Table Of Contents
1. Energy security in the APR countries: history, theory, exercise
1.1 Evolution of the “energy security” notion
1.2 The history of the PRC. From energy policy to energy security.
1.3 Energy security and its practical threats. The case of the Asia-Pacific Region
2. Various ways to ensure energy security within the framework of Chinese domestic policy
2.1 Extensive approach. History and perspectives
2.2 Intensive approach. The leading course or a transitional stage
2.3 Energy security and its practical threats. The case of the Asia-Pacific Region
3. Chinese foreign policy for the good of energy security
3.1 International cooperation as the means of sustainable energy security in China
3.2 Energy value of the Malacca Strait and South China Sea. Perspectives and threats
3.3 The Northern Sea Route. An alternative solution to the dilemma of a safe sea energy stream
List of abbreviations
Throughout the history energy has been the engine of the human civilization. For several tens of thousands of years a man has gone from producing energy using mere fire to super-advanced nuclear reactors. Moreover, over the past 5 thousand years the Earth’s population increased 150 times while the energy consumption grew 2500 times. Today energy resources are of strategic importance to the implementation of any state’s internal policy. On top of that they play a key role in the nowadays international relations. For that reason energy security dilemma draws particular attention.
New times put China in a difficult position where it must guarantee sufficiency of energy resources, which is the very foundation of the energy security term. The recent pace of economic development has led to a sharp increase of energy consumption, which became a heavy burden on the country’s mineral resource potential. Notwithstanding the fact that there are vast reserves of energy carriers within the PRC the per capita factor is critically low bearing in mind that China’s population represents a fifth of the entire human race. In addition according to the logic of development China is bound to see its per capita factor to grow making the energy consumption to extend furthermore.
By the early 90s of the 20th century the inland energy sources stopped sufficing the briskly widening demands, which forced the authorities to come up with swift and effective countermeasures both in domestic and foreign policies. Therefore, by the beginning of the 21st century the PRC broaden substantially its national production of hydrocarbons filling the missing part by overseas supplies. For a while this scheme provided China with the right amount of energy sources. However due to relatively low energy efficiency on the ground the growth of hydrocarbon consumption level laid bare another issue of energy security, which is the environment that was exposed to negative effects of the excessive energy usage. To mitigate these side effects the government has proposed a massive project to make a wide use of alternative energy technologies plus to enhance the energy efficiency aspect.
Along with the internal issues China likewise faced problems of external origin. The main portion of oil supplies is coming from the regions like Middle East and Africa and being shipped via one single acceptable route of the Strait of Malacca. Considering the high level exposure to military and political risks here China is obliged to weigh all its options including the one to diversify the recently settled petroleum streams by expanding the partners list.
Thus, in the past two decades China has been handling its energy strategy in the way to conform to the rapidly growing economy. In this research we will not only be able to observe the evolution of China’s energy security but also define the current position of the PRC in the international relations system and determine its future course of energy development that will decide China’s role in the 21st century.
1. Energy security in the APR countries: history, theory, exercise
1.1 Evolution of the “energy security” notion
For the first time the notion “energy security” (ES) showed up in people’s mind about 40 years ago. Another Arab-Israeli conflict during the brief period of 1973-1974 led to an oil embargo of some high standard wages states, those who supported the Israeli side. That was the first time when the West realized its weakness and dependence on the imported oil, which brought large economic damage to the embargoed states.
It was a starting point for the development of the “Energy security” notion. We must say right away that up until now there is no universally accepted concept, which means that there is a variety of definitions being usually developed to accommodate the energy situation in a particular country. So, in this case we will break down this concept to different words and support the whole notion with different opinions from all over the world.
Let´s start with the word “security”. Security – is a state of protection from any sort of threats, risks, challenges and danger or in other words a state of an object when none of that could bring any considerable harm to this object. The word “energy” means everything that is in any manner connected to energy flow or energy resources.
From the first usage of the ES notion its definition process went in parallel with all the significant political, economic and energy events. In 1992 the World Energy Council tried to identify ES in the following way: “a state of protection of individuals, society, economy and country from the threats of safe fuel and power supply. Though, the Western society tried to give this notion a more concrete shape. One of the definitions was given by the head of CERA (Cambridge Energy Research Associates), D. Yergin: “The objective of energy security is to assure adequate, reliable supplies of energy at reasonable prices and in ways that do not jeopardize major national values and objectives”.
The point is that the most part of the Western world is represented by the states with relatively low amount of energy resources in comparison to their needs. Due to this energy security for these counties is mainly limited to the level of hydrocarbon reserves or their absence. In this context energy supply can be internal or external.
For this reason the energy security in the Western literature is often connected to the problem of external sources dependence when the energy supply is mainly external. In this case it is vital to guarantee the energy sources within the country as well as beyond its borders. This definition gives the government some sort of legitimacy when it comes to political decision making process even with the involvement of military. This is right the way the ES is described in some American research. One of those was written by Patrick Clawson – “Energy and National security in the 21-st Century”. The study “Energy and Security: Toward a New Foreign Policy Strategy” created by Kalicki J. H. and Goldwyn D. L. describe ES as “assurance of the ability to access the energy resources required for the continued development of national power”.
There are also such definitions, which give governments a significant portion of political maneuverability in case they strictly follow these ideas. The representative of the American National Laboratory (Oak Ridge) Leiby P. offers us one brief and easy for understanding concept. “Energy security represents the accessibility of energy wherever and whenever it is necessary, at an expected price”. In other Western studies ES is also connected with security of energy infrastructure such as gas and oil pipelines, nuclear stations, shipyards, liquefied natural gas (LNG) plants, oil refineries and other.
Coming to Russian researchers we must admit that there is no full solidarity on the aspect. Some researchers such as Zhiznin S.Z.and Kokoshin A.A.express ES from the position of the energy exporting states. The others take a neutral stance in their definition, which has some similarities with the one of the World Energy Council. Many experts here define ES as a state of safety of the country or territory and its inhabitants as well as the economy, against any possible shocks that are able to damage energy supply, which means stable and sufficient energy flow for all branches of fuel and energy complex (FEC) and its healthy development. Energy commodities in its turn must meet the criteria of variability, quality acceptability and accessibility in all regions and for all segments of people of a particular country. The main difference from the American counterpart is the focus on an ultimate user – human.
According to the other expert from the Russian Foreign Affairs Ministry, Mironov, you can only talk about energy security when there are guarantees for permanent and reliable functionality of the country’s energy sector, which is only possible with a stable energy supply under economically acceptable conditions. Without taking into account some peculiar differences the majority of Russian researchers agree that strategic energy reserves is a core criterion when it comes to the definition of energy security.
Now it’s important to take a look at how China sees the energy security concept. As one could expect there are also different views in the Chinese scientific community. The ES dilemma was discovered in China after it lost the position of a regional oil exporter or in other words when the internal oil consumption level overreached the production capacity. Starting from this point, Chinese scholars got on their way seeking what energy security means to the Middle Kingdom. Some of them, which could be logically linked, associate energy security with oil security like it was done by Wu Lei in his study “China’s oil security”. The author tells about the imminent oil competition in the Asian region and offers his forecast for the oil security in the new century.
However, the Chinese approach did not hold still. On the contrary the idea of ES altered and expanded. Today this approach includes similar features mentioned proposed by the Russian and Western scholars. For instance Chen Xinhua in his study “Energy will change the fate – China is facing the challenges of the chosen path” offer his own view on the ES matter. The author suggests that for China, being an importer country, energy security means getting a stable access to energy commodities at any time at a reasonable price and with the variety and quality corresponding to the consumer’s requested criteria and his ecological requirements necessary for country’s economic and social development.
