Changes in Global Energy Landscape and the Impacts on China

□ Shen Yamei

Changes in Global Energy Landscape and the Impacts on China

□ Shen Yamei

Since June 2014， the price of BRENT crude oil， the international base price for crude oil， has plummeted by more than 50 percent， from a high of 115 dollars per barrel to less than 50 dollars per barrel in January 2015， its lowest price since 2009. So far， the twelve members of the Organization of Petroleum Exporting Countries （OPEC）， after two rounds of meetings， have decided not to cut output and maintain production at 30 million barrels per day， therefore extending the falling price trend further into the future. The current state of affairs reflects fresh changes in the global energy landscape that present both opportunities and challenges to China in its external energy environment， and call for active responses and initiatives from China in terms of conducting international energy cooperation.

Changes in Global Energy Landscape

Currently， the world economic recovery is both moderate and uneven， and international geopolitics is undergoing fundamental readjustments. In this context， the long-strained supply-demand relationship in the global energy market has eased and it is now showing signs of being a buyer's market， with a downward price tendency. Emerging economies， as major energy consumers，have acquired an increasingly important role in the global energy landscape，and China， while pursuing energy security， is exposed to a relatively relaxed external energy environment.

Relatively abundant energy supply

The global energy supply has been augmented greatly in recent years，thanks to technological innovations in oil and gas exploration and utilization，diversified sources of non-traditional energy， as well as improved energy efficiency. According to BP （British Petroleum） statistics， the global output of oil grew by 0.6 percent， natural gas by 1.1 percent and coal by 0.8 percent in 2013，1BP Statistical Review of World Energy， June 2014， p.8， p.22， p.32. In order the keep the statistical standards consistent， statistics appearing herein are mainly quoted from BP reports， except when otherwise stated.and the overall reserve-production ratios are maintaining a mild， yet steady， growth curve. The relatively abundant supply of energy has lessened people's anxieties about the global shortage of fossil fuels. It is estimated that in the years between 2012 and 2035， world primary energy production will increase at an annual rate of 1.5 percent， the same as the rate of increase for primary energy consumption.2BP2035 Shijie Nengyuan Zhanwang （BP2035 World Energy Prospect）， January 2014， p.15.

Meanwhile， the four centers of energy supply on a global scale are well established， namely the four geographical areas of the Middle East， North America， Russia and Central Asia. The Middle East has the biggest share of the world's energy supply， with proved oil reserves accounting for 47.9 percent of the world's total， and proved natural gas reserves accounting for 43.3 percent of the world's total. Oil exports from the Middle East are about 34.9 percent of the world's total oil exports， and its exports of LNG （Liquefied Natural Gas）are 41.3 percent of the world's total. North America has become the second biggest energy producer， driven by the progress the US has achieved amid the shale gas revolution. Technological innovations and policy encouragement measures accumulated in the latest energy revolution have spurred rapid development of new energy resources， and greatly unleashed the potential of oil and gas exportation and production in the North American region.Meanwhile， Russia and Central Asia can boast their biggest energy surplus. For example， Russia in 2013 has increased its natural gas output by 12.5 billion cubic meters， the biggest increase in output volume compared with that of other producers， and Russia remains the biggest fossil fuel exporting country in the world. In addition to the aforementioned four geographical centers，emerging energy markets in Africa and Latin America are also burgeoning and have their own attractions. However， resource-rich countries in African and Latin America still have a long way to go before they can conduct competent exploration and raise their output capacity， considering the existing restraints in the local economic environments， inadequate infrastructure conditions，and lack of capital， technology and services， etc.

Consumption moving eastward

The growth rate of the world's primary energy consumption was slightly lower than the average 2.5 percent over the past ten years， but it accelerated from 1.8 percent in 2012 to 2.3 percent in 2013. Emerging economies are a steady contributor to energy consumption， with a growth rate of 3.1 percent. Non-members of the Organization for Economic Cooperation and Development （OECD）， including China and India， have absorbed 49.4 percent of the world's total oil exports and their oil consumption is 50.8 percent of the world's total. The Asia-Pacific region， as a whole， is the destination for 73.2 percent of exported LNG and its hydro-power production has contributed to 78 percent of the world's total hydro-power production increment. As a matter of fact， China alone， in terms of energy consumption，surpassed all European Union members in 2007， overtook over the US in 2010， and was expected to go beyond the whole of North America in 2014.3U.S. Energy Information Administration， Data Tables A1：“World total primary energy consumption by region， Reference case， 2009-2040”， http：//www.eia.gov/forecasts/archive/ieo13/.In contrast， the growth rate of the consumption by OECD countries was 1.2 percent in 2013， with the US having strong growth momentum of 2.9 percent， but there was negative growth from the EU （- 0.3 percent）， Japan （-0.6 percent） and Spain （-5 percent）.

