China sharpens focus on energy security as Ukraine war raises supply crunch risk
- Plans for increased domestic oil and gas outputs shed light on Beijing’s eagerness to reduce reliance on foreign fuels
- Chinese fossil fuel imports have fallen sharply since the Russian invasion, which threatens to worsen a looming energy crunch
The war, which has lasted 11 months and shows no sign of an immediate end, has “profoundly” changed the global energy supply landscape, according to Wang Zhen, president of China National Offshore Oil Corporation (CNOOC) think tank the Energy Economics Institute.
A report by the institute predicts a tightening this year in the global oil market, with Russian supplies continuing to be hit by Western sanctions as well as the Opec+ decision to reduce supply.
“The importance that countries attach to energy security has increased significantly [in the wake of the Ukraine war],” Wang told an online energy forum in December when the report was released, according to state-owned Economic Daily.
Also last month, Beijing announced its latest plans to strengthen China’s domestic energy supply by expanding consumption and investment at least until 2035.
Priorities include improving reserves and increasing production of domestic oil and gas, while boosting the exploitation of the resources onshore and offshore, according to a document released by the State Council.
“[We should] promote stable and increased production of shale gas and enhance the scale of shale oil development, while guiding and encouraging social capital to enter the field of oil and gas exploration and exploitation,” the State Council said.
While the plans were widely seen as part of Beijing’s push to revive its Covid-hit economy, they also shed light on China’s eagerness to address energy security concerns, which has become one of the Chinese leadership’s top priorities.
China’s energy imports have fallen sharply since Russia’s invasion of Ukraine, which exacerbated tightening energy supplies in Europe and pushed up global prices of oil and gas.
According to the Energy Economics Institute report, China’s crude oil imports for 2022 are likely to stand at around 501 million tonnes, accounting for 70.9 per cent of its oil use, down from 72 per cent in 2021.
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In contrast, domestic output has been growing, with oil production expected to reach 205 million tonnes, its highest since 2016, the report said.
Against soft demand caused by economic weakness, China’s gas production was expected to reach 221.1 billion cubic metres, with year-on-year growth of 6.5 per cent, the institute estimated.
Chinese waters hosted nearly 40 per cent of the world’s offshore drilling operations last year, with further expansion under way.
CNOOC said last week that work had started on the second phase of its ultra-deep sea gas field off the southern island province of Hainan. Once complete, the field’s annual peak output is expected to rise from 3 billion to 4.5 billion cubic metres.
Nationally, offshore natural gas production is estimated to grow to 23 billion cubic metres this year, compared to last year’s 21.6 billion cubic metres. China’s offshore oil production is expected to exceed 60 million tonnes in 2023.
As the world’s second-largest economy and biggest manufacturer, China is highly dependent on fossil fuel imports, becoming a net importer of oil in 1993.
Since then, it has steadily ramped up efforts to bolster energy security – establishing international energy partnerships in the Middle East and receiving hundreds of cubic metres of natural gas every day via pipelines from resource-rich neighbours including Russia and Central Asia’s Kazakhstan, Uzbekistan and Turkmenistan.
Still, China’s energy security remains vulnerable, particularly to geopolitical and economic forces and even the changing climate.
In December 2017, thousands of families in northern China suffered through a winter heating crisis when Turkmenistan reduced supplies of natural gas. And in 2021, a coal shortage led to a power crunch that rippled from coastal factories to households in the north.
The most recent pain was felt last summer, when hundreds of millions of people – from rural Sichuan province in the southwest to the eastern coastal province of Zhejiang – were subjected to power rationing because of record-breaking heatwaves and drought.
Uzbekistan last month ordered its state-owned gas producer to temporarily halt exports of natural gas to China as the Central Asian country battles to cope with surging power demands this winter.
China has been pushing to improve its domestic production of oil and gas since 2016, when a supply glut sent global oil prices into a dramatic plunge. At the same time, China’s domestic crude oil production dropped to its lowest since 2010, at just 199.69 million tonnes.
Policymakers in Beijing have long urged domestic companies to increase investment in domestic oil and gas exploration, but efforts have intensified in recent years.
In 2019, China announced a seven-year action plan to increase domestic production and storage in its oil and gas industry. State-owned oil giants were also told to increase financial and technological investment.
Some progress is being made. In November, Xinjiang’s natural resource administration said it was inviting bids for five onshore exploration blocks in the region, for an initial period of five years for successful bidders.