The Ji Lin University scholars made it an even broader concept. Energy security is an interdisciplinary notion, which goes beyond the issues of energy supply and consumption. The energy security conception has its impact on country’s international status, economy structure, social stability and development. The ES interconnects at least with six spheres of a state’s life: energy supply security, transport security, prices security, structure security, environment security and the most important – national security. A tougher approach even suggests that in addition to what was mentioned ES is a global energy fight for oil and gas import passages.
In any case all the aforementioned notions have their similar features. However, the history shows that the main difference is an emphasis which is laid on a particular feature of ES in accordance with national interests. When it comes to the USA – it is a global and unimpeded access to energy sources wherever and whenever it is needed to guarantee protection of the national interests; Russia – uninterrupted and stable energy export flow in order to provide a steady financial influx to the state budget; China – acceptability of the price policy offered by export countries and safe energy transport routes.
Nevertheless, as it was mentioned before the contemporary epoch shows us that energy security goes beyond the framework of hydrocarbon resources trade between consumption-countries and production-countries. Now energy is an essential condition for any state to guarantee normal life for its people, enhancement of production capacities, economy development, military efficiency and other. Assuming this we can say that by the beginning of the XXI century the ES notion went through a serious evolution to the level where it now means harmonic interaction of all the spheres of human life that in any way influence a constant access to energy in the world.
At the same time bearing in mind the thought that there is a huge dissimilarity of national interests it leads to a situation of a big world energy imbalance. Due to this there is a whole list of energy security threats capable of taking it out of balance. They can be differentiated into several categories: socio-political, economic, man-made, ecological and other. All the threats are interconnected and could be classified using a specific criterion (Table 1.1).
Using the aforementioned ES definitions we can determine the main energy security threats regarding the supply and consumption part. Here we can find the following: violation in providing necessary energy demand supported by economic factors, unacceptable quality of the supplied energy sources, unreliable electric power supply system, poor energy efficiency or inefficient energy resources consumption in the country’s economy, strong dependence on foreign energy sources, undeveloped infrastructure necessary for cross-border energy flow and/or for country’s remote and underdeveloped areas, poor variability of energy sources types and/or high dependence on one particular type, unstable energy power supply of large sections of population.
In this situation one can raise a reasonable question on what could be done in order to prevent the threats of ES. There are many tools that could be used to enhance ES, which could also be broken down into several groups.
State regulation:improvement of the regulatory and legal framework, connected to energy issues, in accordance with contemporary realias, optimization of tax system, promotion of “green” and energy saving behavior amongst the population, observing the general state of energy security in the country and providing a prompt reaction to the emerging issues.
Market regulation:endorsing a reasonable and transparent price formation on energy resources, setting up reliable insurance markets, promotion of foreign economic ties concerning energy sector, diversification of energy sources, optimization of energy consumption structure.
Backup regulation:calculating the fuel and energy resources (FER) reserves being necessary for an emergency case of a foreign supply shutdown, setting up the FER reserves, establishing an efficient system of FER distribution and interchangeability.
As we can see ES is a sophisticated problem, which requires the same sophisticated solution. A system of possible methods of tackling the ES problem will help us to effectively analyze the risen issue. Thus, we can build up three main approaches in the energy security quest: extensive, intensive and innovative.
Extensive approachwould mean expansion of primary energy production and/or consumption volume; extension of infrastructure for its transportation to the ultimate consumer; and enlargement of strategic hydrocarbon reserves.
Intensive approachstipulates taking energy efficiency in the field of production, transportation and consumption to a new level.
Innovative approachcould be applied when it comes to the technology transition to a new level. This means development of alternative and atomic energy and also application of utterly new ¨green¨ technologies in the field of primary energy consumption.
In the proposed list of approaches we can also trace some sort of an evolution of ES approaches where their historic significance in the process of application by a human was changing during last two centuries and continue to do so nowadays. Being based on some reasons of a particular time the evolution of approaches went through the history starting from the extensive approach, going through the intensive and now being led by the innovative. The given classification is applicable in the domestic policy as well as in the foreign one. Having mentioned the field of the approaches´ application within domestic policy we should also indicate their features within foreign policy.
Extensive approach:expansion of foreign trade of hydrocarbons and their final products; increase in joint production of primary resources; common growth in size of cross-border energy infrastructure.
Intensive approach:exchange of energy efficient technologies in terms of primary energy resources production, transportation and consumption and also cooperation in the field of exchange of strategic hydrocarbon reserves in an emergency case.
Innovative approach:cooperation in the field of exchange, application and joint development of new green technologies designed to use alternative energy sources.
However, as it was stated before each country has its own energy security definition as well as energy priorities, which determine its methods in the way of providing ES. Usually it depends on which energy status holds this or that country: importer-state, exporter-state or transit-state. At the same time a country can be a holder of several statuses. The aims that these groups’ members pursue could be completely opposite in their sense. Historically it came to be so that if for an importer ES depends on its capability to diversify the energy balance (EB) structure having in its possession more and more new stable, cheap and clean energy sources, then for an exporter the objectives would be vice versa.
After performing some analysis one can see that the main objective for an energy exporter-state is to tie up as close as possible an importer-state on an energy source, which that exporter-state finds in abundance within its borders. At the same time the both sides prefer to have as few transit-states as it is possible on the way of their energy cooperation. The tying up of an importer-state is usually carried out by low price policy, wide variety offers, high quality products, convenient cooperation or absence of competitive alternatives. For better energy security an exporter-state will be also highly interested in spreading its grip on as many countries as possible in order to diversify its markets to have better confidence in the coming day. Though, this policy also means a necessity to expand infrastructural objects and tools of energy delivery like pipelines, gas liquefaction plants, oil and gas transportation fleet and so on.
For importer-states the main criteria are to have constant, unhindered and long-term supply with acceptable and reasonable prices. The same principle but different in terms of application importer-states have with regard to the diversification of the incoming energy sources and routes, which is also connected to the infrastructural modification. For instance if a state proposes to make a switch to gas or electricity fueled vehicles, this means a bigger switch to gas fuel or recharging stations.
For a state, which represents a territorial link on the way between an exporter and an importer, it is vital to have all possible energy power and energy sources, usually regardless of their origin, flowing through its territory. It is important to receive profit for its mediator service in the process of energy resources transition. In this case diversification of energy routes avoiding transit-state’s territory either by exporter or importer is against transit nation’s interests. Sometimes, however, even the transit-states could be differentiated as transit-exporters and transit-importers. It is when these states combine two different roles.
In each of these cases there are particular threats for each of the mentioned groups and ways to overcome them. When it comes to exporters ES threats include underdeveloped technological and infrastructural base, weak management in the sphere of energy production, consumption transportation and also obstacles of natural (environmental) or artificial (bureaucratic) origin on the way to its rectification. This list can be added by lack of investments and sometimes even their overabundance. The latter one leads to a failure in the funds application. Regarding importer-states the threats are more or less similar even though they more refer to effective energy consumption and distribution.
In all the listed cases there could be also found common interests, which include stable, long-term energy resources and products supply. This way of cooperation insures the payback of investments that leads to new infrastructural projects, natural resources exploration and development of new reservoirs. This reminds an endless circle where one part pulls the other one. Developed infrastructure attracts investments in new resources deposits, and new deposits attract investments to improve infrastructure.
In addition to the set aims and priorities of ES there another thing presents a substantial part of this notion - fuel and energy balance (FEB), which is being shaped differently in each country. The Russian FEB, for instance, is being formed by its energy security concept till 2030, which leitmotif is as follows. “The formation of reasonable fuel and energy balance must be carried out on the basis of its regional economic optimization, diversification of the fuel and energy resources consumption structure in order to provide the nation’s energy security. The price and other economic leverages are being used to ensure high levels of extraction and production of interchangeable energy carriers”.
The history shows that when it comes to importer-states, mainly due to lack of their own resources, they have to pay more attention to energy efficiency development and rely more on renewable energy rather than their partners – exporter-states. Another crucial factor in the course of FEB formation is the prices on a particular energy source and its stability in the energy market.
