International Trade China: Coal, Oil and Gas

Table of Content

II. Table of Figures

III. Abbreviations

1. Introduction

2. Facts and Figures

3. Coal
3.1. Production and Consumption
3.2. Export and Imports
3.3. Reserves and Resources
3.4. Regions
3.5. Price
3.6. Transportation

4. Oil
4.1. Production and Consumption
4.2. Export and Imports
4.3. Reserves and Resources
4.4. Regions
4.5. Price
4.6. Transportation
4.6.1. Railway
4.6.2. Domestic Pipelines
4.6.3. Transnational Pipelines
4.6.4. Ship

5. Gas
5.1. Production and Consumption
5.2. Export and Imports
5.3. Reserves and Resources
5.4. Regions
5.5. Price
5.6. Transport
5.6.1. Domestic Pipelines
5.6.2. Transnational Pipelines

6. Politics
6.1. Coal
6.2. Oil
6.3. Gas
6.4. Regulations
6.5. WTO
6.6. Free Trade Agreements
6.7. Important acquisitions and cooperation’s
6.8. International Trade Conflicts

7. Companies
7.1. Sinopec
7.2. CNPC
7.3. China Shenhua Energy Company Limited

8. Conclusion

IV. Bibliography

V. Appendix

II. Table of Figures

Figure 1 China's Coal Production & Consumption 1981-2007

Figure 2 China’s Hard Coal Trade (million tons)

Figure 3 World Coal Flows by Importing and Exporting Regions, Reference Case, 2006, 2015, and 2030

Figure 4 Total Worldwide Potential of Hard Coal

Figure 5 Total Worldwide Potential of Soft Coal

Figure 6 China's Major Coal Fields and Mines Source: McGraw-Hill (2008)

Figure 7 Coal Prices in China Compared with International Markets

Figure 8 China's Oil Production & Consumption 1979 – 2007

Figure 9 Projections of China's Oil Demand in 2020 (million Barrel/day)

Figure 10 China’s Oil Balance in the Reference Scenario

Figure 11 Worldwide Oil Imports and Exports 2007

Figure 13 Total Worldwide Potencial of Oil

Figure 12 Oil Discoveries in China

Figure 14 Most important oil fields and LNG locations

Figure 15 Chinese Oil Transport Sea Lines

Figure 16 China's Gas Production & Consumption 1979- 2007

Figure 17 China’s Gas Balance in the Reference Scenario (bcm)

Figure 19 Full Potential of Gas Resources, Reserves and cumulated Production 2007

Figure 18 Natural Gas Discoveries in China since 1997

Figure 20 Petroliferous basins in China

Figure 21 Sinopec's 5-Year Share Course Development

Figure 22 Sinopec's Business Fields

Figure 23 Sinopec's Revenue allocated to Business Fields in Percent

Figure 24 CNPC's Business Segments

Figure 25 CNPC's Crude Oil & Natural Gas Production

Figure 26 Weighted average sales price of self-produced coal of CSEC from 2006-2008

Figure 27 The Emerge of Chinas Middle Class

Figure 28 Development of Chinese Car Figures

Figure 29 World Coal Production in Percent

Figure 30 World Coal Consumption in Percent

Figure 31 World Oil Production in Percent

Figure 32 World Oil Consumption

Figure 33 World Gas Production

III. Abbreviations

illustration not visible in this excerpt

1. Introduction

China’s extremely fast growing economy has made the demand and supply of energy a crucial topic. Today, China is the largest consumer of primary energy and the third largest producer.

In the years between 1978 and 2000, the Chinese economy grew by 9% while at the same time the energy demand only grew by 4%. This trend has been turned around in 2001, when growth was stable at 9%, but energy demand grew by 13% a year.

While China demanded 10% of the world energy demand in 2001, supporting these demand by 96% of domestic production, in 2007 they already accounted for 15% of the worlds energy demand, making them dependent on imports for coal, oil and gas, due to domestic supply lower 90%.

As a result of these movements in the domestic demand and production picture of primary energies, China will have to face growing dependencies on the international energy markets, to secure sufficient energy to industry and population.