The center of gravity in terms of global consumption is moving eastward due to two trends. On the one hand， the trend of self-sufficiency in the western hemisphere is gaining momentum. The oil and gas imports of the US and European countries have peaked， due to rising energy efficiency and decreasing consumption. This new trend leaves more room for the demand of developing countries and provides more initiative for traditional suppliers in general and those energy exporting countries in the Middle East in particular to reach the eastern markets. On the other hand， Asian economies， which are growing in great leaps， need to satisfy their growing energy needs in the development process. The huge market potential has turned Asia into a quality client for almost all energy producers. To illustrate， traditional oil and gas suppliers as well as emerging ones， including the US and Russia， now view Asia with great interest and have turned to it as a major destination for energy exports.

Energy mix fine-tuning

The increasing output of shale oil and gas， as well as unconventional oil and gas from the ocean， has provided a strong impetus to the global energysupply. In the foreseeable future， fossil fuels， due to their relatively easier obtainability， will remain the dominant source of energy in the global energy mix， accounting for 86.7 percent now， and possibly 81 percent in 2035. Oil demand makes up the biggest share of total energy consumption， achieving an absolute gain of 1.4 percent in 2013， although its relative percentage in total energy consumption has been shrinking for the past 14 consecutive years. Coal for electricity is mostly favored by emerging economies due its comparatively low price， and demand for coal has grown at such a rapid pace that a supply glut is emerging and leading to even lower prices. Natural gas has also grown in popularity over the past decade， thanks to a number of driving forces including higher demand from booming Asian economies and global efforts to cut carbon emissions.

On the other hand， perpetuated perceptions about a possible energy shortage and the grim realities of environmental degradation confronting the world instill a common desire in most countries to make better use of renewable energy in order to safeguard their energy security， adapt to climate change and achieve sustainable development. As a result， renewables， including solar， wind， biomass， geothermal energy and hydropower， are spearheading a new round of rapid growth. In 2013， renewable energy contributed to 5.3 percent of generated electricity from all sources of energy， up from 2.7 percent five years ago. It is estimated by the International Energy Agency （IEA） that the ratio of renewable energy sources in total primary energy consumption will rise from the current 13 percent to 18 percent in 2035， and that renewables will contribute to about 50 percent of the electricity increment by then.4IEA， World Energy Outlook 2013， November 12， 2013， p. 197.However， it is worth noting that， partly due to subsidy policy readjustments，global investments in renewable energy sources have seen negative growth since 2012.5Wu Minshuo： “Nengyuan Zhuanxing Huhuan Dazhanlue He Haozhengce” （i.e. Energy Transition Calls for Grand Strategy and Good Policy）， People's Daily， August 5， 2014， p.23.And a series of problems have emerged， such as manufacturing overcapacity of burgeoning sectors such as photovoltaic and wind power. It is safe to say that renewables， both in terms of their current stock and prospectiveincremental quantity， are far from replacing fossil fuels as the leading source of energy in the global energy mix in the near future.

Falling prices mirror market reality

The current round of huge price movements in the energy market can be attributed to many reasons. First， oil demand has been suppressed，since the pace of global economic growth is slowing down in general， and，in particular， most emerging economies and European economies have failed to achieve as much growth as expected. Second， supply has been boosted，because substantial amounts of non-conventional oil from the US and Canada have made up for the Middle Eastern production disruptions and supply shortfalls where political situations have drastically worsened since 2011， and because oil exports from Iran and Iraq have resumed since 2013. Third， the members of OPEC， including the energy tycoons of Saudi Arabia，Kuwait， and etc.， have refused to cut oil output so as to maintain their market shares in tight competition with newcomers in the energy market. There is widespread speculation that established oil exporters， represented by Saudi Arabia， are willing to accept low prices for an extended period so as to squeeze the finances of some of America's fledgling shale companies and ultimately to curb the US energy boom.