However, in most of the cases hydrocarbons still play a key role. The West is not an exception. As it was stated earlier according to the West conservative approach energy security is being measured by economic losses, which can occur due to an abrupt termination of supply flow or sudden alteration in the price market. For almost the half-century of energy security existence the internationally recognized price market was established only when it comes to oil. At the same time prices on other energy sources are largely being formed with reference to the oil prices. The situation reminds the one regarding different world currencies with their focus on the U.S. dollar.
As an example we are going to provide a brief historical summary of events that had their impact on the oil price formation and by this on the energy security in common. In the end of XX - beginning of XXI centuries the human civilization experienced at least 5 oil market shocks that led to serious fluctuations in the sphere of production and, thus, price:
1) The Persian Gulf crisis in 1990/1991. The world witnessed a production shortage of 4.3 million barrels per day (mb/d). After the crisis found its end the price was gradually falling down from 40 to 15 U.S. dollars per barrel. After the end of the newly came Asian crisis the price again adopted a growth trend.
2) 2001 – Iraq stops its oil export. The production shortage is calculated to be 2.1 mb/d.
3) Venezuelan workers strike 2002/2003 – 2.6 mb/d shortage.
4) The war in Iraq in 2003 – 2.3 mb/d shortage.
5) The hurricane Katrina in 2005 – 1.5 mb/d shortage.
With the advent of another financial crisis in 2008 the oil price reaching the level of 105$ hastily fell to 65$, after which, though, started to grow again and now it is back on track with about 105$ price (Figure 1.1).
Hence, having so many factors there is a reasonable question – how do we eventually determine an energy secure or insecure state in the contemporary era? Depending on which side of the energy security term we can define the level of protection a state offers against ES threats. For example socially you can call this or that nation energy secure if its government provides at least basic energy services to the people – an access to electric power and fuel. Politically it means that a government is obliged to adopt an official energy security policy and create effective tools for its implementation. In the field of international cooperation an energy secure state should apply a coherent policy of its commitment to multilateral collaboration called to find solutions to international energy issues: regional cooperation to increase energy security, collaborative implementation of Kyoto protocol’s articles and other. From the point of view of advanced development energy secure state is supposed to develop and introduce innovative technologies designed to improve the energy security indicators.
Drawing a conclusion line we can see that for last four decades the energy security conception have been accumulating new additional meanings and senses. Today ES is closely tied with the fields of politics, information, technology, military, monetary and finance, socio-economics, environment, resources, transport and so on (Table 1.2). Therefore, there were many factors in the modern history that complemented the ES notion and which help us now to determine the level of energy safety of a particular country. Scholars and politicians from all over the world treat it differently, however they do agree that this problem exists and that it is of top priority.
1.2 The history of the PRC. From energy policy to energy security
Most part of the world works hard to build up its tools and measures to fight energy security threats shaping them into different sorts of national strategies. Until recently Russia for instance adhered to the “Energy strategy of Russia for the period up to 2020”, though it required some amendments, for which there was formed the “Energy strategy of Russia for the period up to 2030”. The EU in turn stood by the principles described in the document called the “Green Paper. A European Strategy for Sustainable, Competitive and Secure Energy”, whereas Washington exercised its own “Energy policy”. China was not an exception in this list and as any other international actor followed its energy strategy full of goals and methods to achieve them.
Yet before the PRC came to the current understanding of ES priorities Chinese energy policy had gone through a number of transformations. At the time when the People’s Republic of China was founded the energy security notion was not applied not only in China but in the whole world as a matter of fact. The closest concept to ES was “energy policy”. At the first stage this policy in the PRC was entirely based on the perception of energy self-sufficiency and self-reliance. To strictly comply with the given idea was only perceptible by the means of those energy carriers that were found in abundance in China. At the time it was mainly about coal and oil.
Up until the 80’s the Chinese state apparatus concerning implementation of the energy policy principles had a stringently systemized hierarchy. The process was managed by three ministries, which were directly accountable to the State Council of the PRC. They represented the core industries of the day: coal, oil and chemical. The time went on while the bureaucratic machine was extending its boundaries and the energy sector management was getting more and more into the hands of the State Planning Commission.
In the late 70’s of the 20th century owing to the growth of domestic petroleum demand Chinese energy policy was getting more and more concentrated on sustainable oil security. The history of Chinese oil security could presumably be divided into four stages.
Stage 1: 1978-1992
Yin Jin Lai Policy (引进来)– policy to attract investments from outside.
When Deng Xiaoping comes to power Chinese foreign policy makes a U-turn. This is the period of opening up to the world. The reform is assumed to draw significant financial assets from abroad forwarding them to all sorts of fields in China including the energy sector. Yet the oil policy continues to bear on the two fundamental pillars: self-sufficiency and self-reliance. Among the foremost means of preserving oil security are reduction of the oil demand, extension of domestic production, partial transition to alternative energy sources and other. The energy sector is headed by the National Development and Reform Commission. State-owned companies have access to a limited number of countries and their oil assets and mainly do the export part.
Stage 2: 1993-1999
The oil production is no longer commensurate with its consumption. Being forced to deal with new circumstances Beijing has to accomplish some earnest adjustments in the energy policy. The pace of fundamental reforms unfolding on the ground accelerated from the speed of new leaders coming to power to the rate of five-year plans passing one another. So, in order to catch up with the oil demand in China authorities initiate the maximum possible extension of domestic petroleum production and reorganize the state-owned energy companies to improve their level of competitiveness, which in addition to that took their course to the foreign market searching for new sources of oil. The governmental mechanism concerning energy sector is also undergoing some certain alterations. In 1993 the Ministry of Energy is removed. Instead of it is established the Ministry of Electric Power though it lasted only until 1997.
Stage 3: 2000-2008
Zou Chu QuPolicy(走出去)– the policy of “Going Out” or “Going Beyond”.
Chinese government becomes fully aware of the impracticability of the previously set course of self-sufficiency and self-reliance policy concerning the energy sector and takes a decision to deploy a comprehensive cooperation scheme with the overseas energy partners. In view of that the General Secretary of the Communist Party of China Jiang Zemin assumed that the “Going Out” policy, which supports the involvement of Chinese capital in overseas countries, will provide China with a broad access to foreign oil and gas reserves and thusly will increase the size of incoming energy supplies to Chinese market. Therefore, the state “Going Out” policy also becomes a motto for state-owned energy companies to intensify their outreaching strategy and make it spread all over the world. Herewith in 2003 the National Development and Reform Commission is set up in order to successfully manage the emerging energy matters.
Stage 4: 2008-till present time.
In the period of the global financial turmoil the China’s “Going Out” policy receives its full application, which provokes massive Chinese investments to disperse all over the world. The energy sector and resources production field become most affected as the Chinese financial input in these spheres grow exponentially. At the same time as the oil deficit breaks out Chinese government ultimately starts to fully apprehend that its energy policy must not be limited to a narrow circle of energy sources in order to provide sustainable development. Moreover, this exact energy policy must work on the whole combination of tasks and not only to provide the sufficiency of energy resources supplies coming to satisfy domestic needs. Consequently China also becomes fully aware that it now has to take into consideration the environment conditions both on the national level and regional plus global levels likewise. The acknowledgement of the need to address this mission area could be qualified as a transition to the preservation of energy security.
Yet Chinese government was not the only one to be concerned about these issues. There was another side of China’s program of opening up to the world as it came along with a backlash from the global community. The world started to openly point out to Beijing that it was having multiple problems in cooperation with China: a limited list of fields accessible for foreign investments, no competitive environment in the energy sector and excessive use of carbon energy sources like coal in the Chinese FEC, which poses a vivid threat to the environment and cannot but bother China’s neighbors. In order to have a better grasp on the nature of such claim it will be helpful to explore different aspects of energy cooperation between the world and China.
