China to increase investment in Xinjiang energy resources

A recent article in the The New Your Times highlights growing Chinese investment in Xinjiang’s energy resources. Given the large provable reserves of oil, natural gas, and coal present in the region, investment will go forwards regardless of increased potential for ethnic and economic strife.

The main drive for investment is in oil. Xinjiang has 21 billion tons of estimated oil reserves. The city of Karamay in the Dzrungarian Basin is quickly becoming a hub for oil exploration and production in the region. Located near the Kazak border, Karamay has the advantage of being near existing oil and gas infrastructure and along future pipeline routes from Russia to China. Along with E&P, a slew of other industries are moving into the region from electricity providers to expand infrastructure, to coal gasification to transform the 40 percent of Chinese coal reserves locating in Xinjiang.

The energy and development boom will certainly give China a boost at a high cost to Xinjiang and its Uyghur population. One of the main drivers behind Xinjiang energy investment is the opportunity to shift pollution away from China’s eastern, Han core. Although the large number of development projects will be presented as an economic boon for the region, development projects do not automatically equate a large influx of Uyghur job opportunities. Many of the companies taking part in the Dzrungarian Basin boom are either using local Han labor or are importing Han labor from outside of the region, a long standing grievance for local Uyghurs for decades.

A new program of oil and gas development and regional investment in Xinjiang will end with an all too familiar conclusions, Xinjiang’s exploitation for the benefit of China proper. The long standing tensions that exist in Xinjiang will continue unless the rewards of development are distributed far more equitably. The pending oil and gas boom were certainly be a welcomed boost to China’s national energy needs. Can or will the Chinese government transition that gain into a positive on the local level remains to be seen.

China to Reduce Shale Gas Targets

China’s National Energy Administration recently released a report indicating the country will not reach its 2020 shale gas target of 60 -100 billion cubic meters. Revised estimates now put Chinese shale gas production at 30 billion cubic meters by 2020. The major hindrances cited were water supply issues, high levels of seismic activity near shale deposits, and the geological difficulty of Chinese shale deposits.

The news is disheartening for several reasons. Given the large reserves in China, shale gas difficulties mean a cleaner alternative to coal based power is no longer fast approaching. The reduction in expected shale gas production also means China will be more dependent on foreign natural gas suppliers to meet growing energy needs. This means waiting out long-term pipeline projects and continuing reliance on, from a Chinese perspective, easily disrupted sea routes.

The reduction in estimated output is not without its positives. Realization that large scale shale production in areas of high seismic activity is  not prudent reduces the risk of industrial and environmental incidents. The reduction of water hogging  fracking techniques in a country on the verge of a water crisis also brings forth its own social and economic benefits. The National Energy Administration’s announcement is not likely to affect current projects in Sichuan, China’s shale gas hub for the time being.

(Link to original story in The Economist)

 

Central Asian Border Violence and Chinese Pipeline Plans

A recent border clash between Kyrgyzstan and Tajikistan, reported July 28, 2014, may put a major hurdle in the way of  a Chinese gas pipeline project in the area.  The incident, in which one Tajik died and eight were wounded, highlights continued tension between the two Central Asian countries going back to January of this year. China had planned to begin construction on Line D of the Central Asian Gas Pipeline (CAGP)  from Turkmenistan through Tajikistan and Kyrgyzstan. If ethnic tensions increase, the viability of the pipeline’s route may come into question.

While China has significant natural gas capacity from Central Asian countries at present, energy pipelines are more than simply a means to oil and gas for China. Oil and gas pipelines play prominently in Chinese economic integration plans with neighboring countries. Line D may be the tie that binds all of Central Asia to China by further integrating Tajikistan and Kyrgyzstan into the Chinese regional economic fold.  This is particularly important for China as regional economic integration can be transformed into other forms of state-to-state cooperation, especially in response to an uncertain security situation in Afghanistan and Xinjiang. If China works to act as a mediator between the two it would highlight not only the importance of Line D but also Tajikistan and Kyrgyzstan to Chinese regional plans.

China and Russia Sign Gas Deal

China and Russia signed a 30-year, $400 billion natural gas deal on 21 May 2014. The gas deal is the culmination of a decade long negotiation, believed to have gotten a final push to completion after the fallout from recent Russian actions in Ukraine. Under the gas deal, Gazprom will supply China National Petroleum Corporation (CNCP) with 38 billion cubic meters of natural gas annually. The deal also calls for the creation a 2500 mi/4000 km pipeline named Power of Siberia which will pull gas from the Chayanda gas field in Siberia to China. Russia’s first gas delivery is expected in China in 2018. Along with the natural gas deal, Russia and China signed a contract for Novatek to supply China with 3 million tons of liquefied natural gas (LNG) annually.