The purpose of this paper is to show the change of trade flows in China with a focus on the primary energy resource coal, oil and gas. The change of production, con­sumption, import and export of these as well as related topics as price and transpor­tation will be identified.

Illustrating government involvements and economic players will complete the re­search to offer a comprehensive picture.

2. Facts and Figures

With a population of 1,3 billion people, China is the most populated country in the world. By the year 2050 the United Nations estimate a population of 1,64 billion. This is almost an increase of the entire American population. At as today, 80 – 150 million are estimated without a job which represents an unemployment rate of approximately 10%. In 2008 China reached a GDP of $ 2.542,93 billion ($2,5 trillion) which is ex­pected to grow to $3.532,53 billion in 2012. Between 2003 and 2007 the Chinese economic grew by an average of over 10% and will now, due to the financial crises, slow down and achieve approximately 9% in 2009. Chinese Exports have achieved $1,78 trillion in 2006 which made them the third largest trading country in the world, behind the US and Germany. In 2008 Chinas export total was 41,18% of the GDP and imports accounted 34,54% of the GDP. Between 1980 and 2005 the GDP mul­tiplied by the factor eight and trade by the factor sixteen.

China is ruled by the Communist Party of China (CPC) with their leaders Hu Jintao and Wen Jaibao. The largest and only Party of the country has approximately 80 mil­lion members.

3. Coal

3.1. Production and Co nsumption

In the year 2007, China was the largest producer and consumer f coal worldwide. With a total production of ¹ 289,6 million tons oil equivalent (mtoe), up by 7% in com-parison to 2006 with 1205, mtoe, China claims 41,1% of the world wide coal produc-tion. This ranks China as the largest producer in front of the Unite States with 87,2 mtoe, representing 18,7% of

illustration not visible in this excerpt|

Figure 1 China's Coal Production & Consumption 1981-2007

Source: BP Statistical Review of orld Energy 2008, own illustration

the worldwide production a nd Australia with 215,4 mtoe (6,9%). A pproximately 95% of the 1289,6 mtoe were produced by mine operations1. Due to this large mining

quantity, the bad working c onditions and very low safety measures , over 6.000 mine workers die every year². T oday China’s production has more than four times the vo-lume of 1980 and double t e amount of the year 2000. Their total onsumption grew from 1215,0 mtoe in 2006 y 7,9% to 1311,4 mtoe in 2007. Which r epresents 41,3 % of the worldwide consumpt ion. Because of the large resources an due to that also the production, China’s pri ary energy is based to 69% on coal. Ma in reasons for the strong growing demand are the chemical, steel and power generatin g industry.

3.2. Export and Imports

In 2005 approximately five billion tons of coals were produced worldwide, but only 16% percent of them were traded on international markets. The consumption of the other 84% (4.225 million tons) occurred in the producing countries themselves.

Figure 2 China’s Hard Coal Trade (million tons) Source: IEA (2007): World Energy Outlook 2007. In the 1980th and the 1990th China, as the world largest producer, exported 1%-2% of their annual coal produc­tion. Towards the end of the 1990th the export rate grew and in 2001 reached 7% of the domestic production (94 million tons). By that time, China was the second larg­est exporter with a share of 13,5% of the total export market, behind Australia which had 192,2 tons which had a share of 28,7%. Close behind China was South Africa with 69,2 million tons (10,3%).

This made China the second largest exporter of coal in the world until 2003. By 2005,

China had exported 71,8 million tons and therefore had dropped down, to become the fifth largest exporter, behind Australia (231,3 mil. tons), Indonesia (108 mil. tons),

Russia (75,7 mil. tons) and South Africa (73 mil. tons). The biggest trading partners which imported the coal were Japan (32%), South Korea (30%), Taiwan (23%) and India (5%). These 71,8 million tons consisted of 65,7mil tons steam coal and 6,06 million tons of coking coal³.