When it comes to dominant presence of state in the energy sector the privatization process indeed passed over it. For the most part it maintains state-owned. The best reasoning here would be that although promotion of foreign investments in the Chinese FEC appears to be an effective means to hold up the national energy security still this sphere is rather sensitive one for the PRC, therefore there is a moderate pace for any renovations. In spite of the fact that with each coming year it becomes easier for overseas assets to make their way to various Chinese areas including electric power productionan official list of fields offered for foreign money came out only in 2007. Even so these sectors are only allowed for foreign companies if they work jointly with Chinese partners inferring the binding nature of shared investments in all sorts of projects.
From a financial point of view such policy could be reasonable. In 2004 the FEC in China accounted for more than a quarter of all the industrial products seriously affecting the formation of national budget. According to the State Council of the PRC 40% of all the registered tax revenues came from the FEC enterprises. In 2007 the tax incomes were same high. At the same time the level of the FEC products kept growing. The FEC share grew with varying degrees of success from 28% in 1995 up to 35% in 2008.
Hence, the fuel and energy sector in China comprises a significant contribution to the entire nation. In case foreign capital grows into a steering force this could shape the whole FEC sector, which in perspective could present a certain threat for China as it could be used as political leverage to impose pressure on Chinese authorities.
Of particular concern here is the foreign force affecting the final point on the path from energy production to ultimate customer, which is the distribution system. Any sort of turbulence in the energy system can disable all the vital industries keeping this country on the run like manufacturing, agriculture or, which is of most priority, military as it can jeopardize the national security and the territorial integrity of this country. Hence, that is the foundation, on which Chinese officials build their cautious attitude to the foreign presence in the FEC.
Another field of concern for the government in their efforts to pursue the ES concept is protection of the environment and the problem here is especially acute. For 65 years of history of the People’s Republic of China most of its fuel and energy balance has been formed of coal, which took a hard blow on the environment. Even after the government initiated a program to diminish the coal consumption and production rates in 1997 Chinese demand for this energy source only grew ever since. The cast-iron and steel industries likewise the one about cement production have not found a better substitute for coal in their relative segments where it is being used in abundance. Still after signing the UN Convention on Climate Change China started to bear some commitments vis-à-vis the international community for the state of its environment.
The new eco-friendly attitude was displayed by the initiated “national project of China’s response to climate changes”, published “national newsletter on climate change”, established state body designed to act on climate changes and issued periodic edition of the “White Paper” regarding governmental measures in the energy sector. In the edition of 2007 Beijing published a number of specific measures that helped China to limit car engine emissions through the means of ban of assembly, import or selling of vehicles with emission level excessing the set standards. Moreover, the government encouraged assemblage for the vehicles consuming alternative or hybrid fuels and construction of railroad transport and buses with electric motors. Additionally there was inserted strict environmental oversight in the course of implementation of new energy projects and renovation of old energy facilities. When it comes to nuclear energy the supervision of the currently operated nuclear power plants got improved. Same thing will be applied during construction of the projected plants. Construction of old models coal-fired power plants with direct coal combustion method was also forbidden.
Along with that Chinese government using legal means and market leverages promoted rational use of energy in order to increase the level of energy efficiency in China. In October 2007 at the 30th meeting of the Standing Committee of the National People's Congress a revised draft of the “energy conservation law” was adopted. In relation to saving resources the new energy law was identified as the foundation of the national policy. In fact it was about an all-encompassing state PR campaign spreading among people to propagate in favor of a prudent attitude to natural resources use.
Unfortunately the true story is that the lion’s share of the social masses does not take seriously the green propaganda offered by Chinese authorities. Even on the governmental level such entities like state universities sometimes have problems with executing an economical approach to saving water and electricity not mentioning those institutions that do not relate themselves to the government. On the word of ordinary Chinese citizens it is all due to the established mentality while mentality itself is an extremely conservative phenomenon. Altering the mindset of more than a billion people nation is a time-consuming task as well as any other major transformation in China. The entire Chinese culture is very traditionalist and does not tolerate sudden changes. For that reason it will most probably take some time before common people in China will start treating sagaciously the given natural resources in their everyday life.
Although there are some setbacks energy security in China was still of top priority lately. One of the most effective means to fight the ES threats was determined as application of advanced technologies, which was stated in the adopted “long-term plan on science and technology development for 2006-2020”. The central part of the document is dedicated to the development of science and technology in the energy sector and here are some of its key points that will help us understand where China is going with all this.
1) In order to decrease energy consumption the top priority is to perform a policy of energy conservation. That implies enhancement of energy conservation technologies and application of more energy efficient methods to use primary energy at the final point of consumption chain.
2) Promote a more diversified fuel and energy balance and expand the energy supplies. This requires the shares of oil, gas, nuclear and hydro energies to be enlarged. In a similar manner it calls for a breakthrough in a particular set of technologies that grant access to the energy of wind, sun, biomass and other renewable sources, plus providing an omnipresent use of these technologies.
3) Improve the environment, which entails innovations in the field of energy efficient and clean employment of coal. The clean techniques of coal usage signify its liquefaction and gasification.
4) Upgrade the existing energy facilities and organize the process of introduction and mastering of innovative energy technologies.
5) Boost up technology capacities at regional level with the aim to optimize energy consumption there. Establish safe and reliable transmission and distribution of electric power by utilizing advanced technologies. These technologies should support three core principles in the process of electricity transmission: 1) larger volumes 2) longer distances 3) higher efficiency and lower energy losses during transmission.
Five years later Chinese ES priorities for most of the part kept their validity. The edition of “White Paper. Energy Policy of China (2012)” mostly reiterates the aforesaid with some specific addendums. This issue of “White Paper” unambiguously encourages the participation of private capital in exploration and production of energy resources, in construction of pipelines and power transmission lines, in enhancement of coal refining and cleaning, in maintenance of production and consumption of energy renewables. Plus, there is a strong support for transitional reforms towards market pricing concerning transmission and distribution of electricity. In the same context the mechanisms of rational prices formation for accumulated electricity are being fostered. The electricity acquired at coal-fired plants should be evaluated taking into account the prices of coal as well as petroleum products and natural gas.
The same “White Paper” also points out the need to improve the legislative system in the part where it regulates the market relations. Furthermore, there are references to formation of a general energy law and perfection of legislation concerning the regulation of strategic petroleum reserves, production of offshore oil and gas, pipelines protection, managing nuclear energy and revision of legislative “Act of Coal” and “Act of Electricity”. What is worth mentioning in this document Chinese authorities emphasize the need to reduce the state presence at the microeconomic level and streamline the administrative regulation. Additionally the paper highlights the regulatory measures that are essential for fighting monopoly and unfair competition in the energy sector.
Chinese officials, moreover, recognized the lack of progress that had been made in establishing distribution energy system where China is stepping up its force. As a result China creates special bases and circulation systems for natural gas. When it comes to big, industrial cities and areas of intensive energy consumption application of renewable energy technologies gets the most encouragement. In conclusion the document underlines that energy security is a global issue of the entire international community and that the majority of states will not be able to conserve their energy security all alone. A curious afterthought for the just mentioned part is that Chinese authorities believe that the PRC never acted as and never will pose a threat to the global energy security by always standing by the principles of equality, reciprocity and win-win relations.
One should be cautious about these principles as whether it is on purpose or not but China is still seen as a peril to the energy security if not of the entire world then certainly of some individual states. The PRC is a giant energy consumer and no matter what its interests will get in the way of other states’ interests. Struggling for its own place in the world’s areas of energy deposits and for a share of energy resources in the global market it is eventually what makes China to threaten its rivalries. Another question is whether such competition could be kept in civilized frames or it will go down the path of a struggle for survival. Yet China is striving to make any steps necessary to perfect its image and not “lose face” in the eyes of the international community.
