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China's Quest for Energy

Cooperation and coordination will help the United States avoid an energy-policy confrontation.

Fortnightly Magazine - February 2006

it the third-largest auto-sales market, and adding to its distinction as the second-largest petroleum consumer in the world, behind the United States.

To a lesser degree, China’s growth affects global markets for all energy commodities, including coal and LNG. But more broadly, the potential for conflict between China and the United States over energy security issues poses geopolitical risks that jeopardize economic stability and defy easy solutions.

At the same time, however, the need for energy security creates significant opportunities, as China and the United States work toward solutions that serve the long-term interests of both countries. Whether and how these opportunities might evolve depends on the ability of leaders in both countries to engage in cooperation and coordination as a strategy for avoiding confrontation and conflict.

King Coal Reigns

Like coal mines, China’s power industry has seen many small, freelance power projects crop up all over the country—many of them outside the normal permitting process, and using minimal emissions controls if any. “A lot of local developers have set up projects without even partially going through approval procedures,” says Zhu Songbin, president of Songlin Group, a consulting and research firm in Beijing. “The central government realized this is no way to do business, so they shut down about 120 GW of power plants.”

Many of the plants have restarted several months after they ostensibly were closed, however, as power-supply margins grew dangerously slim and the need for power outweighed other concerns. “We’ve had a power-supply shortage for almost three years,” Zhu says. “A lot of people are saying it’s time for us to reconsider our energy and power policies, and focus on using something other than coal.”

China has the world’s third-largest reserves of coal, and is the largest producer and consumer of coal in the world. In theory, its reserves are more than adequate. But in recent years, coal producers have been unable to keep up with demand, forcing some power plants to burn oil when they run out of coal. Others have been forced to shut down completely, causing brownouts and blackouts in many areas of the country.

To improve China’s energy security, the central government has begun restructuring its electric-power sector to encourage more rational and competitive investment. Furthermore, its policies are emphasizing fuel diversity—namely by expanding hydropower, nuclear, and natural-gas fired capacity.

Natural gas has been expected to serve a growing share of China’s fuel demand, particularly in coastal urban areas that can be served by LNG imports with minimal new pipeline construction. But price increases in recent years and months are forcing decision makers to re-think the role of natural gas in China’s energy strategy.

“Price control in China has left gas prices in a former state, closer to coal prices than reflective of the world market,” says George Hopley, an associate director with Barclays Capital in New York. “Even before the Hurricanes in North America, prices were trending toward $7 or $8[/bcf], and that is double what they want to pay. It will be tough for them to look at the LNG market now, in