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In an Oil and Gas Fumed Atmosphere ——The Russia-Ukraine Conflict and the Suddenly Magnified Energy Security Perspective [Excerpt]


This excerpt from a lengthy news report, written in April 2022, examines the global energy market amid the Russia-Ukraine war and takeaways for China. The author suggests that “although the Russia-Ukraine conflict is far from Asia, the global energy market is unitary in nature.” He argues that high oil prices are a “further warning of the importance of diversifying energy supplies for energy security.”

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Determined China


Although the Russia-Ukraine conflict is far from Asia, the global energy market is unitary in nature. In international markets, prices for primary energy—coal, oil and natural gas—are all soaring, requiring the use of similar thinking to that used to respond to energy security crises in order to deal with the current situation. Giving due consideration to both economic growth and emissions reduction is the only option for China’s energy strategy.


Will soaring international oil prices affect China, a major oil and gas consumer?


On March 7, Lian Weiliang, deputy director of the National Development and Reform Commission, answered this at a press conference held at the State Council Information Office: given that a relatively high proportion of China’s crude oil and natural gas is extracted abroad, it will be affected, and the cost of imports will see something of an objective rise, but overall the impact is manageable.


This answer is rooted in facts.


Data released by the National Energy Administration show that in 2021, China’s crude oil imports were 513 million tons, and although this is a decline of 5.3 percent year-on-year, a first-ever decline, the external dependency ratio was still as high as 72 percent. As for external dependency in natural gas, data for 2021 are not yet available, but natural gas imports in 2020 amounted to 136.5 billion cubic meters, with a high external dependency ratio of 42 percent.


A high degree of external dependency means that to a great degree supply and consumption will be influenced when there are changes in international market conditions. It is precisely in this sense that the tight international oil and gas supply and price spikes have an impact on China. However, this impact is still under control.


On March 8, the Chinese Ministry of Foreign Affairs said that China and Russia would continue to carry out normal trade cooperation, including in the field of oil and gas, which eased domestic worries about energy security somewhat. Previously, during Putin’s visit to China for the Winter Olympics, Chinese and Russian authorities and enterprises signed a series of cooperation documents, which included the China National Petroleum Corporation and Gazprom Agreement on the Purchase and Sale of Far Eastern Gas and the Supplementary Agreement 3 on the ‘Contract for the Purchase and Sale of Crude Oil to Secure Oil Supply to Refineries in Western China‘ and others. Gazprom issued an announcement on February 4 stating that after the Russian-Chinese Eastern Gas Pipeline is commissioned, Gazprom’s annual pipeline gas supply to China will increase by 10 billion cubic meters, which, together with the “Power of Siberia” pipeline, will bring the total annual gas supply to China up to 48 billion cubic meters. The continued deepening of energy cooperation between Russia and China will provide an important guarantee for China to achieve its “dual carbon” [peak carbon and carbon neutrality] goals.


Regarding natural gas, given that about half of domestic gas prices are managed at the gate station, that part of gas prices does not change with the international market. At the same time, for a high percentage of China’s imported gas sources, the links to oil prices are by long-term agreements, with relatively stable prices and weak pass-through effects. Only a small portion of LNG prices purchased on the spot market follows the market, and in contrast to Europe, China’s LNG prices fluctuate significantly less than the international market due to the stabilizing anchor effect of managing gas prices at the gate station. During the 97% price surge in Japan and South Korea early last year and the 165% surge in Europe in December, China’s LNG prices rose only by 6.6% and 34%, respectively.


But in the case of refined oil prices, since the Russia-Ukraine conflict began, domestic refined oil prices have also risen with international crude oil prices. On March 17, the National Development and Reform Commission announced an increase in domestic gasoline prices of 750 yuan per ton, and an increase in diesel prices of 720 yuan per ton. Translated into liter prices, No. 92 gasoline increased by 0.58 yuan per liter, No. 95 gasoline increased by 0.62 yuan per liter, and No. 0 diesel increased by 0.61 yuan per liter. On March 31, the National Development and Reform Commission issued a further news release, stating that as of midnight, March 31, domestic gasoline and diesel prices were being raised by 110 yuan per ton. Translated into liters, the prices of No. 92 gasoline, No. 95 gasoline and No. 0 diesel were all raised by 0.09 yuan per liter. This was the “seventh consecutive increase” in gasoline prices since December 31 last year.