To show China’s commitment to the policy of harmonious energy development Chairman Hu Jintao made a clear statement with this regard in Saint Petersburg on July 17, 2006. During the meeting between the Group of Eight and the six developing countries – namely the PRC, India, Brazil, South Africa, Mexico and Congo – Hu Jintao expressed his vision of how Chinese and the world’s energy sectors are supposed to receive their development and security.
In his statement Hu Jintao stressed that China pays close attention to the dilemma of global energy security. The main emphasis laid on the matters of environment protection, enhancement of energy efficiency, prioritized reliance on its own resources while strengthening cooperation with other states in the field of energy on the basis of mutual benefit, a stable system that provides access to ecologically friendly and economically viable energy carriers for all its members. Most importantly all the just mentioned factors must be achieved multilaterally. The Chairman also underscored that the global energy security is of vital importance as the development of every country and people depend on it. Furthermore, Hu Jintao accentuated that any state is rightful to make full use of its allocated energy resources in order to uphold its development.
That was no accidental comment. Despite of all the campaigns to preserve the worsening ecosystem run by the PRC the world society still deems them unsatisfactory. What is more, China does realize its position as one of the most contaminating nations in the world. Nevertheless, by abruptly saying no to coal and switching for, let’s say, gas will lead to immense economic losses as coal remains the cheapest energy source, which, moreover, could be found in profusion in China. The price difference on raw material itself could grow fourfold and this is if we leave alone the need to expand the gas infrastructure. Hence, on the ground of commercial factor Beijing could not just all of a sudden sacrifice its economic well-being. For the same reason Beijing not being able to ignore the global criticism attempts to justify its actions particularly by the statements of rightfulness of any country including China to use its own resources for the sake of development, which is also part of energy security.
To sum it up we should once again pinpoint the major milestones on the Chinese path to full comprehension of energy security and show up the main tracks of future energy development in the PRC. For less than half a century Chinese energy policy has undergone a colossal conversion. After opening up to the outside society China by now has managed to accomplish a far-reaching leap forward in restructuring its energy sector and forming up the energy security policy. The modern era for China will be also full of significant changes where the government has already set a list of priorities to adhere to. This comprises stable energy development, nature protection, upswing of energy efficiency, government institutions reforming, energy infrastructure expansion and energy balance diversification. Yet the main question in the energy agenda of China remains the same. Will the regime be up to tackling the pressing issues of energy security without damaging the economic security, which till this day has been the foundation of the whole development of the Middle Kingdom?
1.3 Energy security and its practical threats. The case of the Asia-Pacific region
The human civilization goes through constant modifications connected to the surging energy intensity of the modern human lifestyle. Starting from the early stage of carbon resources use till the end of the XX century the main causes for the energy consumption increase in the world were the population growth and improvement of energy-intensive technologies. This proves a broad application of the extensive approach in ES.
The XX century came to be the most active phase in the population and energy-intensity growth on the Earth. However, the latter one went substantially ahead. This meant that by the end of the century less people used more energy in comparison to their ancestors. The most rapid growth was in the 80’s, when according to Russian scholars each person of this planet accounted for approximately 2.4 tons of oil equivalent (t.o.e.) (Table 1.3). Nevertheless by the end of the century there was noticed a reversed process – decrease of the world average growth in energy consumption. It became possible due to the development of advanced energy efficient technologies and their introduction to the everyday life. For comparison in 2012 with the estimated population of the Earth of 7.15 billion peopleenergy consumption was about 12.5 billion t.o.e., which mathematically gives us almost 1.75 t.o.e. per capita. This can be referred to a gradual transition to the intensive approach of different nations in their ES.
When it comes to population in the Asian region its average growth during 1980-1995 slowed down a little. It was especially the case in China due to the implementation of the “one family – one child” policy. The growth was around 1.5-2% per year. Another aspect that intensely influenced energy consumption was GDP. Asian countries were the world leaders in terms of economy growth. In this case each year China, South Korea and Chinese Taiwan increased economically by 10%, 8.5% and 7.5% relatively. Energy consumption in the same areas grew by 5% in China and 7% in South Korea and Taiwan. At this period the energy sector of the Mainland China grew at a moderate pace as its economy was still based on consumer industry and agriculture.
Another, yet temporary, event that prevented rapid growth of energy consumption in the region was the Asian economic crisis. The shock of this scale made some Asian states to revise their plans for energy sector development and froze some of large projects. Here even though the oil prices fell sharply during 1997-1999 (Figure 1.1) energy resources lost for the moment their importance.
Having overcome the crisis most of the APR states returned to their path of energy intensive economic development. Most vividly it showed up in China. The energy demand was pushed by the fast economic growth predominantly because of the skyrocketing development in production, construction and transportation industries. At the same time it was led by the increasing population growth and its social living standards. Browser
In this case the lower middle income countries of the APR had to watch their economic growth and energy consumption swelling faster than their energy production capacity. The problem of the excessively rapid economic growth in the contemporary era was vividly described by the Russian scholar, Gyrich. He called this national phenomenon as “economy overheat”.
This was particularly the case in China, but all the regional countries had their energy sectors growing in size. Even today we can witness the consequences of such super-fast economic development. In 2012 ten biggest APR economies (USA, PRC, Japan, Russia, India, South Korea, Mexico, Australia, Canada, Indonesia) accounted for 62% of primary energy of the entire planet. Although there was a big step made in energy efficient technologies the regional demand for energy because of the region’s “overheating economies” expanded tremendously.
It especially manifested in China and India. The growing trend is really stunning as in 1980’s the two states’ share of energy consumption was just 8%.In 2012 90% of total growth in the world energy demand was taken by these two countries and their share became 26.5%. Another global actor – the USA – comprised 18% of the world energy demand and if we take these 3 states alone they would cover almost a half of the energy consumed volume. The provided statistics runs ahead of the Western scholars’ predictions made six years ago, which promised this result not earlier than by 2030. At the same time considering the fact that Chinese and Indian economies still have room for further expansion it is safe to say that world energy streams will be highly impacted by these two countries.
In this regard it is rather appropriate to take a look at the variety of energy sources that power up the world, which is more fitting to be called lack of variety. Last century hasn’t changed the world’s FEB as the biggest share is still falls on hydrocarbons. In 2011 87% of the world energy was extracted from fossil fuels mostly by burning combustible natural resources like oil, coal and gas. This leaves only 13% to all other possible energy sources.
In this situation of weak diversity of energy sources countries concentrate on a narrow circle of hydrocarbon energy commodities, making it a harsh “battlefield” for those of high value. This energy race has a big potential in the APR bearing in mind that the main energy consumers are located in this area. For instance according to British Petroleum in 2012 the four major oil users, which represented the USA, China, Japan and India consumed 41% of oil while had only 4% of this type of fossil in their possession (Table 1.4).
Upon even closer inspection of the two major developing economies in the APR – China and India, we can say that the energy supply issue can get much worse in the coming future. The both nations are the most representative in this world having 1.35 and 1.22 billion of people respectively. The principle issue is the extremely low level of energy resources per capita in these states.
There is a highly valuable information source when it comes to statistics in China, which is represented by the “White Book” issued by the State Council Information Office of the People's Republic of China. This book reveals all the official statistics when it comes to energy sector. The book’s edition of 2007 uncovers the comparative statistics of energy resources per capita in China. According to it the Middle Kingdom’s most represented energy sources – coal and hydro resources per capita, are about 50% of the world’s average level. Let’s not forget gas and oil of course. Here China does not exceed the level of 1/15. Hence, the overall rate of the proven reserves of all the Chinese existing resources per person is set to be about 33% of the world average.
Data provided by the World Bank confirms this unlucky rank likewise. Basing on the report in 2011 Indian and Chinese energy consumption per capita was 0.6 and 2 tons of oil equivalent accordingly. For comparison reasons the United States used 7 t.o.e. that year. The main problem lies in the historically chosen way of the Asian countries. In case of China there was a huge leap in the population growth during the XX century. By the time the People’s Republic of China was founded it was clear that the relatively modest energy reserves within the Middle Kingdom’s borders will be insufficient to fully satisfy the most densely populated state. The final verdict for the Chinese energy security was enclosed in the official policy of Mao Zedong regarding population growth, which could be reduced to one capacious phrase – “人多里最大” (Ren duo li zui da). That could be translated as “big nation means big power”.
