Dr. Kang WuSenior Fellow

Presented at the POST Conference 2013Hilton Hawaiian Village, Honolulu, Hawaii

March 6, 2013

China’s Energy and Environmental Challenges: Regional and Global Implications

• Energy and Economy: Where China Stands• Structure of Energy Use and Future Growth• Rising Oil Demand and Imports• Emerging Natural Gas Market• A Net Coal Importer Forever?• Environmental Challenges and Future Energy

Options for China• Concluding Remarks

An Outline

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Energy and Economy: Where China Stands

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• Measured by conventional exchange rates, China ranked as No.2 in the world in 2011 and accounted for 10.4% of the world’s total GDP.

Size of the Economy

4

• In terms of PPP (purchasing power parity), China has a higher share of the world’s total GDP at 14.3%.

Size of the Economy (cont’d)

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0 2 4 6 8 10 12 14 16

US

China

Japan

India

Germany

Russia

Brazil

UK

France

Italy

The World's Ten Largest Economies Based on PPP Valuation, 2011

GDP (US$ trillion)Note: PPP = purchasing power parity.Source: IMF (October 2012).

1. US' Share: 19.1% (US$15.1 trillion)2. China's Share: 14.3% (US$11.3 trillion)3. Japan's share: 5.6% (US$4.44 trillion)4. India's share: 5.6% (US$4.42 trillion)

• China has taken over the US as the largest energy consuming country in the world since 2009.

Energy Use

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0 10 20 30 40 50 60

China

US

India

Russia

Japan

Canada

Germany

Korea

France

UK

The World's Ten Largest Primary Energy Consuming Countries, 2011

(mmboe/d)

• However, when it comes to oil, China is a distant No. 2.

Energy Use (cont’d)

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0 2 4 6 8 10 12 14 16 18 20

US

China

Japan

India

Russia

Germany

Korea

Canada

France

UK

The World's Ten Largest Oil Consuming Countries, 2011

(mmb/d)

Structure of Energy Use and Future Growth

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-

10

20

30

40

50

60

70

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

(mm

boe/

d)

Primary Energy Consumption in China, 1995-2013

Non-Commercial Solar/Wind/Other Renewables Nuclear Hydro Gas Oil Coal

Note: Data for 2013 are projections.

• The direction of China’s PEC growth is largely set by coal.

The Energy Scene

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• A closer look at the structure shows that China relies on fossil energy to meet 85% of its demand.

• While the share of coal is exceedingly large, the share of gas is the smallest among major economies in the world.

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The Energy Scene (cont’d)

Oil17%

Gas4%

Coal64%

Nuclear1%

Hydro6%

Others*8%

Structure of Primary EnergyConsumption of China, 2011

Total consumption: approximately 57 mmboe/d.*Include solar, wind, other renewables, and non-commercial energy.

• Future growth of PEC is led by gas, nuclear power, and hydroelectricity.

• Coal will continue to play a dominant role in the overall structure though its share is forecast to decline.

• The role of oil in overall energy use is stable but the volume is increasing notably.

The Energy Scene (cont’d)

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0%

10%

20%

30%

40%

50%

60%

70%

80%

0

20

40

60

80

100

120

2009 2010 2011 2012 2013 2015 2020 2025 2030

Shar

e

(mm

boe/

d)

Primary Energy Consumption Forecast for China and Shares of Individual Sources, Base-Case Scenario, 2009-2030

Coal Oil Gas Hydro Nuclear Solar/Wind/Other Renewables Non-Commercial PEC

Note: 2013-2030 data are projections.

Rising Oil Demand and Imports

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Outlook for Oil Imports

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3.8 3.8 4.1 4.1 4.1 4.2 4.2 4.2 4.2 4.3

(4.1) (4.4)(5.1) (5.5) (5.9)

(6.5)(7.5)

(9.7)(10.4)

(11.5)

(14)

(12)

(10)

(8)

(6)

(4)

(2)

-

2

4

6

2008 2009 2010 2011 2012 2013 2015 2020 2025 2030

mmb/d

China's Crude Oil Production and Overall Oil (Crude & Products) Imports, 2008-2030

Crude Production Net Oil Imports/Future Requirements

Note: 2013-2030 data are projections.