While both deals are significant to both countries respective needs, together they represent a massive investment in not only natural gas development but also Sino-Russian relations. Long gone are the days of the Sino-Soviet Split. For China, the deals are incredibly beneficial. As mentioned in an early post, China is undertaking a massive shift towards natural gas over coal for electricity generation. The smaller LNG deal itself helps China expand natural gas usage, especially since most of China’s LNG infrastructure is located near energy hungry urban areas.

The Power of Siberia deal is more than just a steady supply of energy from a foreign source. Traditionally, Chinese overland pipelines have been an important stage in improving relations with neighbors and setting the stage for greater economic cooperation. Sino-Russia relations have been beneficial to each country since the fall of the Soviet Union, however the Power of Siberia deal could signify a greater integration between the two countries given the long-term nature of the deal.

China Shifts Toward Natural Gas

Development requires energy, and in the case of China that energy need is massive. Traditionally, coal has been China’s energy source of choice given its cheap abundance domestically. This reliance is beginning to change as the Chinese government looks for cleaner more efficient alternatives to coal. Even with strong development of renewable energy sources natural gas is currently the only large-scale feasible alternative to coal based energy for China.

Natural gas offers several advantages to coal outside of the lower pollution levels. Pollution is a major concern, especially given estimates that China will have close to one billion people living in urban areas by 2030. The Chinese government is looking to curb not only carbon emissions but a whole host of pollutants that coal-fired power plants generate. While gray sky’s are China most obvious pollution problem, acid rain, respiratory diseases, and shorten life spans are significant as well.

Natural gas is also extremely easy to transport. China’s coal deposits are located in central and western China whereas its major energy consumers are located across the southern and eastern areas of the country. Although natural gas pipelines are expensive, once operational they create a much cheap and effective transport system than the road and railways need to move coal. China currently has several major international gas pipelines and extensive LNG terminals along its coast line, making a transition to natural gas as a primary energy source easier.

A transition to natural gas would also put greater pressure on oil and gas companies to move forward with unconventional gas extraction. China is home to some of the largest proven shale gas reserves in the world. Shale gas development is dependent on several factors, not just a coal dominated electricity market. Technology and available water resources also act as hindrances. A greater emphasis on natural gas usage would make it easier for Chinese oil and gas companies to shift resources into tackling those problems and expand shale gas extraction outside of the Sichuan basin. Overall, a shift toward natural gas in China would have wide-ranging benefits.

Vietnam Objects to Chinese Offshore Rig

A new Chinese, deep sea oil rig in the South China see is raising objections from Vietnam. The Haiyang Shiyou 981, owned by CNOOC, is moving into position by the Paracel Islands, disputed territory for both countries. Vietnam is calling the move illegal while China claims the drilling activity will take place in Chinese territorial waters.

China’s ongoing dispute over the South China Sea with its neighbors has reached a high point in the past few years. China has shown assertiveness in its territorial claims in the region that have increased tensions and misgivings among its less powerful neighbors. The somewhat arbitrary  Chinese claim on the South China Sea is exacerbated by the presence of oil and gas deposits in the region.

The Chinese government has a policy of developing domestic energy resources to their maximum potential in order to avoid long, vulnerable supply routes. Energy resources within the South China Sea are a problematic implementation of this policy. The amount of oil and gas, along with the territory itself is heavily disputed. The recent drilling rig placement is more political than practical in application. Furthermore, if China is able to establish a number of working deep sea rigs, there is no guarantee they will not be used as military targets against China should a territorial dispute turn to combat action.

Development of oil and gas resources within the South China Sea is an inevitable occurrence. The method in which those resources are extracted is not. An aggressive, unilateral development by the Chinese government will push rivals to speed up their own attempts at extraction. This could easily lead to environmental issues and poor resource management techniques as speed take precedence over efficiency. The worse case scenario is open combat between China and one of its southern neighbors. Even with a larger navy and air force, a surprise attack could result in an embarrassing outcome for China as tankers and rigs are destroyed or captured. China needs to apply its tradition of bilateral, joint extraction projects that have benefited it greatly on land to exploration and extraction in the South China Sea. This may be a clear break from the prevailing government narrative on the South China Sea, but it would provide a much more stabilizing outcome.

The drilling rig placement was announced on 5 May 2014. Within 48 hours Filipino police arrested a Chinese fishing vessel near the Spratly Islands, and a Vietnamese military vessel crashed into a Chinese vessel near the Paracel Islands drill site. Clearly the area is rife with tension that could quickly escalate. China and Vietnam have previously fought naval skirmishes in the region and Vietnam views China as its greatest security threat. China’s next steps in developing energy resources in the South China Sea will be crucial not only to Chinese energy policy but also regional security policy.