Nobody doubts the powerful state called China. However, because of the policy adopted by the official predecessors’ today the Chinese energy sector turned out to be trapped. China is spreading its energy access to all the citizens, which implies the increase of total energy consumption. It does comprise logical fragment as it is the social side of the ES term but the growth of per capita eventually puts the PRC in a complicated position. The similar situation could be found in India and it is self-evident that in the both states energy sector will only broaden with time. In case the two most populated countries are ever to reach the level of the most energy consuming state – Iceland, with its 18 t.o.e. per capita, the Asian countries will have to search for gigantic amount of energy resources to satisfy their needs – ten times more than it is currently seen.
At the same time to have energy resources is as important as to know how to effectively use them. Practically it indicates the level of intensive approach application in the region. The extensive and intensive ES approaches are interchangeable, which means that lack of energy efficient technologies could easily be replaced by additional volumes of consumed energy resources with relevant consequences. For last two centuries there was little attention paid by the APR states to the development of energy efficient technologies preferring to build up the missing part by a plain production or import expanse. It was especially the case about China as the very communist ideology following the example of the Soviet Union encouraged records in the production at different mineral resources deposits.
Unfortunately it signifies that the APR developing economies adopted environmentally harmful policies and used quite inefficient ways to consume the resources received by procurement contracts or straight from “nature”. In 2011 the abovementioned top ten APR states constituted 54.5% of the world’s GDP. At the same time these nations produced almost 67% of carbon dioxide emissions. For the sake of objectivity it is worth noting that the energy efficiency degree and the amount of air emissions differ greatly among the APR Top Ten (Table 1.5).
Japan in terms of energy efficiency has become a leading power in this list. The lack of natural resources and significant population density forced Japan to find the best use of any energy good discovered in its possession. Thus, in the end of the XX century the intensive approach was the only choice for the island state to sustain its energy security. In the recent years it gave the following results. The difference between the most energy efficient regional state and its antipode is dramatic. In 2011 Japan was 5.5 times more energy efficient than Russia, 4 times than China and 3.5 times than India (Table 1.5).
Logic could be found in these facts if there is a need for one. The main reason for this to happen is the abundant hydrocarbons in general that could be found in Russia and big amount of coal in China and India, which temporarily allows these nations to concentrate on production volumes rather than consumption efficiency. Following the simple and tempting solution to use the given energy reserves the governments shape their energy balances on the basis of hydrocarbon resources.
Japan on the other hand had to adopt other principles, which stipulated the highest possible diversification in its FEB. The first step on this way was made in 1977 when Japan started to import Indonesian LNG. In 1999 this list was added by the first country of the Arabian Peninsula - Qatar. In the end of XX century this policy bore real fruit as Japan had one of the most diversified energy balance: 21% - nuclear energy, 22% - LNG, 27% - oil, 20% - hydro energy, 10% - coal.
The period of energy stability was interrupted in March 2011. The Fukushima event became the collapsing Rubicon, which misbalanced the whole energy structure. Being pushed by public pressure, the government had to adopt a new policy of entire nuclear renunciation. This pursue of a more secure energy sector required Japan to give up cheap nuclear power, which pushed up the prices on electricity. Being afraid of any repetition of those dreadful events Japan had to redistribute the shares in its energy balance in favor of a less diversified variant: 2% - nuclear energy, 48% - LNG, 25% - coal, 16% - oil, 9% - others.
It was difficult for the international community to expect any of this to happen in the modern times. In 2007 British Petroleum experts predicted the Japanese gas consumption to reach the level of 107 billion cubic meters only by 2020. However, in the light of the mentioned events the same experts had to acknowledge that in 2012 Japanese gas consumption already skyrocketed to 116 bln m3 and the demand keeps growing (Table 1.4).
All these trends tell us that the majority of the regional powers hinge on foreign energy markets, which implies that the APR entered the epoch of tough energy competition between neighbors. In case of Japan LNG has an absolute advantage due to its positive qualities. However, the special nature of LNG makes it difficult to transport and that leads to the price increase. Therefore, gas forcibly makes room for oil in the Asia-Pacific energy market, which is 72.2% (Figure 1.2).
Such a serious imbalance gives us a clear picture of oil’s definitive victory over other hydrocarbons in the import configuration of the APR states. This represents a high risk situation especially when the biggest energy importers (USA, China, Japan, India) lacking oil in their own soil (Table 1.4) have to bring in more than a half of their oil needs (Figure 1.3).
At the same time for last twenty years the Asian part of the region was marked by a relative stagnation in oil production, which truly exacerbates the “hunger” for energy. The difference between oil consumption and production extends with a confident pace. The Oxford scholars Raphael and Stokes predicted the Chinese oil consumption to double by 2030 with the comparison of the 2010 amount where the majority of the oil demand will be covered by its import. This will definitely make the APR states more dependent on the oil market prices.
Another aggravating factor is the worldwide demand for oil which goes up every coming year. It is especially dangerous for Asian countries due to their poor reserves. For six years from 2006 till 2012 the world’s oil production capacities could not catch up with the world’s oil demand (Figure 1.4). It means for last six years humans used more oil than produced and there could be two main reasons for that. First, each day the largest oil basins are relentlessly depleting. Second, key energy companies artificially control the level of production under the level of demand to trigger the oil prices. Be that as it may but it impacts all sides of the APR nations’ life starting from prices on fuel and electricity for people and finishing with overall inflation.
It is especially apparent with electric power. One of the main purposes of energy resources in the modern history is electricity production. This entails that for energy security to be sustainable a government needs its electric production capacities to pertain the needs of the population. With this regard the Energy Information Agency (EIA) prepared a historical report and forecast for medium term perspective about the amounts of electric power consumption in the USA, China and India (Table1.6).
Using this official U.S. statistics it is evident that in the end of XX century there was a modest upturn of electric power consumption proving the previously stated arguments. Yet the new millennium brought remarkable changes as there was a hitting the roof uprise in the demand for additional electric power. According to this official statistics among these three “giants” of energy consumption Washington passed its unenviable leadership to China in 2010. So, at that time the USA used 98 quadrillion of British Thermal Unit (qbtu) when China set to be at the 101 qbtu level. By 2040 according to the EIA’s prognosis the current pace of economic development will bring Chinese society to the future where Chinese government will have to search for twice of the current amount – 220 qbtu. On the other hand there will not be too much contrast for the USA with the comparison to present times – just 107 qbtu.
Consequently in the light of these figures the regional energy demand receives its logical explanation. In case this estimation is to come true any time soon the situation in the APR can deteriorate immensely. The given scenario signifies a sharp increase in the regional energy demand, which specifically is the case with China. This demand will bring changes to every life sphere of those countries that shape the Asia-Pacific region and those that are located outside of it likewise. Everything will be seriously impacted: politics, economy, finance, energy markets, environment, regional and global geopolitics…
A vivid example could be given even today as the term “resource nationalism” is widely known nowadays. This phenomenon becomes increasingly popular with the nations, which possess relatively big amount of resources and which also try to ensure their sufficiency for the coming times. These states understand that the existing reserves are fading away, when the number of claimants grows exponentially. At the same time resource nationalism is also becoming a powerful political and economic leverage.
Nevertheless, where there is a demand there must be a way to satisfy it. Bearing in mind the limited amount of energy resources in the Asian soil the missing part will have to come from somewhere. None of the currently existing even most advanced energy efficient technology is capable of improving substantively the situation neither for China nor for India. Moreover, if the taken course is to be proceeded in the middle-term future none of the countries will be able to satisfy the surging demand either because of lack of resources or because of inadequate infrastructure.