• During the Year of 2012:• Middle East : 50% (4%)• Africa : 24% ( 7%)• Asia Pacific : 3% ( 11%)• Elsewhere : 24% (16%)

1. Saudi Arabia 20%

3. Russia 9%

4. Iran 8%

2. Angola 15%

10. UAE 3%

9. Kuwait 4%

8. Kazakhstan 4%

7. Venezuela 6%

Note: China’s cumulative crude imports: 5.41 mmb/d, up by 6.5%. .

6. Iraq 6%

Crude Imports, 2012

5. Oman 7%

Top 10 Crude Oil Exporters to ChinaIn the Month of December 2012 (kb/d)

Saudi Arabia

Angola

Iran

Russia

Iraq

Venezuela

Oman

Kuwait

Kazakhstan

Libya

1,043

771

593

443

352

322

321

241

207

164

Cumulative (kb/d)

1. Saudi Arabia 1,0752. Angola 8013. Russia 4854. Iran 4395. Oman 3906. Iraq 3137. Venezuela 3058. Kazakhstan 2139. Kuwait 20910. UAE 174

Emerging Natural Gas Markets

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Natural Gas (Conventional) Balances

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• Despite good prospects for domestic production, consumption is poised to grow faster, leading to larger gas imports.

-30

-20

-10

0

10

20

30

40

50

2007 2008 2009 2010 2011 2012 2013 2015 2020 2025 2030

(bsc

f/d)

Outlook for Natural Gas Production, Consumption, and Net Import Requirements in China

Production

Consumption

Net Imports

Note: Data for 2013-2030 are projections.

Rapid growth in demand: three times higher by 2030

Good domestic production potential but insufficient to meet

growing demand

The result: Huge imports are required. Both LNG and pipeline gas are needed.

A Net Importer of Coal Forever?

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• After decades of being one of the world’s major coal exporters, China became a net importer in 2009. China has surpassed Japan to be the world’s largest importer of coal.

China is Becoming a Net Coal Importer as Well

-

50

100

150

200

250

300

350

90 92 94 96 98 00 02 04 06 08 10 12

China's Annual Coal Exports and Imports, 1990-2012

Exports Imports(mmt)

Environmental Challenges andFuture Energy Options for China

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SEVERE POLLUTION

• Air, land, and water pollution is at an all time in China.

• Beijing along with a huge area in North, East, and South China has experienced smog and foggy weather with heavy pollutants since the start of 2013. The PM2.5 readings are extremely high.

• In a joint study of ADB and Tsinghua University of China, among the world’s ten most air polluted cities, seven are in China.

• China has already been the world’s largest CO2 emitting country for years.

• Fossil fuels dominate the world and Chinese energy use today and it is non-renewable. Overall, its future role will decline for technical, economical, and environmental reasons. But in a few areas, the growth continues:– Clean Coal Technologies (CCT): Widely used in developed countries but

far less in developing countries. China needs CCT technologies and has a long way to go to fully implement them. The environmental benefits will be huge.

– Natural Gas: A better fossil fuel than coal and oil. Has a bright future in some parts of the world like the Asia-Pacific region where it is underutilized. China is actively promoting the use of natural gas.

– Methane Hydrates: Still at the experimental stage, but could have a huge impact if commercially viable.

– Coal-to-Liquids (CTL), Gas-to-Liquids (GTL), Coal-to-Methanol (CTM), Coal-to-Gas (CTG): Limited future but pursued by many investors in China.

– Carbon Capture and Storage (CCS): Also called carbon capture and sequestration. CCS has now been developed in China, albeit slowly.

