the relevance of state strategy and the energy industry ismuch stronger and so are the po]iticalaspccts of the energy probiem

Te wkat extesut came ¢ kfiRasoRve Gts_emeifgy

gerebEeggesby cooperataorm wgth Japage?

Nami Morimoto"

This paper ^{aims to examine} China'scurrcnt and futureenergy problems ^",hich

stand in the way of Chinese sustainable dev･elopment and also sustainable

development throughout the Asia Pacificregion. Although a considerable number of studies have been made on the supply and demanct prospects^{of energy, what} has

not been examined in detailisa consideration of the political ^{aspects of energy} issues.This^{articte's analysis will} focus^on thisarea by considering Chintt'sdomestic

economic pollcies,^energy policjes^and foreignpolicies ^and their bearing on the

energy probEeinsitfaces.The most beneflcialmethods forChina to solve itsenergy problems ^{will also} be explored together with an analysis of China-Japan cooperation and itseffects,

gntroduction

The energ)i problem isone of thefundamenta}problems tobe solved toachicL'e, sustainab]e developmentinChina and tiieAsia Paciiicregion. Regional stability in

East Asia isalso affected by,_{energy concerns as energy} has a deep connection not only with economic problems but also with political^and environmental issucs.

China, inparticular,has been continuing it$rapid ecenomic growth, ^and its^energy

demand has dramatically increasedsince itintroduced the"open-door''

poLiciiin1978.

China'soil demand is expected t.oii'}creaseinthe future,and concern over the impact

of thisincreasehasbeengrowing. Energy also has a strategic nature as ".inf'luences the security of nations greatly.Looking back at history,there have been countiess

dtsputes over resources. Though oil and Ratural gas ^came to be traded oR a commereial basisby the transformation of internationalsocietv after the end of the

Coid War, t'he relations between business enterprisett and politicalstrat.egies of

governrnents ^{are sti]1} intitnate.i/'Especial]yin a seciatist country IikeChina. the relevance of state strategy and the energy industry ismuch stronger and so are the po]itical^{aspccts of the energy} probiem. Furthermore, the cnergy problem is related

toenvironmental problems,

At ^{present, the main resources used as primary energy sources in} theworld are

fossilfuels Ccoa,L,petroleum ^{and natural} gas), ^{nuclear energy,} and alternatlve energy 148(65)

opefi\-n*eg [H]ks[{t"ms･ts-p.Rk\N] as^loe-^2oe2fii

sources (solar,^wind, fuel^{cells, etc).} From thislist,China largelydepends^{on coal,}

which causes air pollution,^{acid rain and} global^warming,2) Therefore,dealing with

China'senergy problem ^also has the potential key to solving China'senvironmental problems, Any environmental problems in China ^{will eventually affect its}

neighbours, The Koreas and Japan,^{Trade between China and} Japan ^{is also}

expanding greatly ^at present ^{as well and the economic} interdependence of both

countries hasbeendeepened^{as a result.} The relationship betweenJapan^and China

isa matter of concern as italso has an influenceon the whole of international

soclety.

1. PossibleResponses toEnvironmentalIssues

Ithas been a challenge forChina toachieve harmony between energy tosupport continuous economic growth ^and protection^{of the} environment. In relation to the environmental problems, ^{attention must} be _paid to the ^{ratios of} primary ^energy

consumption inChina,Table 1shows the breakdown of this.3) Table 1. Primary Energy Consumption of China (%)

Coal 67,1

Petroleum 23.4

Naturalgas 2.8

Hydroelectricenergy 6.7

147(66)

Source^:Chinesestatistical yearbook. 1999

It^can be^seen frorntable1thatthe consurnption of coal and petroleum ^exceeds 90%, and therefore China greatly depends on these two energy sources.

Unfortunatelysuch a largeconsumption of fossilfuelscauses environmental problems, This has become so serious in China that its solution is called

"environment

regeneration", not "environmental

protection"^{any more.} This problem includesair pollution,^{acid rain and} global^warming, The air po}lution^{and acid rain}

are caused by SOx (sulfur^{oxide), NOx} (nitrogenous^{oxide) and dustemissions, and}

global^warming isdue to the emission of C02 (carbon^{dioxide),SOx, NOx and C02}

are discharged from the combustien of fossilfuels,China isthe 2"dlargestcarbon

dioxide-emitting^{country in the world after the U. S,and the concern about} its impact^has beengrowing ^worldwide. In terms of the environmental problems ^of the

world, China isa very important country due to itssize, large population ^and its

economic potentiaL In^order to solve the environmental problems, ^an appropriate energy solution has to be achieved from among the following options :increased

non-fossil fuelusage, improved energy ethciency and ^{reduction of} pollutionfrom

fossil^fuels(coal,petroleum ^{and natural gas). These options will all} be examined in

To whEtt cxtent can Chinasoive itsenergy problems bycooperation with .Japan?Narn･i Moriinoto turn.

