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ENERGY SECTOR DEVELOPMENT AND REFORM IN PRC With Special Reference to the Oil Industry Presented by Dr. Cherng-Shin Ouyang Research Fellow Chung-Hua Institution.

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Presentation on theme: "ENERGY SECTOR DEVELOPMENT AND REFORM IN PRC With Special Reference to the Oil Industry Presented by Dr. Cherng-Shin Ouyang Research Fellow Chung-Hua Institution."— Presentation transcript:

1 ENERGY SECTOR DEVELOPMENT AND REFORM IN PRC With Special Reference to the Oil Industry Presented by Dr. Cherng-Shin Ouyang Research Fellow Chung-Hua Institution for Economic Research 75, Chang-Hsin St.,Taipei, Taiwan 29th September 2008 at Economic Department of Moscow State University

2 2 Part 1: Overview of Chinas Energy Sector Development Part 2: Reform and Market Opening

3 3 Chart 1 International Comparison of Energy Consumption Efficiency, 2006 (toe/10,000 US$GDP) source: The Industrial Map of China Energy, 2006 toe: ton oil equivalent

4 4 Chart 2 Energy Consumption / GDP of PRC (tce/10,000 RMB), 1980~2005 source: Chart 1 tce: ton coal equivalent

5 5 Table 1 Structure of Primary Energy Consumption – Selected Countries, 2005 Energy in Country kind OilNatural Gas Nuclear Power CoalHydro Power Total USA Japan Germany UK France China Source BP(2006), Statistical Review of World Energy, %

6 6 Chart 3 Strategic Oil Reserve (days) – Selected Countries, 2005 source: various * Author estimate

7 7 Chart 4 Primary Energy Production and Consumption of PRC, 1989~2005 Domestic energy consumption Domestic energy production 100 million tce

8 8 Table 2 Economic Growth and Energy Consumption of PRC, 1981~2005* Real GDP a (ann. ave.) Growth Rate, % Growth of Primary Energy Consumption (ann. ave.) b, % 6th FYP th FYP th FYP th FYP th FYP *arithmetic ave. notes a) 1993~2004: revised GDP by SSB b) 1999~2004: revised energy consumption by SSB

9 9 Chart 5 Energy Consumption Elasticity (e) of PRC, 1994~2005 Asian Financial Crisis Notes: 1999~2005: revised figures normal: 1>e>0 (rest) abnormal: e<0 (1998) abnormal (inefficient): e>1 (2003,2004) Source Chinese Statistics Bulletin, Chinese Energy Statistics Bulletin, DRC State Council

10 10 Table 3 Primary Energy Structure Forecast – PRC, 2005~ Total Energy Consumption (standard tce/per person per year) Installed Power Generation Capacity (1,000 w/per person) Primary Energy Structure, % Coal Oil Natural Gas Hydro & Nuclear Power Renewable Energy Total100.0 Source Chinese Academy of Sciences

11 11 Table 5 Energy Consumption Forecast – PRC, 2000~2020 ERI (forecast)DOE(U.S.)IEA BaselineSustainable Growth Green GDP HighMediumLow (mill standard tce) 2,1502,0801,8702,0901,9701,8401,9502, (mill standard tce) 3,3002,9002,4703,2202,7902,4302,5603,170 Annual Ave., % 2000~ ~ ~ source World Bank & DRC (2007) sources consumption Projection

12 12 Table 6 Energy Final Consumption According to Sectors and Energy Types, 2000/ mtce% % % % Agriculture ~803.1~3.2Coal ~ ~29.3 Industry ~ ~54.2Oil ~ ~22.8 Transport ~ ~20.2Natural Gas ~1578.4~6.3 Residents & Commerce ~ ~24.4Electricity ~ ~22.8 Other ~1777.8~7.1 Total ~ Toal ~ Source: ERI: Energy Consumption Forecast- Baseline and Green GDP Scenarios year Sector year Energy Type