Besides the foregoing market-based analyses， there are also educated judgments probing the geopolitical side of the story. To illustrate， Thomas L. Friedman， a renowned US political columnist， eloquently ascribed the falling oil prices to a “conspiracy theory” in an article last October， implying that a global war is underway “pitting the United States and Saudi Arabia on one side against Russia and Iran on the other”， and that the American-Saudi oil alliance is deliberately trying to “bankrupt Russia and Iran by bringing down the price of oil to levels below what both of them need to finance their budgets”.6Thomas L Friedman， “A pump war？”International New York Times（Paris）， October 16， 2014， p.7.No matter if this geopolitical rationale has correctly captured the driving forces behind falling prices， it does reflect to a certain extent the negative effect theoil price slump is having on both Russia and Iran.

As for the market repercussions of falling prices， it is certain that in the short run energy importing countries will benefit from easier access to fuel imports at lower cost. Nevertheless， the downward price trend if left unchecked will tighten the financial grip on energy producing and exporting countries，and subsequently create operational risks for supply businesses， thus incurring heavier pressure on the ongoing upsurge of the oil boom in countries such as the US and Brazil. In the long run， thanks to the diversification of energy sources as well as their channels of supply， fuel prices will more often than not be fixed following what the market will reasonably bear. At present， the supply-demand relationship in the energy market determines that there won't be a sharp rebound in oil prices， barring unexpected geopolitical upheavals and aggregate fluctuations in financial markets.

Challenges to China's Energy Security

In the context of the relatively relaxed energy market environment， as elaborated above， China， as the world's biggest consumer of energy， is growing increasingly dependent on oil and natural gas imports at a rate of 58.1 percent and 31.6 percent respectively.7Economics and Technology Research Institute， CNPC （China National Petroleum Corporation）： “2013 Nian Guoneiwai Youqi Hangye Fazhan Gaishu Ji 2014 Nian Zhanwang” （i.e. 2013 Summary of Domestic and International Oil and Gas Industry and Development Prospect of 2014）， International Petroleum Economics， Issue 1， 2014， p.35.This in one aspect reveals the many challenges confronting China while pursuing energy security， including challenges to deal with the pressure to meet the huge domestic energy demand， restraints on accessing and locking in reliable channels of supply， inertia in promoting a more varied energy mix， and geopolitical sensitivities in international energy cooperation.

Intense competition with other importers

In Asia， demand for energy far eclipses what the local production and trade of energy is able to offer， and Asian economies are becoming moreand more dependent on supply from sources outside the Asian region. That subjects Asia to a low position in the global energy supply system. In China's adjacent neighborhood， only Russia to the north and Central Asian countries to the northwest are net energy exporters， and neighboring countries in other directions are basically net importers. To illustrate， Asian economies including China， Japan， India and South Korea all have alarmingly high dependency on foreign oil and gas markets， especially the Middle East. The importing economies of Asia compete with each other globally， which not only leads to frequent frictions and even conflicts of interests between them， but also has spill-over effects on their interactions in and outside the region.

Furthermore， China's quest for oil and gas in such emerging energy markets as Africa and Latin America is caught in an evident tug-of-war with other major countries. For instance， due to geographical proximity and traditional ties， Europe has absorbed 43.4 percent of Africa's oil exports，44.5 percent of its LNG exports and 82 percent of its PNG exports in 2013，whereas China accounted for only a small share. Another arena is the US-dominated energy landscape in the western hemisphere. Buyers from India，Japan， Russia， Iran， etc. have upgraded their cooperation with the energy-rich producers and exporters of Latin America， with a view to forging more intimate energy relations， as well as closer commercial and political ties. The fact that China has managed to meet its oil and gas demand mostly by importing from outside the neighborhood has brought about a series of variables， hinging on whether the exporting countries are on sufficiently good political and economic terms with China to be a reliable sellers of energy， whether they are ready to do business at reasonable and acceptable prices， whether transit countries along the transportation routes will work to ensure safe and secure lines of energy transportation， and whether resource competition with other importing countries can be properly handled. All these outstanding issues will have a direct bearing on the long-term development of China's economy.