After they had net exported 25 million tons in 2006, the net import stood at

illustration not visible in this excerpt

Figure 3 World Coal Flows by Importing and Exporting Regions,

Reference Case, 2006, 2015, and 2030

Source: Energy Information Administration – International Energy Outlook 2009

4 million tons in 2007 ⁴. This was a long foreseen result of forced production stoppag­es in 2003, due to a series of serious accidents and a rising coal price which had doubled within a year. Still, China will proceed to export coals, mainly to Taipei, Ko­rea and Japan which are located close to the big exporting harbors of China. Steam coal exports are expected to rise from 66 million tons in 2005 to 178 million tons in 2030 and coking coals exports will increase from 5 million tons to over 16 million tons in the same timeframe. The latest export numbers show, that the amount of exported coals has dropped by 19% to 53,17 million tons in 2007 ⁵.

In the 1980th and 1990th China only imported approximately 1,5 – 3 million tons which represented a share of 0,3% – 0,8% of the worldwide coal imports. In 2002 this quan­tity grew to 11,3 million tons and 2005 reached 25 million tons. These were allocated with 18,15 million tons as steam coal (47% of world trade volume) and 7,19 million tons as coking coals (9% of world trade volume). The countries of origin were Viet­nam (41%), Australia (23%), Indonesia (9%) and Canada (5%). These imports cov­ered 1,2% of the Chinese coal consumption and represented 3,3% of the worldwide imports, which made them the 8th largest importer of coals.

Since 2007, China has become a net importer of coal and will from now on remain as one for a certain time. Their position the next years in the international market will grow, due to expected net imports of 65 million tons by 2015 and 95 million tons by 2030. By 2015 China will not only be a net importer of steam coal, but also be a net importer of coking coals. Main reasons for becoming a net importer are⁶:

- Abolition of 5% export subsidy
- Lowering of the import tariffs
- Less competitiveness due to higher production costs
- Higher domestic demand, but at the same time, closure of small mines

3.3. Reserves and Resources

If we take a look into the future, we need to analyze the reserves, resources and ac-cumulated production. In 2007 there were proven resources left of 990 billion tons of

illustration not visible in this excerpt

Figure 4 Total Worldwide Potential of Hard Coal

illustration not visible in this excerpt

Source: Bundesanstalt für Geowissenschaften und Rohstoffe 2007, Page24 coal. This can be divided into 711 billion tons hard coal, which includes hard brown coal, black coal and anthracite, and 279 billion in soft brown coal⁷.

The US has the largest hard coal reserves with 232 billion tons (33% of the world reserves), followed by China with 167 billion tons (24%) and India with 73 billion tons (10%). If one now takes a look at the world’s hard coal resources, one will see, that the US, with 6.488 billion tons, owns 43,8% of the world wide known and proven resources. Second spot is China with 4.200 billion tons

illustration not visible in this excerpt

Figure 5 Total Worldwide Potential of Soft Coal Source: Bundesanstalt für Geowissenschaften und Rohstoffe 2007. Page 25 (28,4%) and Russia with 2.662 billion tons (18%).

If one know takes a look at the soft brown coal, one will be able to see simi­lar characteristics. Worldwide there are reserves of 279,3 billion tons of soft brown coal known off. Russia holds 91,6 billion tons (32,8%) , followed by Germany with 40,8 billion tons (14,6%). China is ranked fifth spot with 25 billion tons (9%) behind Australia (13,4%) and the US (11,1%).

At the end of April 2008 the Chinese government acknowledged that they only had reserves left for twelve days, in some areas even just for a week. This was already two days less than they had announced the month before⁸.

3.4. Regions

Figure 6 China's Major Coal Fields and Mines Source: McGraw-Hill (2008) The main production regions in China are the northern provinces as Shanxi (493 mil. tons), Henan (154 mil.tons), Shandong (140 mil. tons) and Shaanxi (132 mil. tons). They are directly connected to the most signifi­cant coal fields which date back to the Jurassic Period. The prov­ince Inner Mongolia in the north­east produces additional 202 million tons. These five provinc­es are responsible for approx­imately 50% of China’s produc-tion⁹. China has 6.109 coal ing locations. The majority of the coal storing locations are along the over regional province “Sinic Shield”, which is 3.000 km long and 1.000 wide. It is also known as the North Chinese Platform. The largest consumers are located in the south and the east. The main instrument of transportation is the train (more detail in 2.6 Transportation).