13 Table 7 Oil and Natural Gas Production & Consumption – PRC, 1995~ Oil Domestic Output (1,000 barrel/day) 2,9893,2523,3063,3463,4013,4813,6273,684 Annual growth rate (%) Domestic Consumption (1,000 barrel/day) 3,3954,7724,8725,2885,8036,7726,9847,445 Annual growth rate (%) Balance (1,000 barrel/ day)-406-1,520-1,566-1,942-2,402-3,291-3,247-3,761 Natural Gas Domestic Output (100 million cm) Annual growth rate (%) Domestic Consumption (100 million cm) Annual growth rate (%) Balance(100 million cm) years Source: BP (2007), Statistical Review of World Energy, 2007

14 14 Chart 6 Imported Oil Dependence – PRC, 1965~2005, % Source: Chart 1

15 15 Table 8 Area/Country Concentration Ratio of Crude Oil Import – PRC, 2005/2006 Area Countries/ Top Middle East Saudi Arabia Africa Angola Europe & Central Asia Iran Asian Pacific Russia Western Hemisphere Oman Yemen Sudan Congo Indonesia 3.2 Equatorial Guinea Venezuela 2.9 Total100.0 Total Source: China Custom Statistics, 2006/07

16 16 Future Prospect Domestic oil consumption continue to rise Imported oil reaching 50% of domestic consumption Gas consumption expected to increase at two digit Energy/oil security a serious policy concern Future growth likely to be impinged by resources and environment constraints

17 17 Major Strategy Responses Drafting Energy Act (to be promulgated end of 2007) Unifying energy governing body: plan to reinstate Energy Ministry (abolished in 1992) To develop renewable and alternative energy resources To enhance energy conservation while emphasizing clean energy: End of 11 FYP to reduce unit output energy consumption by 20% Global oil hunt coupled with increased international cooperation

18 18 To initiate Three-Phase Program in building strategic/commercial oil reserve (Target: 60 days of annual consumption) Undertaking comprehensive market- directed energy sector reform Overhauling energy (oil) administration structure Major Strategy Responses (cont.)

19 19 Evolution of Chinas Oil Market – Four Phases I. Pre-reform period (before 1981) Incorporated within national economic plan, resources allocation based on overall balance State intervention: at various levels of the oil sector /government Self-sufficient in oil consumption: have surplus for export until 1993 II. Reform Period (after 1981) 1. Plan & market coordination (1981~1994) Adopting production responsibility System (PRS) Dual pricing allowed: above-target crude (exceeding 100 mt) and allocated input quota conserved be freely disposed at market price Emergence of social entities in oil business Oil futures market set up in Beijing & Shanghai (1996)

20 20 Evolution of Chinas Oil Market – Four Phases (cont.) 2. State Domination (1994~1998) Oil sector reform Production/import: subject to state allocation plan Abolishing dual pricing Closure of oil futures trading 3. Reform and Opening (1998~) Building international linkage Price mechanism adjustment Import liberalization Access to wholesale & retail oil products market

21 21 Main Feature of the Pre-reform Oil Industry Management System - An Integral Part of the Traditional Planned Economy Ownership, management, and control entrusted to the state The governing body and the governed-state enterprises- are intermingled, both represent administrative units at different levels of the oil industry complex Despite incessant administrative restructuring the oil business management system remained largely intact Production based on quota within a vertically integrated command system; resources allocation and intra-industry coordination followed bureaucratic rules

22 22 Oil Industry management System Reform – Three Phases Phase 1 (1982~1998) Bureaucratic organs divorced from Enterprises Phase 2 (1998~2003) Restructuring and enhancing professional management competence of the three state oil groups: CNPC, Sinopec and CNOOC Phases 3 (2003~) Market oriented reform taking place

23 23 Brief History of the Three State Oil Groups General Oil Administrative Bureau of State Fuel Industry Ministry 1950, 4 Oil Industry Ministry 1955, 4 State Fuel-Chemical Industry Ministry 1975 Oil Industry Ministry 1978 China National Petroleum Corporation / 1988, 9 China National Petroleum Corporation / (CNPC) 1998, 7 China National Off-Shore Oil Corporation - CNOOC 1982, 2 China Petroleum and Chemical Corporation- Sinopec 1983, 7

24 24 Increasing Flexibility in Domestic Oil Pricing Formation of domestic oil price (particularly oil product prices) traditionally fixed and regulated by the government to safeguard the livelihood of people However, oil as a strategic commodity withstood pressure of liberalization until the late 1990s Growing import of crude and spiraling world oil price enabled the authority to adopt more flexible approach in the shaping of oil prices Since 1998, government-sponsored adjustments in the mechanism of oil price formation has undergone five stages