The chain reaction triggered by rising oil prices continues to unfold. For consumers, every rise and fall in oil prices is a matter of vital interest. For China, high oil prices are a further warning of the importance of diversifying energy supplies for energy security.


In fact, there were already some early signs in previously released policies. The State Council General Office issued the New Energy Automobile Industry Development Plan (2021–2035), and in it proposed achieving a 20% share of new energy vehicle sales by 2025, and stressed the construction of new energy vehicle charging piles to support this.


At present, China’s new energy vehicles are developing rapidly. In 2009, China’s new energy vehicle production was less than 300 units, but in 2021, China’s new energy vehicle production and sales exceeded 3.5 million units.


According to a recent set of data from the National Bureau of Statistics, from January to February 2022, vehicle production was at 4.27 million, representing an 11% year-on-year increase in production; new energy vehicle production stood at 810,000, an increase of 151%, and the penetration rate of new energy vehicles was 19%. Such high growth also proves that the future development potential of new energy vehicles cannot be underestimated.


Aside from the new energy vehicle sector, more and more Chinese enterprises, including those in the solar energy and wind power sectors, are also playing an increasingly important role in the development of new energy in Europe and even worldwide.


China’s renewable energy industry development, of which photovoltaics is representative, is already out there ranking among the first in the world.


At present, all of the links in the manufacturing end of the global photovoltaic industry are concentrated in China. China’s production capacity of polysilicon, silicon wafers, solar cells, and modules, respectively, account for 69%, 93%, 77% and 69% of global totals. In 2020, China’s total exports of photovoltaic products (silicon wafers, solar cells, and modules) amounted to about $19.75 billion, of which module exports accounted for $16.99 billion, with export volume of about 78.8 GW, up 18% year-on-year and a record high.


“Energy must be grasped in our own hands.” This is the future direction of China’s energy strategy, and is also an inevitable requirement of today’s increasingly unpredictable world situation. The national energy development strategy puts special emphasis on: stepping up the clean and efficient use of coal, with orderly reduction and substitution, giving impetus to coal-based power generation upgrades which save energy and reduce carbon, increase flexibility, and improve heating supply, and promoting the construction of large-scale wind and solar power bases; during the 14th Five-Year Plan period, ushering leapfrog development in China’s wind power, solar power, and other types renewable energy, and basically completing the construction of a clean, low-carbon, safe, and efficient new energy system. At the same time, we will vigorously promote a “seven-year action plan” to increase storage and production in the oil and gas industry, to ensure the equivalent of 200 million tons of oil.


The Chinese government has also proposed that the share of non-fossil energy in primary energy consumption will reach 25 percent by 2030, and installed capacity of wind power and photovoltaic power generation will reach more than 1.2 billion kilowatts. Expectations within the industry are more aggressive, suggesting this will reach 1.7 billion kilowatts or more by 2030.


Since the wave of power restrictions in the fourth quarter of 2021, China has continued to set the tone for the “dual carbon” goals: requiring that [work toward their achievement] must be based on national conditions and hold tightly onto the energy rice bowl; uphold the principles of steady progress and gradual realization; and refrain from becoming detached from reality and from engaging in a ‘carbon rush’ or in campaign-style “carbon reduction.”


The 2022 Government Work Report makes clear that “energy consumption intensity targets shall be assessed in a coordinated manner during the 14th Five-Year Plan period, and room will be left for appropriate flexibility, and new renewable energy and raw material energy use will not be included in controls on total energy consumption.” At the same time [it stated that government will] “give impetus to a transition from ‘dual control’ of energy consumption to ‘dual control’ of total carbon emissions and carbon intensity.” The view in the industry is that this reflects the central government’s balancing of economic growth and emissions reduction efforts.


The “two-wheel” new energy and fossil energy approach has been laid out, with peak [carbon] in 2035 at 200 million tons of oil and gas equivalent. This is China’s bottom line on energy.


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Cite This Page

高凡婷 (Gao Fanting). "In an Oil and Gas Fumed Atmosphere ——The Russia-Ukraine Conflict and the Suddenly Magnified Energy Security Perspective [Excerpt] [乌烟瘴油气——俄乌冲突与骤然放大的能源安全角]". CSIS Interpret: China, original work published in China State-owned Enterprise Management [国企管理], April 1, 2022

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