Future Energy Options:Fossil Fuels – Room to Improve

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• Despite Japan’s Fukushima nuclear crisis since March 11, 2011, the future still looks good for nuclear power in China.– Nuclear fission power used today has its limitations and safety

concerns.– Nuclear fusion power has greater potential but has not yet

been developed commercially.• China is on track to massively expand its nuclear power

programs:– Current installed capacity: 14.7 GW– Under construction: 31 GW– Government targets

• 2015: 43 GW• 2020: 80 GW

Future Energy Options:Nuclear Power – Huge Growth Ahead for China

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• The future can be unlimited– Hydroenergy: China has a huge hydroelectric power

sector. The total installed capacity has just passed the mark of 230 GW and is still growing. By 2020, China is likely to have more than 350 GW of hydroelectric capacity.

– Wind Power: Surpassing the US recently, China is No. 1 in total installed capacity, reaching 63 GW at the start of 2012. China is the leader in new wind power buildup as well.

– Biofuels and Vegetable Oils: Available and used today. Can be expanded in China and elsewhere.

– Commercial Biomass and Biomass Power: Has growth potential in developing countries, including China.

Renewable Energy

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• Renewable Energy (cont’d)– Geothermal: Developed well in some countries. Has room to

grow in China.– Solar Energy (Heat): Developed well in China. Has room to grow.– Solar Photovoltaic and Solar Battery: China is the leader and it

has a good future.– Solar Power: Not well developed. Has good potential in China.– Tidal Power Generation: Not well developed.– Ocean Thermal Energy Conversion (OTEC): Not yet commercially

developed.– Others: LED, smart grid, hydrogen, fuel cells, etc.

• More important is energy conservation and improvement of energy efficiency!

Renewable Energy (cont’d)

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Energy Efficiency and the Environment• Government’s Energy Efficiency and Environmental Targets• Energy Efficiency Targets:• Reduce the energy intensity (energy use per unit of

GDP) by 16% by the end of 2015 from the 2010 levels during the 12th Five-Year Program (FYP).

• Carbon Emission Targets• Reduce China’s carbon emission intensity (carbon

emissions per unit of GDP) by 40-45% by 2020 from the 2005 levels. The target under the 12th FYP is a reduction of 17% by 2015 from the 2010 levels.

• Raise the share of non-fossil energy in total energy use to 11.4% by 2015 and 15% by 2020, from under 10% at present.

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• As the world’s second largest economy, China is currently the largest energy consuming and CO2 emitting country in the world. It also has the world’s largest automobile market.

• China ranks as No. 2 in terms of oil consumption and crude imports. However, with stagnated domestic production, the imports are rising fast.

• Natural gas is well underdeveloped and underutilized in China. It has huge potential to grow.

• Despite being the largest coal producing country in the world, China is also the largest coal user and now the largest coal importer in the world!

Concluding Remarks

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• China plays a leading role in hydroelectric power, wind power, and solar heating developments in the world. Overall, the importance of renewable energy is growing relatively fast in China.

• However, the challenge for China is enormous. First and foremost, China’s air, land, and water pollution is at an all time high! Meanwhile, while it has huge room to massively develop renewable energy, its need for fossil energy—oil, gas, and coal, which are all non-renewable—will continue to grow, leading to much larger imports where security of supply is at a bigger stake. Moreover, with more energy to be used, China is under heavier pressure to improve energy efficiency, conserve energy, and ultimately reduce total CO2 emissions (not just intensity of emissions).

Concluding Remarks (cont’d)

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• BP Statistical Review of World Energy 2012, June 2012.• EIA (Energy Information Administration), International Energy

Outlook 2011, Washington, D.C.• EIA, American Energy Outlook 2013 Early Release Overview,

December 2012, Washington, D.C.• IEA (International Energy Agency), Oil Market Report: A Monthly

Oil and Stocks Assessment, various issues, 2013, Paris, France• FGE’s Energy Database, 2013.• China National Bureau of Statistics.• Platt’s Price Database.• Author’s own research.

Selected Sources of Data

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Thank You