1.1.Non-fossilfuels

The ^{energy sources which} do not emit SOx, ^{NOx and} C02 ^{are nuclear energy}

and aLternative energy sources such as w[nd, solar and geothermal ^energy. China is

eager for the introduction of these energies as a means of reducing itspollution.

However, both alternative energy sources and nuclear energy, are not presently

major energy sources due to the costs and technology ^necessary for their

implementation. Usage of atomic energy isespecially controversial because itneeds careful management to avert. potential disaster^{as can be seen from the critical}

accident of the nuclea'r power plantinTokai-mura, Ibaraki,JapanⁱⁿJune^1999.Thus,

alternative energy sources and nuclear energy cannot be the main sources of energy

forChina forthetime being.That beingthecase these cnergies cannot help alleviate

Chinese environmental pollution ^at present giv･en ^{china's current situation.} However Japan^{has the meney and technology tomake this} possib]eifenergy cooperation is possibte betweenthem.

1.2. EnergyusageeMciency

The environmental problem isalso related to the]ow eficiency of energy usage

inChina,Though the etilciency unit has shown a tendency toimprove _year by year, itisst."l about 10 times as inethcicntas that of Japan4).Envirenmental poilut/ion

from the energy discharge i$expected to become huge iHhe economy grov-'s^rapidly

and cuFrent methods ef generating ^{energy with such a} low ^{energy efficiency are}

used in China,5)ln order to avoid this,energy ethciency has to be improved, but there hasbeen ver.i'littletransferof advanced foreigntechnologiestodatebecause

itisnot economically viable.fi) China isunlikely toachiex,e the necessary levelsof ethciency to $low the environmental damage while coping with the increase in

energy proctuction that their growing ^economy demands,lf^the relationship between

China and .lapanpermits it,then Japanese^{technology could help to improve China's}

energy ediciency and envirenment while helpingkeep Chinese pollutionfrom Japan.

L3. Coag

China ^has considerable amount of coal reserves and a long history of coal production ^and its energy poli'cy has long been coal-centered. Coal issuitable for

developjngcountries as the price islow. [-[oweverbecause itisa resource that contains abundant carbon and sulfur, C02, SOx, NOx, and impuritiessuch as dust

are emitted in large quantities into the atmosphere when itis burned.This is

causing serious air po]lution inthe cities of China since clean coal technologies and

pollution^{contro} equiprnent are not} fullydeveloped or cemmon!v used. Moreover,146(67)

opixtlEiff1ftptaee[^Nijgsck\ms･:-i･fif!tt}!Iwaslog･2oo24

145(68)

SOx and NOx cause acid rain, and they have broughtthissame problem toChina's

neighbors such as Japan^and SouthKorea.Inorder toget^rid of theseproblems, ^coal

consumption must be reduced, or clean coal technologies have to be equipped.

However the costs of these technologies are high, and sales of these technologies from advanced countries todeveloping^countries have been limited.Though coal is likelyto remain China'sprincipal ^resource, the coal-centered structure will have to

be changed tosolve the environmental problems. Once more thisisan area where

Japanpessessesthe necessary technologiestohelpChina _and intheprocess ^reduce environmental pollutioninthearea as pollution^{recognizes no} internationalborders.

1.4. Petroleurn^{and natural} _gas

The lastchoices are the other fossilfuelspetroleum ^{and natural} gas,Petroleum isused not only forfuelbut also formaking various chemical substances including

plastic products. Furthermore, oil is the only practical fue} at present for

autemobiles. Therefore,petroleum isessential formodernization and the increasein

oil demand js likelyto be the largestincrease among all the various energies.

However, though itcauses less,the large consumption of Petroleum also causes the

same environmental problems ^{as coal,} As a result China has paid^{rnuch attention to}

natural gas ^{as an energy} that emits lesspollutionintotheenvironment. Natural gas discharges no SOx,and lessNOx and C02 incomparison with other fossilfuels.If

conditions foritsdevelopment are organized, they will be prornising ^{and necessary} new sources of energy forChinainthe future.The money and technology forthe exploration and utilization of these tesources,not to mention the_{political problems}

associated with their locations,_{will all}require Japanesecooperation, Therefore,the

roles of petroleum ^{and natural} gas having been recognized as vitaltothe sustainable development of China,the followingchapters will focus on thesetwo energies,

2.Responsetoeconomic growth

The Chinese government has established a goal ^{of an annual rate of at} least 7.2% _{economic growth.} To achieve thisgoal,they need to secure stable sources of energy, Chjna^now has a major problem tosecure thenecessary energy foreconomic

growth. The Chinese GDP (Gross^{Domestic Product)} grew to900billiondollarsfrom 111.5billiondollarsduring the 25year period from 1973 to 1998,and the amount of

the _primary energy consumption has also showed a largeexpansion as ^can be seen

fromtable2.