25 25 Major Policy Responses A. 1st Stage (1998,7~2000,5): Reform Agenda of the Crude and Oil Product Prices Pricing Formula: lagged floating (by one month) Measures: Crude benchmark: taking monthly average of Singapore, London and Rotterdam quotations as the base Oil products pricing: crude benchmark + premium (floating band: 5%~8%) Oil products retail prices: based on import prices + circulation charges Main drawbacks: encourage inventory speculation due to predicable (home and foreign) price differentials

26 26 Major Policy Responses (cont.) B. 2nd Stage (2000,6~2001,10): Price Setting Mechanism Reform Pricing Formula: lagged floating (by one month) Measures: Crude benchmark: reverting instead to Singapore monthly average price of oil products as the base for official price adjustment High frequency in price adjustment: 17 times in total Main drawbacks: ditto

27 27 Major Policy Responses (cont.) C. 3rd Stage (2001,11~2005): based on Notification of the State Planning Commission for tying to International Price and for Oil Products Price Adjustment Pricing Formula: lagged floating (by one month) combined with partial enterprise pricing autonomy Targeting instead to the monthly (weighted) average oil products price of Singapore, New York and Rotterdam according to the weights: 60%, 20% and 20% Asymmetrical targeting: lifting domestic prices when weighted average goes up but resisting downward adjustment the other way round Enterprises granted some flexibility in retail trade at self-made prices Main drawbacks: Oil product prices trend upward but remain sluggish compared to crude price rises Lagged floating distorts resource allocation and consumption behavior Price gaps encourage export thus aggravate shortages at home

28 28 Major Policy Responses (cont.) D. 4th State (2006~ ): Continue to raise domestic prices accompanied by the implementation of loss-compensating policy packages and compulsory profit tax on crude producers Abolishing direct linkage with foreign benchmark prices; resorting to indirect linkages Introduce four compensating measures Establishing inter-industry redistributing mechanism in realigning profits and losses of up- and down- stream enterprises, i.e. between crude and oil product suppliers Establishing horizontal price-coordinating mechanism to even out the negative impacts of distorted price spectrum Establishing mechanism for subsidizing agriculture, utilities of public interest and socially weak groups Introducing (redistribution) financial mechanism in taxing windfall gains (threshold for ultra profit tax: 40US$/b)

29 29 Major Policy Responses (cont.) E. 5th State (2007,1~ ): Begin to implement and Suppressing time gap arising from delayed foreign market targeting; aim at synchronizing price setting Targeting oil futures and shifting to three anchors: Brent, Dubai and Minas

30 30 Dilemma in Official Pricing Policies Objectives In principle, gradually tying domestic oil price to international benchmark is the right step because it may Rationalize allocation of resources, Ensure that industries delivering tradable and non-tradable stand on equal footing, and Obviate suboptimal resources diversion abroad

31 31 Dilemma in Official Pricing Policies Consequences Price Perversion ( ): yet due to disproportionate and retarded price movements of oil products, crude distributors (upstream on the intra-industry chain) benefit from rises in international oil prices and able to reap huge profit, while refineries and oil products distributors suffer both from the controlled floating band and the delayed cost-plus transfer to final consumers Efficiency v.s. Egalitarianism: Current price – setting mechanism evokes contradiction in macroeconomic goal- fulfillment. There is an inherent, textbook-type trade-off between the pursuit of efficiency in energy use and ad hoc egalitarianism (including control of inflation). Upon the inception of the 5-stage price adjustments, the above- mentioned drawbacks remain, though less conspicuous than it would otherwise have been

32 32 Dilemma in Official Pricing Policies Consequences (cont.) Heated debate over both the speed and dimension of continued price reform (liberalization) is going on all the time in China (predominantly at the academic level) Socialism with Chinese characteristics implies that gradualism still outweighs radicalism in seeking to converge to international practice in the pricing policy of oil business.