3.5. Price

Up until the year 1993, coal prices were dictated by the Ministry of Coal and the

illustration not visible in this excerpt

Figure 7 Coal Prices in China Compared with International Markets Source: IEA (2007): World Energy Outlook‘07 State Planning Commission. In the time between 1993 and 2006 China had a system of “in-plan” and “out-plan” pricing in which the National Development and Reform Commission set a contract price for the “in-plan” resources. These resources were responsible for half of the total used resources in the power generating sector. The “out-side” supplies were traded to spot market prices. In 2001 these were still the same price level as the “in-plan” resource (+/­145 RMB/t), but while within the next three years in “in-plan” sup­plies grew by 50%, the “out-plan” supplies price doubled. In 2007 the National Development and Reform Commission announces the free trade of coal for electricity producing companies and therefore the two-tier system was abolished¹⁰. That especially included no more state involvement to price regulations. The future price is expected to draw near the market price and to truly reflect the costs of production and supply¹¹. Meaning, the contract and the spot price had to be negotiated at market rates.

3.6. Transportation

More than 50% of China’s coal transportation is on the rail way by trains and covers more than 40% of the entire Chinese rail freight. Additional transportation options are road, inland waterways and coastal vessels. Overall coal shipments are expected to rise from 507 million tons coal equivalent (mtce) in 2005 to 1.060 mtce in 2030 for steam coal and from 117 mtce to 182 for coking coal. Qinhuangdao is the most im­portant coal exporting seaport for domestic and international customers in China and is located north on the east coast in the Bohai Sea¹².

Most of the transports are delivered by old trains with a capacity of 3.000 tons coal. Only two modern transportation lines have been achieved

1. Daqin Line: It has a total distance of 653 km connecting the cities Datong (connecting the provinces Shanxi, Shaanxi and Inner Mongolia) and Qinhua­ngdao. Uncommon to Chinese business, this line is operated by the Daqin Railway Company Limited, a publicly traded stock company, and not by the Ministry of Railways. Freight trains can carry up to 20.000 metric tons of coal. This accomplished 300 million tons of transported coals in 2007 ¹³.
2. Line from Shuozhou to Huanghua: With a total of 588 km shorter than the Da-qin but as powerful if it comesto transportation capacity.
With $0,16/tone-km the rail freight costs from the west to east are higher than the international standard¹⁴. In comparison to rail freight, shipping costs are comparable to the international freight market. Only 10% of the domestic coal transportation is on the water and are focused to go north to south. For smaller coal transports, the Grand Canal, the Yellow- and the Yangtze River are used. In 2005 approximately 370 million tons of coals were handled in Chinese ports¹⁵. Road transportation usual­ly should be operated by trucks with a capacity of 70-80 tons, but mostly is done by overloaded trucks with a capacity of 20 tons which are inefficient and expensive.

4. Oil

4.1. Production and Consumption

In 2007, behind the US, China was the second largest consumer and the third largest net importer of oil. Oil is most important primary energy in the world with a share of approximately 36%. Leading net importer were the US and Japan. Approx­imately 20% of the Chinese primary energy was based on oil. The National Defense Research Committee of the US government expects these figures to maintain on this level until 2010.

[...]

---

¹ Cf. Schmidt, Sandro 2007, Page 3 et seq.

² Cf. Mines and Communities 20 06

³ Cf. Bundesanstalt für Geowissenschaften und Rohstoffe 2008

⁴ Cf. International Energy Agency 2008, Page 342

⁵ Cf. German Trade and Invest 2008

⁶ Cf. German Trade and Invest 2008

⁷ Cf. Bundesanstalt für Geowissenschaften und Rohstoffe 2008, Page 25 et seq.

⁸ Cf. Verivox 2008

⁹ Cf. German Trade and Invest 2008

¹⁰ Cf. Center for Strategic and International Studies 2007, Page 26

¹¹ Cf. International Energy Agency 2008,Page 340

¹² Cf. Caruso, Guy 2003

¹³ Cf. Mine exploration, photographs and mining history for mine explorers, industrial arc-haeologists, researchers and historians 2008

¹⁴ Cf. Hoa Wang 2008

¹⁵ Cf. Jane, Mélanie; Austin, Angelica 2006