Concerning the primary ^energy consumption per ^{capita, while} the average of

OECD countries is4.63tons, China ^has a very small amount of consumption ^with O.664tons (See^{table 2.)This isa} greatly lower nurnber as the world levelhas an average of 1.47tons. With the economic growth and the improvement of the

TovihatextenteaJiChi-a$vlveitst'nei'g'y prob]ein/sbi,coopcratic)n witi] Jap{-]n?Nami ts,Iorirnc)to Table 2.Gl)P and Primary Energy Consumptionof China

r---LtL"-L"'L'tt'""'L'-'Lt't'-t'tL--u-LL-

) tT-.-.1

GDP (Bi]lion$)

/

-t I

i'PrimarvEnGrgy{.Mtoe

--- ･I--

s.,,:^nsuinption I

-ll-

]973i15

Z64

l

1

i

1.--m---

Mtnv.ttt ttnvt-ttrr-/

I 1998ttttttt t tt t tt tt ttli

goo 1

t tttttttttttttl ₈₉₁ !

1

l

."--.-t--1 Source ^r1'heE.nergyConscrvatienCenE.er,

"Handboek _{of energ}r & economic} $1'atistics.in.Tapan'Z²⁰⁰¹

standard of [jvjngof Chinese people,^{ownership of} prival/eautomobiles and eiectrical appliances' w･ill greutly increaseand the amount of energ}' consumption isexpected

to rise 'further.E/Itiseasy to imagine that the totai energy consumpti,en wili shoor up inChina even ifthe rise per^capjta isa little,as ithas a population ^{o'f1.Zh{11ion.}

Table3. PrimaryEnergyConsumption per Capita,1998(toei'Person)

r-l11

OECD Totai ^T--i₁ ^･1.63

[-"'-l^"J'orldTotal

hrrmNrmtm.r.Ttt.--T-r..

r--uLt--.-.wut-uu-t-wnne.nvtNt

i' l,47

--r--4--..--"-

1 1

i, ^Chirra I ^O.664

"-L-" -- .

L...-

'''''

sot:rce :Th(JEncrgy conser"i･Jl'I;]^{tion cenier,}

"Handbook

of energy & econe:nic statistics inJapan'',²⁰⁰¹

Though iti'san overwhelmingly resource rich country compured with Japanand

SQuth Korea, Chiiiahasabont 26 tirnesthelandrnassof Japan^{w,ith li'5of theworjdis}

popu]at,ion ^and it^{i'svery serious in meeting its}dernand^{for energ}, for ltsrapid}

e･conomic growth. A stable energy supply is indispensab]efor the eontinuous economic deve]opment^{that the Chinese} government isaiming for.Inorder tose{/'ure a stable energy siipply･, what. methods open to China should be examined. There arc

four options whjch w･M beexamined inturn.

2.I. Developing domestic^oil field

The firstoption is increasing the production in cxisting oil fieldsin China,

Petroleum^{has iong} beenChina'sprincipal ^{source ()f acquiring} foreig.ncur]'ency. The

petroleum trade has been important^{for re]ations} between Japan ^{and China ever}

since theirdip].orriatic^{relations ",ere} norrnalized in 1972.However, in I999,China

sudclenJy suspended crude oil exports toJapan,9)^{Though the export$ were rc'suined}

soon after, it is clear that ^'Lh¢ energy balance between tw'o coun'trie.$ I･iad

fundamentally^changecl, The Chinese _petroleum ipdustry faeed thc' _{sex･'crest of} circumstances due te the fallof the internationalcrude oil pricet.hatbegan inIate

l997together with the maiiagement. aggravation o'fstate-owned cornpanies. In oi'der

to overconie such conditions the Chinese governinent ^{conducted the} 'l'ollo",ing'

iarge-scale^reforms.

l/!''//

144(69),

ope.J,<\qlldee(Hdsscit\,gB^･;-･:.h･kdb\$1]ca^{10e 20e2}fii 2.1.1. Reform of thepetroleum industry

The petroleum industry^of China used to use the functiondifferentiatedsystern which meant that the CNPC (ChinaNationalPetroleumCorporation)^covered the upstream operations (development,production) ^and SINOPEC (China^Petro-

Chernical Group Corporation) took charge of the downstream operations

(refinement,petrochemical, product ^sales). Airning at strengthening the

competitiveness of itspetroleum industry,the Chinese government ^{carried out a}

reorganization of state-owned oil companies. CNPC and SINOPEC exchanged some

property ^{with each other} in July1998^and they were reborn as two integrated

conglomerates from onshore upstream to downstream operations. This ^reform

brought a competitive principle totheChinese_petroleum industry forthe firsttime.