Eventually the size of rising energy demand in the Asia-Pacific region is a colossal burden not only for consumer states but also in some way for production states. From one point of view the world mounting demand for energy carriers opens self-evident business opportunities for producers. Alternatively this state of persistent energy demand being ahead of energy offer can be extremely risky. Not always can countries make a deal in this severe competitive environment. The most alarming is that sooner or later the world suppliers will reach the point of incapability to satisfy the demanded energy resources. At this very time nations can initiate a conflict or in the worst scenario it may lead to an open military confrontation.
2. Various ways to ensure energy security within the framework of Chinese domestic policy
2.1 Extensive approach in energy security. History and perspectives
One of the main conditions for energy security to be called sustainable as we previously discovered is sufficient amount of energy resources where it is needed. In China’s case they are mainly needed in the industrial sector as long as it is clearly a locomotive for the Chinese economy. In the recent years the industrial sector required three quarters of energy consumption leaving just 11% for the social sector 11%. This type of energy-intensive economy had a long way to become what it is now.
For many decades the economic development systematically dragged energy consumption. For instance for almost half a century from 1965 till 2012, power consumption in China increased by 21 times, which happened to be 22% of the world’s total share. For the same period the rest of the world increased its energy consumption only by 2.5 times (Figure 1.5). For China to satisfy its demand and sustain its energy security the extensive approach was the only effective solution, which signified constant expansion of energy resources production and import
Due to sequence of Chinese energy history coal came to be the major energy source for the Middle Kingdom. At the time of the PRC’s foundation coal was merely the only type of energy used on that soil. In 1950 coal stood for 97% of energy consumption in China (Table 1.7). This was a harsh post-war period for Chinese people. Coal was an obvious solution to improve the situation in the energy sector. Of course using coal to cover all the energy needs was not the best choice but at least it was some choice. So, considering the coal stocks, cheapness and relatively simple techniques of extraction and usage coal for many decades ahead took the leading position in the energy structure, where coal finds itself likewise nowadays. Today energy balance has shifted its weight to oil side but the leading position of coal stands still – almost 70%. Moreover, in 2011 the two energy sources combined held the energy balance share of 87% (Table 1.7).
The industrial usage of coal in China has been mounting for several centuries already. However, during the contemporary era of the PRC’s existence the coal industry received a real free pass. For a little more than 60 years the coal sector enlarged by 100 times – from 32 million tons production in 1949to 3.18 billion tons in 2011. By 2012 China became the world’s largest producer (47.5%) and consumer (50.2%) ever known in the human history. Nobody expected this scale of expansion. The real demand for coal on the ground marched ahead of any possible forecasts. The predicted coal production capacities and consumption volumes for 2020 provided by Chinese experts in 2004 were already behind in 2012 by 1.5 times (Table 1.8).
This truly high level demand forced Chinese government to introduce a “tightening belts” policy and limit the coal outflow to the foreign market. In 2004 the Commission for Development and Reforms in conjunction with the Commerce Ministry and the General Administration of Customs worked out “policy of coal export quotas” and set the export quota at 80 mln tons level. With each coming year and rising domestic demand for coal the quota for its export simultaneously was dropping down. In 2010 it was 38 mln tons.
Alongside with the settlement of exporting quotas the government set up additional artificial obstacles for coal on its way to foreign market. Starting from 2004 the previously established tax deductions for coal export dropped from 13% to 11%, in 2005 – to 8%, in 2006 – were wholly cancelled. In the same year starting from November the tax deductions were replaced by 5% export tariffs for coking coal, which doubled up to 10% in 2008. This method of regulation successfully diminished the export share of coal redirecting it to the domestic market.
On the other hand the coal import policy was as well running through some changes. Depending on the coal type the import tariffs were falling for several years in a row starting from 6% to 3% in 2005, to 1% in 2006 and to 0% in 2008. Thus, this coal tri-regulation policy of import-export in and out flows played a rather significant role in boosting up the coal consumption share. In addition the production volume had to determinedly go up likewise (Figure 1.6). This state of affairs was similar to the one that had happened with oil in 1993. At that time there was a rapid switch from oil export to its vast import (Figure 1.7). Thus, for less than a decade China gave up its position as one of the biggest coal exporters and became its biggest importer.
This transition was undergone in a smooth way due to specific structure of the Chinese coal sector. The lion’s share of this sector is owned by the government, hence it is easy to be regulated. Large government coalmines are considered to be relatively safe and comprise 51.1% of the total production volume. Small coalmines that are owned by local governments represent 12.5% of production. The private coalmines sector has as well a serious portion that makes up more than a third in its balance.
Even though there is a well-regulated coal industry China still faces series of problems. In 2003 there was a severe lack of material at coal power plants, which led to a whole chain of blackouts in many provincial cities. These power failures occasionally took place in such provinces like Zhejiang, Shandong, Jiangsu, Guangdong and Fujian. It even affected such a developed city as Shanghai. At the same time there were even cases of energy surpluses. In order to solve these issues the government initiated a power transfer program between different provinces and regions to regulate the electric power prices, balanced consumption and unloading of energy grids.
The main cause for this problem to appear is that natural resources in China are scattered all over the country in a rather uneven manner: 60% of coal reserves are concentrated in the northern part (Figure 1.8), 70% of hydro resources are located in the southwestern part, the vast majority of oil and gas could be found in the northeastern, central and western regions of the PRC. At the same time the most energy consuming part of China is the eight southern provinces plus Shanghai. Here is located the state’s “industrial muscle” and more than a third of the population. On the contrary an incomparably small proportion of the energy resources feed a gigantic locomotive called Chinese economy – only 2% of coal and 10% of hydropower production.
Due to this natural resources dispersion and the abovementioned priority given to coal as the main source of energy in China the government has to solve another huge issue regarding infrastructure and resources’ transportation. Unlike gas and oil coal represents a firm solid substance and that earnestly complicates the transportation part, which is being carried out mainly by using rail-tracks and freight trains. This coal movement of billions of tons across the country from the north to the south becomes a heavy burden for the Chinese railroads. In case the current course is being proceeded in its form of traditional coal usage it will inevitably require infrastructural expansion sufficient for transferring additional volumes of coal and vast costs for the budget.
The other sphere that will suffer a high cost in case of broad expansion of coal consumption is the environment. It has already undergone dramatic changes for last several decades and been brought to a critical condition in some regions of the Middle Kingdom. Each year China produces more than 9 billion tons of CO2 (Table 1.5), which shove the country to an imminent environmental abyss. In 10-15 years the lack of effective reforms in this field can ultimately spread the foggy effect of the Beijing 2008 Olympic Games corner to corner in this country.
As a consequence we can see that even though there is a big potential for coal industry to promote its enlargement the further application of extensive approach in China’s energy security is unproductive and moreover dangerous. Being aware of the growing threat Chinese government long time ago initiated a program to promote energy sources diversification and diminish the role of coal in the country’s energy balance. Therefore this energy course’s aim was set on other than coal energy sources including oil, gas and alternative energy (Table 1.7). As a result scholars from all over the world started to predict the going down role of coal in China. In this case the Russian scientist – Chufrin, tells about the shrinking value of coal and foresees it to decrease to 60% by 2020 and 58% by 2025.
The second place with the fifth part of the country’s energy balance holds oil. In order to estimate opportunities of the extensive approach in the oil industry we need to consider the factors affecting the oil production, consumption and import. As long as China historically prefers to rely on its own reserves we will start with the reserve potential.
The Asia-Pacific region is as well known for its substantially vast oil fields in Australia – in the Timor Sea, in India – in the Bay of Bengal, in Vietnam – in the South China Sea (SCS). The PRC was not an exception and as any other petroliferous state had its great discoveries in the history of oil production. In 1959 for instance there was discovered the largest Chinese oil field called Daqing(大庆油田)that supplied China with enormous amounts of oil for several decades in a row. The very same oil field allowed the Middle Kingdom to export large bulks of oil to its neighbors. Other big oil fields were discovered in Ordos and Tarim basins and Bohai Bay. However, the immense economic development in 1980’s and multiplying population seriously eroded these oilfields’ potential.