High threshold for sustainable development

Considering the rising environmental and societal cost of modern energyexploration and utilization， many countries of the world are voluntarily moving closer to the low-carbon approach in their policies regarding energy exploitation， industrial development， environmental protection and climate change. In the case of the US， the energy consumption mix has been optimized thanks to the successful shale gas revolution and the expanded role of natural gas vis-à-vis coal. Greenhouse gas emissions were cut significantly in 2012， achieving a reduction rate of 11.8 percent over 2005's level of emissions.8U.S. Environmental Protection Agency， http：//www2.epa.gov/carbon-pollution-standards/regulatoryactions.As the US enters a new period of oil and gas prosperity， the Obama administration has no choice but to pay more attention to regulating the associated environmental problems， and therefore will gain more initiative in international climate change talks and negotiations.

However， for China， in the process of accelerating industrialization and urbanization， it is a different story. For the time being， it is rather difficult to upgrade China's high-energy consuming industrial structure， or to reverse its rising trajectory of energy intensity， or to rewrite the reality of China's natural resource endowment of abundant coal and scarce oil and gas. It means there is still a long way to go before greenhouse gas emissions can be substantially reduced and sustainable development fulfilled. According to BP statistics，China's coal consumption reached 1，933 million tons of oil equivalent in the year 2013， accounting for 50.3 percent of the world's total coal consumption. In the same year， China also ranked as the world's biggest polluter， emitting 28 percent of the world's total carbon emissions， and contributing to 58 percent of the global carbon emissions increment.9“Global Carbon Budget2014”， September 21， 2014，http：//www.globalcarbonproject.org/carbonbudget/14/hl-full.htm.The fact that China has such a big share in global coal consumption and in pollutant emissions has made it aneasy target for global environmentalists， and its word and deed could be fully exposed to the spotlight in international climate change talks.

Geopolitical driving forces

Supply insecurity and price volatility are issues of vital importance to China's economic health and sustainability， but they are vulnerable to geopolitical upheavals. As mentioned above， China is highly dependent on the Middle East—six countries out of China's ten biggest exporters are from this region—for its oil imports. This means that China's tolerance for political turbulence in the Middle East is rather limited since geopolitics here inevitably touches on its energy supply security and price stability. For instance， China's energy relations with Iran have been visibly impacted by the US-led sanctions regimes targeting Iran.

In terms of China's neighboring geopolitical environment， challenges of a greater magnitude are popping up. Ever since the US started to implement its“rebalancing” to Asia strategy， a number of China's neighbors have “hijacked”the US' desire for their cooperation and become more provocative in disputing China's long-held territorial sovereignty claims in the East and South China seas. At the same time， they have behaved in a more assertive manner and heightened energy competition with China both in and outside the Asian region. This is reflected in the fact that sub-regional energy cooperation in northeast Asia has not been able to get started， because both China and South Korea have such a problematic relationship with Japan that they can hardly unite as one collective force in arguing for favorable energy prices with sellers，or in securing vital sea lanes through joint efforts.

Regarding the energy transportation passages of China， they are not diverse enough to accommodate flexibility. Most of China's oil imports are sea-borne， with 90 percent of them transported by foreign tankers， 80 percent en route through the Strait of Malacca. As a result， peace and security in Strait concerns the stability of China's macro-economic environment.

Unfavorable elements driven by geopolitics have also influenced worldwide public opinion regarding China's “going out” drive in its energystrategy. Due to differences in political systems and ideologies between major developed countries and China， Western mainstream media kept on churning out theories of a so-called China energy threat， and spread false allegations against Chinese enterprises for “conducting neo-colonialism” by “draining local energy resources”. Albeit unfounded accusations that the Chinese Stateowned energy enterprises lead to “unfair market competition” due to their“State-owned background”， what the established western actors in the global energy market really worry about and fear is the likelihood that China's participation in the same pool of energy cooperation would “encroach on”their traditional spheres of influence. In this context， it becomes manifest that for China the mission to explore and maintain energy interests through international cooperation goes hand in hand with the mission to safeguard her political interests. This is a dual-part mission rather than one part overriding the other or being sacrificed for the other.