The pricing ^{system was also changed} inJune 1998tothe new system whereby

theprice^{of crude oi]and oil}products ^were decided by an index-pricesystem based

on an international price,iO)The market price^of the crude oiland oilproducts ^used tobe controlled by the governrnent inChina,and thechange tosuch a price^system

means a switchover from theconventional socialistic policy^{with strohg controls to} the price ^system based on the market principles that are conscious of the internationalmarket,

Afterthe reforms, the business performance ^{of the} Chinesepetroleum industry

was dramatically improved as itsrestructuring progressed ^and the internatienal

crude oil priee ^soared, Accordingtothe announcement by the Chinesegovernment inMarch 2001,the total profit^of 65 petroleum ^{companies reached} 92.2billion_yuan

and this figureaccounted for40.9% of theprofit^{of all} state-owned enterprises,ii) The

reform of thepetroleum -industryisnow what we call the symbol of thestate-owned enterprise reform in China. However, regardless of these results, Chinese energy

developmenthasfor^a longperiod been stuck ina rut. The threemain oil producing zones - Daqing, Shengliand Liaohe,situated inthe northern and northeastern parts

of China-are_considered tobenearing depletion.China can sustain theircurrent level

of production ^{only with} additional, sound investments.WhileCNPC and other state oil companies intendto continue exploration efforts inWest China as well, thefunds

and technologies available forfrontierdevelopment are limitedunless Japan^can be

persuaded tohelp.i2)

143(70)

2.1.2. Introducing foreigncapital and technology

China has been a center of oil development in East Asia since the Daqing oil

fieldwas discoveredin l959.However, the problem ^{of the energy} industry as a result of concentrated national control isthat itappears dull compared to the energy

production in the 1970's.Therefore,inthe latterhalfof the 1970's,China adjusted

theirtraditionaloil strategy of "self-reliance

and exporting forforeigncash" policy.

To what extent can China solve itsenertssy prob]ems b}･cooperation with .lapan^?1Narrii. ptCorl.moto Then itstarted to introduce forei'gncapital actisJely foralmost all the Chine$e sea stages except forthe East China Sea,^{when the reform and open-door} policy^started

in1978,Itwas ina prQjectby the JapanChinaOilDevelopmentCorp,(JCODC) ^that Japan participated for the firsttime. JCODC ^was established as a japanese

consortiurn to carry out exploration and development of petroleuin in Bohai in

March 1980,About 64% of the stockholders ^are pet.ro]eumpublic corporatiens, and some other Japanese^{oil companies also} formed a consortium. This project^{was the}

firstpractical^state busjness^betwe'en Japan^{and China, and this} produced ^about 500

million barrels.

' The ^{state council ot} China approved the jointdev･elopment business with

foreigncompanies on shore in1985and introduced more forejgllcapital. At present, China isproceeding ^{with the release of} the inlandpart ^{of the} Tarim basin to the

foreigncornpanies to expand thequantity ^of their_{petroleum produ} ¢tion.The Tarim

oil fie]dwas said tobeinthewortd's maximum ciass of oil rcserves that hadn'tbeen

developedyet,^and development was made fromtheend of the 1980's.Some Japanese

enterprises also contracted to develop these areas with Western oil companies.

However, crude oil reserves were much Iower than expected with expert.s originally

believingitto be the same levelas Kuwait. Withoutnew discoveriesof large-scale

oil and gas fields,the existing domostic^{oil resources and} procluction^{cannot satisfy}

economic growth in the future,Therefore developing^existing domestic ^{oil fie]ds}

cannot be thesolution to China'senergy problems.

For the development of energy inChina,great sums ^{of money} in t'heform of

fund cooperations were granted, ^{money such as} low interest loans from the internationalbanking agency, ef foreigngovernments, ^{and of} export-import banks.

Among them, Japan's^fund cooperation was the ^iargest. The Japanese^Government

supported infrastruct/urernaintenance related toenergy i'nChinaby ^a ]argequantity of ODA _grants, Compared to ot.her advanced countries, the gravity ^of the energy sector is big in japanese^{ODA. Energy} development in China ^{was regarded as}

contributing to the national interestof Japan,^a resource-poor country. Howei'er',

",ith the economic growth in China ^{and financialdMlculty in} Japan,Japanese

financia]aid to China isbeing reduccd, This puts the cooperation between bot.h

countries at a turning point,

2.2. Developing oil and gas fieldsoverseas

The second choice is overseas development. China is actively cultivating resource diplomacy as a result of production from the existing domestic oil field$

making littleprogress ^while domestic demand forpetroleum increases.Itcan besaid that the st.rategy isof securing stable supplies of resources by making friendly

relations with the various countries that have undeve]oped prov'en^and unproveri142(71)