33 33 Market Opening in Sphere of Circulation Meet WTO market opening time frame: transient phase expires on December 11, 2006 for domestic and foreign oil products distributors/retailers. Trade liberalization: curtailing import tariff combined with loosening of quota limitations

34 PeriodMeasures Jan. 1, 2004 A. Import Tariff Reduction Crude Oil0% Gasoline 9% 5% Lubricant 9% 6% Kerosene, Diesel, Fuels6% (unchanged) Jan. 1, 2004 B. Lift Import Quota Crude OilImport quota of non-state enterprises raised from 9.52 mill ton in 2003 to mill ton Oil ProductsImport quota of non-state enterprises raised from 5.30 mill ton in 2003 to 6.10 mill ton C. Trade Services No later than Dec. 11, Oil Products Retailing-Gas station: each foreign enterprise may own and operate up to 30 gas station; foreign entities are allowed to expand their business only as minority stake holder in a Chinese-owned enterprise No later than Dec. 11, Wholesale Trade-Wholesale trading rights in crude and oil products opened to foreign investors Jan. 1, 2004D. Transport, Warehousing & Social Services -Chinese entities deprived of the right in maintaining controlling interest in piers which are opened to all carriers; -Foreign investors are encouraged to undertake construction of habour infrastructure, oil and gas pipeline, reservoir, as well as pier terminals Table 9: Time Schedule of Oil Market Opening Source: Dan Shi (2006), Report on Market-Oriented Reform of chinas Energy Industry, pp

35 35 Summary and Evaluation In 2005, Chinas energy self-sufficiency stands at 92.2%, a noticeable improvement over the year 2000 (78.5%), notwithstanding the deteriorating trend persists since the breakeven year1992. Chinas energy efficiency raised by a factor of 2.8 in the last 25 years; energy consumption elasticity remains volatile on annual basis which contradicts the FYP configurations (real GDP growth surpasses growth of primary energy consumption by a wide margin, except for the 10th FYP which is negative – Table 8) Aggregate primary energy imbalance would have been worse by now if the authority failed to carry out reform and to push for investment in the energy sector.

36 36 Summary and Evaluation (cont.) Domestic energy supply-gap has many origins: structural, institutional, administrative, etc.; price, quantity and quality represent the three dimensions to which the various causes of supply-gap reduce - given the vigorous growth – induced demand for energy; among them quality is a hybrid notion. Statistical aberrations: the observed low energy efficiency of China after the new millennium may be exaggerated (due to currency undervaluation) much as the unusually low e prior to the new millennium (energy consumption figures yet to be revised). According to ERI forecast, there are three growth scenarios up to the year 2010 and 2020: baseline, sustainable growth, and green GDP; based on the 11 FYP projection, unit output energy consumption be reduced by 20% while per capita GDP doubled in year (base year, 2000).

37 37 Summary and Evaluation (cont.) According to ERI projection, the share of transport in energy consumption pattern will expand from 15.4%(2000) to 20.2%(2020); on the sources of energy use, both coal and oil are projected to decline by around 10%, while natural gas, electricity and others (renewable + alternative) to increase substantially over the same period (Table 6). Both projections appear to be realistic and theoretically attainable in view of the record of Chinese leaderships competence on target-fulfillment. Oil faces serious supply bottleneck more than any other energy sources largely because domestic production of oil is stagnating for years, its import dependence is growing and, worse still, international oil prices are skyrocketing beyond imagination. Dating from the early 1980s, the oil sector has undergone three-phase system reform involving administration, market structure, company management and the price mechanism.

38 38 Summary and Evaluation (cont.) Generally speaking, system reform of the oil sector is on the right track, but there are still formidable obstacles lying ahead. State-enterprises: CNPC, Sinopec and CNOOC, radically transformed and listed on the Hong Kong and New York Stock Exchange by now; CNPC and Sinopec face perpetual conflicts of interest between (a) the government and the oil industry they represent, (b) themselves as holding companies and the many subsidiaries / branches they control, and (c) their crude producing units and the down-stream refining/distributing chains they sit on. Incomplete Reform: Perfection of the oil pricing system and market opening partly alleviate the supply shortage and the potential negative impact on the economy but they are inadequate. More thoroughgoing system reform and coordinating measures aimed at correcting the primary energy imbalance are called for in the future.

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