Meanwhile in order for these massive oil deposits to be successfully extracted Chinese government established several state owned companies: China National Petroleum Corporation (CNPC), China Petrochemical Corporation (Sinopec), China National Offshore Oil Company (CNOOC). Their responsibilities were divided on the basis of geographic principle. The CNPC became fully responsible for development of the northern and western oil deposits; the Sinopec took hold of the southern and eastern parts of the country and the CNOOC started to work on sea.
Nowadays the main petroleum rich zone covers up to 600 thousand km2. Here could be found the today’s largest oilfields: Zhongnyuan, Huabei, Shengli, Liaohe, Dagang and the previously mentioned Daqing. These petroleum deposits represent around 70% of all the proved oil reserves in China. The western part with the total area of 1 million km2 encircles such oilfields like Qinghai, Turpan-Hami, Dushanzi, Karamay, Yumen, Tarim. In the central section with the total of 2 mln. km2 range we can find such oil fields as Changqing, Sichuan, Henan and other. The Ordoss Basin with the area covering 370 thousand km2 represents a relatively new and perspective deposit, which spreads through the provinces Gansu and Shanxi and also the Ningxia Hui and Inner Mongolia Autonomous Regions (Figure 1.9). The continental shelf covers 1.3 million km2. According to Chinese experts the following areas possess substantial amount of gas and oil: the offshore of the East Sea, Bohai Gulf, the Yellow Sea and the northern part of the South Sea.
This all tells us about some sort of potential in China in terms of extensive approach application in the oil industry. The production level continues to grow. As stated by the “report on the China’s energy development” issued in the PRC National Energy Board, China produced 190 million tons of oil in 2008. The average annual growth in the beginning of the XXI century was about 2%. By this pace the production in 2012 reached 207.5 mln. tons.
However the facts indicate that the classic form of oil production growth has not been successful in drawing alongside with the consumption level. Starting from the time of being an oil exporter in early 1990’s China has reached a stage when it needs to import more than a half of its petroleum necessities. The difference between supply and demand grows considerably each year. The statistics show that from 1965 up to 2008 the demand skyrocketed by 37 times while the supply raised only by 17 times.
The predictions for this matter are also full of anxiety. The Oxford’s experts tell us that in 2030 China will consume twice the amount of oil it consumed in 2010. Giving actual figures the researchers say that the import of petroleum will surge by 8.6 mb/d. Not too much room for positive thinking here is due to the diminishing size of conventional oil reserves and rising degree of extraction’s complexity. According to the BP’s data by 2013 China had 2.4 of the proven oil reserves, which equals 1% of the world’s petroleum assets. These figures could hardly be called sufficient when it comes to such a country as China.
Eventually for last two decades the China’s oil sector has embraced many threatening features. No doubt there were attempts made to rectify the deteriorating situation as the one in 1996 when the government introduced a plan to mount the oil production level up to 300 mln. t. by 2010. Like we mentioned before the plan has obviously failed as from 1991 to 2012 the apparent stagnation of productive capacities’ development was accompanied by the five-fold increase in oil demand and rapid growth of import (Figure 2.1)
The given figure also shows an interesting peculiarity according to which China’s oil production plus import exceed the consumption volume. In 2012 there was more than 560 mln. t. of produced and imported material against 483 mln. t. of consumed amount, which leaves almost 80 mln. t. of spare oil. This leads us to another branch of extensive approach in ES – Strategic Petroleum Reserves (SPR). This policy could be referred to the extensive approach as long as it stipulates accumulation and storage of extra oil.
The first steps of this policy’s implementation take us to the beginning of the XXI century. During the tenth five year plan (2001-2005) the government initiated creation of the SPR in China. In 2003 there were commenced construction works of the reserving facilities in different regions of the Middle Kingdom. The program consisted of three stages. The first phase with 4 oil warehouses and 14 million tons of storing capacities has already been completed. The completion of the second and third phases the SPR reserves are supposed to add 28 and 24.5 mln t. respectively. The whole program should be accomplished by 2020.
This plan was designed to catch up with other APR states such as Japan, South Korea and Australia. These states currently contain mandatory oil reserves equal to 90 days of import of oil equivalent. Another vivid example is the USA. In 2006 the SPR of the United States held approximately 94 mln tons that could let the White House to endure no petroleum import for 55 days based on the consumption level of 2005.
However let us keep no assumption that a simple “oilbag” is capable to solve all the long-running issues of ES. Nor is capable any other energy source so far. That would have been a pure delusion. There are lots of problems in assessing actual benefits of such reserves as nobody knows what to do with them in a real life. The Chinese government for instance had no concrete system on how to apply the SPR and distribute those petroleum assets in case of emergency.
Nonetheless it is good to know for a driver that there is an airbag to save him and his vehicle in case of unpredicted circumstance and the same feeling have any government that propose the establishment of SPR in their country. Given that oil represents one of the most popular energy sources in the world this leads us to understanding that even though SPR do no physical good they are important in terms of mental stability and growing confidence in any nation.
It is also important to underline that this confidence and stability is built not only by petroleum reserves facilities. Adequate and timely maintenance of energy sector in China requires an extensive chain of energy facilities and infrastructure across the country and even beyond its borders. Although in recent years China had a ramified energy infrastructure the major part was concentrated in the north-eastern part close to the capital and had no thoroughgoing connection with the southern part, which at some degree lived its own life (Figure 2.2).
Hence, application of the extensive approach implicates the necessity to expand the number of energy facilities and infrastructural base. When it comes to oil it refers to pipelines, oil refineries, strategic oil storages, creation of oil tanker fleet and shipyards to receive them etc. Each of these facilities built drives the China’s choice more and more in favor of oil. On the assumption that the PRC is highly dependent on oil imported by sea it has crucial importance for China to build its own tanker fleet. At the same time such a move will lead to the following consequences:
1) More dependence on oil as one of the most imperative energy commodities and as a consequence acceptance of the reality that more than a half of the demand will be supplied from external sources.
2) With the understanding that the majority of Chinese oil supplies trace their roots to such troubled regions as the Middle East and Africa and run through not less troubled Malacca Strait with its piracy issue, this means high dependence on political and military situation in these areas of high risk
3) Deeper dependence on price trends in the oil market.
The expansion of the oil sector as we can see has two different ways – via ground routes and pipelines or via sea routes and oil tankers. Recently China was leaning more in favor of the latter one as it gives some sort of advantages. Having its own tanker fleet provides freedom in terms of selection of energy partners and paths for delivery of their goods. This offers better maneuverability in the crisis times.
In order for this to happen China is building up its own tanker fleet. Currently the government is planning to build 50 tankers of VLCC type (Very Large Crude Carrier) with enlarged volume of 250000 tons and more, which total cost is 4.5 billion dollars or 90 million each. By now China has more than 60 vessels of this kind. The idea is to make at least half of the imported crude oil to be carried by Chinese ships.
In addition to that China also had a joint-venture with Venezuela to build two ultra large oil tankers with a capacity of 320000 deadweight tons. These kinds of projects are very essential as in the recent years China was still highly dependent, for nearly 90%, on foreign companies and their vessels. On the contrary Japan delivered 80-90% of its imported oil using the services of Japanese companies when the USA was 70% self-sufficient using this characteristic.
However the biggest challenge for China’s oil security is its price. As it was shown in the figure 1.1 the oil prices had a highly unstable course during last two decades. Within this case such small amendments like a deduction of OPEC’s production capacity for 100-150 million tons a year or an increased demand for oil resources from import-nations may lead to price fluctuations up to 200%.
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