Thermal coal futures in China rose to a record 687 yuan (U.S. $108.49) per metric ton in early February, Reuters said.

After snowstorms drove up demand and slowed transport, major power companies reported that coal inventories at some plants fell to two or three days of supply.

On Feb. 5, the National Development and Reform Commission (NDRC) responded by trying to cap prices, ordering China’s Qinhuangdao main coal port to bar trading in standard steam coal above 750 yuan (U.S. $119.39) per ton, Platts energy news said.

Gas imports disrupted

Disruption of China’s gas imports from Central Asia aggravated the situation.

On Feb. 2, the news site reported that CNPC had launched an emergency plan after volumes on the Central Asia Gas Pipeline system fell by half due to equipment failures in Turkmenistan and cold temperatures in Uzbekistan and Kazakhstan.

The reference to weather conditions in the two transit countries suggested the possibility that diversions of China-bound gas may have taken place.

On Feb. 3, the Communist Party-affiliated Global Times said the troubles had brought the pipeline’s supplies to “the brink of collapse,” citing earlier reports by independent and CNPC.

Authorities in Shaanxi, Inner Mongolia, Gansu, Qinghai, and Henan provinces immediately implemented measures to reduce gas use, the Global Times said.

The convergence of problems highlighted China’s growing reliance on imported gas and its vulnerability to energy security risks.

Last year, gas imports of 92 bcm (3.2 trillion cubic feet) accounted for 38.7 percent of China’s 237.3 bcm of consumption, according to NDRC figures. The proportion is likely to climb with the spike in demand this year.

While China’s domestic gas output rose 8.5 percent in 2017 from a year earlier, consumption jumped 15.3 percent and imports soared 27.6 percent, the NDRC said.

The pipeline disruptions may be short-lived, said Lin Boqiang, director of the China Center for Energy Economics Research at Xiamen University, as quoted by the Global Times.

“The incident nonetheless taught China a valuable lesson about self-reliance rather than ‘pinning hopes on someone else,'” the paper quoted Lin as saying.

The report represents a rare official recognition of the energy risks that China faces as it pursues its economic and environmental plans.

As large as China’s import dependence is for gas, it pales in comparison to its reliance on foreign oil, which reached 67.4 percent last year, according to CNPC.

The ratio is headed for 80 percent by 2040, the Paris-based International Energy Agency said in its annual World Energy Outlook report.

Risky business

The risks of transporting oil on ocean routes from the Middle East came into sharp relief when an Iranian tanker collided with a Hong Kong-registered cargo ship in the East China Sea on Jan. 7, killing 32 sailors and causing one of the region’s worst oil spills in decades.

The sinking of the Panama-registered tanker Sanchi also ignited a public dispute with one of China’s key oil suppliers after Iran’s Naval Commander Hossein Khanzadi charged that China delayed visas for special forces seeking to rescue 30 Iranian crew members, according to the MEHR news agency.

China’s Foreign Ministry spokesperson, Lu Kang, called the charges of inadequate rescue efforts “untrue and irresponsible,” Xinhua reported.

Taken together, the troubles of the past three months may not add up to an energy crisis, but they may serve as warning signs of greater energy security risks to come.

Mikkal Herberg, energy security research director for the Seattle-based National Bureau of Asian Research, noted that much of China’s LNG supplies must travel the same ocean routes as its oil imports, compounding uncertainties.

Yet, little high-level attention has been paid to China’s growing vulnerability to energy disruptions.

Official policy statements on the rise in import dependence have been conspicuous in their absence.

The government has yet to issue a white paper on energy security. The National Energy Administration (NEA) has been silent. The National Leading Group on energy and environmental issues has also had nothing to say.

In the case of the sudden spike in gas demand following the coal ban, Herberg said the government was simply caught by surprise.

“This surge in gas import dependence has happened incredibly fast,” he said. “Particularly with this LNG surge along the coast, I think the leadership is just behind the curve in seeing how fast their dependence is growing and how these markets work.”

China’s problem with reliance on gas imports has now become almost as serious as its dependence on foreign oil, Herberg said.

The interruption of Central Asian pipeline supplies, which represented about 42 percent of China’s imports last year, may serve as a wake-up call for senior leaders.

“I think they’re playing catch-up. They haven’t grasped how big their gas import dependence has become, and so absolutely critical,” Herberg said.

“There will be a huge reevaluation, and I would be willing to bet there will be a white paper on gas import dependence and energy security before long,” he said.

Heavier reliance on Russia

In coming years, China will rely increasingly on Russia for new supplies of pipeline gas. Deliveries from Russia’s giant U.S. $60-billion (376-billion yuan) Power of Siberia pipeline project are scheduled to start in December 2019, eventually ramping up to 38 bcm per year.

On Feb. 6, Russia’s Gazprom said it had completed 1,480 kilometers (919 miles), or about two-thirds of the linear section of the pipeline, Interfax reported.

Gazprom hopes to capture 10 percent of China’s gas market by 2025, an official said.

Growth in import dependence may be inevitable. But part of China’s problem stems from incomplete reforms in its domestic gas market, Herberg said.

“These markets still don’t work. They’re heavily controlled by administrative pricing, by CNPC’s practical monopoly over gas pipeline infrastructure and slow-moving response to building pipes that need to be built to move gas more effectively,” he said.



Radio Free Asia’s mission is to provide accurate and timely news and information to Asian countries whose governments prohibit access to a free press. Content used with the permission of Radio Free Asia, 2025 M St. NW, Suite 300, Washington DC 20036.

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