Opportunities for China's International Energy Cooperation

China's position in the international energy system has been highlighted in recent years， due to the massive scale of its economy as well as its huge demand for energy. Since China has started to view the energy issue from a strategic perspective of national development and security significance，10“Xi stresses efforts to revolutionize energy sector”， Xinhuanet English News， June 13， 2014，http：//news.xinhuanet.com/english/china/2014-06/13/c_133405882.htm.we need to proceed from domestic conditions， and actively participate in international energy cooperation， so as to reduce the risk of relying excessively on overseas oil and gas resources， and gain a bigger say in international energy issues.

First， it is necessary to follow a scientific concept of energy security. On the one hand， China needs to enhance its energy self-sufficiency， modernize and optimize its energy structure， identify new directions for scientific and technological innovations， and pursue a conservation-first energy development strategy through policies such as imposing a cap on coal consumption. On the other hand， energy interdependence with the global community is aninevitable strategic choice for China. We should take seriously the role of foreign energy supply in meeting China's demand， and we need to take an active part in tapping the vast potential of the global energy market， so as to “maintain energy security in the pattern of the country's opening-up， and grasp the initiatives of development”.11“China eyes new energy projects for greener development”， Xinhuanet English News， April 21， 2014，http：//news.xinhuanet.com/english/bilingual/2014-04/21/c_133278743.htm.

Second， it is important to expand the global outreach for energy cooperation. We need to take advantage of the worldwide landscape of multicentered energy supply and work to obtain diversified market shares， so as to guard against excessive reliance on one single exporter and to broaden the scope of choice in the energy market. The “going out” strategy should be upgraded， laying equal stress on trade and investment， carving out all-round cooperation in both downstream and upstream projects， and valuing better performance in asset quality as well as operational capabilities.

We must attach importance to maintaining security along major routes of energy transportation. So far， the overall layout of four energy transportation passages have been put in place， with one passage route stretching northwest toward Central Asia， a second one extending to the southwest forming the China-Myanmar oil and gas lines， a third one extending to the northeast forming the China-Russia petrol lines， and a fourth one facing eastward to the sea handling tankers from the Middle East， Latin America and Australia. This relatively comprehensive energy transportation layout has laid a good foundation for China to possibly promote a regional or sub-regional common community bonded by shared energy interests. China could invite countries concerned to start work on this by way of building inter-governmental regimes to secure the trans-boundary pipes and lines， and sign international accords for this.

Third， we need to conduct active energy diplomacy in an all-round way. Relations with major energy-rich countries should be strengthened. Countries such as the US， Russia， and Saudi Arabia， which are rich in oil reserves and vigorous in production， are powerhouses in the global oil market.Iran， Japan and the European states can also make an appreciable difference to the global energy market. We need to conduct cooperation with these countries by deepening policy dialogue and consultation， institutionalizing information exchange channels， and promoting energy technology transfer，etc. Meanwhile， relations with the country's neighbors should be cemented， so as to explore the untapped potential of nearest supply based on the principle of proximity. For example， we can push ahead some key energy projects under the overarching framework of the Silk Road Economic Belt and 21st Century Maritime Silk Road.

With China's outreach drive extending far and wide， protecting China's overseas investments has become increasingly important. We need to set up an operating and long-effect mechanism to protect the legitimate rights and interests of Chinese companies' overseas investments， employing innovative legal tools in the fields of international public law and international economic law. Emphasis should be given to sharpening research into risk evaluation and establishing a dispute settlement mechanism for oil and gas investments.

China can do more to contribute to global energy governance， including advocating institutionalized energy cooperation， so as to turn real politics centered on energy give-and-take into cooperative relations of mutual benefit，shared profit and common development. We can work together with other major energy consumers in Asia to form a coordination mechanism. We can also associate with major producers in Central Asia and West Asia and build a sub-regional trading platform for oil and gas.

Finally， energy enterprises are an inalienable part of China's forward diplomacy. We should encourage them to constantly enhance their qualifications， manage corporate affairs in a more transparent manner， and improve the quality of goods and services. In order to project a positive corporate image， enterprises going out need to shoulder their corporate social responsibilities （CSR）， codify CSR into corporate rules and regulations， and to carry out CSR in practice， such as establishing an analysis， evaluation and report system for environmental and social costs and benefits.

ShenYamei is Associate Research Fellow at the Department for American Studies， China Institute of International Studies.