Chinese Government to Revise Environmental Protection Law

The Chinese government announced on 24 April 2014 it will revise the Environmental Protection Law, the first change in the law in 25 years. The revisions will go into effect 1 January 2015. Among the revisions are much needed stiffer penalties for polluters. Along with a revamped financial penalty system, the revised law will create a registry of law breakers, jail time for polluters, and will demote or remove local officials guilty of misconduct.

China’s Environmental Protection Law is long overdue for reform. In particular. the new daily fine system has potential to create a real financial punishment structure that was much more easily dismissed in the past. The challenge for the government will be implementation. Policy implementation can be a barrier for legislative success in China given government corruption,  lack of transparency, and a nonindependent judiciary.

From an industrial perspective, it is still too early to tell what the impact will be. If the law does meet with widespread success, companies will experience a short-term jump in expenses as they rush to comply with the new rules. With regards to the energy industry, coal-fired power plants and oil and gas companies will be hardest hit, given the high level of carbon emissions both produce. The revised law also targets soil and water pollution, meaning successful implementation and enforcement will put pressure on the energy industry to comply. Given the intricate political channels that exist between the state-owned oil and gas companies and the central government, quick compliance may been used as a criteria for political advancement.

Premier Announces Major Energy Projects

Chinese Premier Li Keqiang announced on 18 April 2014 construction will being on a series of major energy projects throughout the country. Li did not indicate if the projects were already slated for construction or completely new developments. Among items mentioned were hydro and nuclear power plants, solar and wind energy projects, ultra-high voltage power lines, and development of unconventional energy sources.

The projects announcement is designed to convey government commitment to increased energy capacity and production, green energy, and a more diversified energy supply. The scant specifics of the energy projects leaves the announcement lacking an overall sense of importance. Large, capital intensive project announcements are a regular part of the Chinese economic landscape. This should not however take away from the importance of energy investment and development in China.

Li’s announcement of nuclear power projects will likely get a large amount of attention. China reversed its moratorium on approving new nuclear reactors in October 2013 and Li’s announcement could signal not only a resurgence in nuclear power in China, but also globally given the pull China has on markets. How the populace in areas picked for nuclear expansion respond will also be worth monitoring, given recent unrest in China over environmental issues.

Another area worth examining will be projects associated with unconventional energy, specifically shale gas extraction. Unconventional plays have had a major impact in North America and could easily create a radical shift in Chinese energy dynamics. An abundant, domestic, clean fuel source would make a large number of government energy goals a reality. A decreased fear of energy blockades could also result in a more aggressive Chinese foreign policy regionally. Li indicated today’s projects are mid- and long-term focused and they certainly have potential to impact China beyond the end of the decade.

Lanzhou Water Contamination

The city of Lanzhou, Gansu experienced a major water contamination event between 10-14 April 2014. During that period, unsafe levels of benzene were present in the city’s tap water.  The tap water contamination is being blamed on a leak from an oil pipe line operated by Lanzhou Petrochemical Company, a local affiliate of China National Petroleum Corporation (CNPC). An estimate 2.4 million resident were affected by the leak, causing a rush on bottled water.

Lanzhou’s water is controlled by Veolia Water, a French-Chinese joint venture. Cooperation between the company and local government was effective in controlling and monitoring the outbreak, although Veolia only present the information about the contamination to the local government some 12 hours after the fact. Water service was restored 14 April and testing indicates tap water is safe for consumption with no reported major health  incidents.

However, the environmental incident is not without its victims. A group of residents were quick to file a lawsuit seeking civil damages, a public apology, and water quality data for the past year. The suit was struck down on 14 April by a local court indicating that the party bringing the suit did not have authority under the law. If the court had accepted the lawsuit, it would have been a major development in China’s environmental movement. Court’s rarely accept lawsuits from private individuals exposed to pollution.

The Chinese central government has spoken many times about taking a serious stance on pollution and corruption. Allowing private individuals to bring suit against pollution violators could allow quick gains in both areas as pollution and corruption often go hand-in-hand. Short-term strain from a flood of lawsuits would result in long-term benefits for China as a whole. Such an action would also require central and local governments to offer up state owned enterprises for sacrifice. It is this element, combined with the overall loss of control to a potentially destabilizing popular environmental movement that most likely stays reform. Beijing still likes to work through affiliated NGOs and more importantly the Ministry of Environmental Protection to tackle pollution. Given the long list of potential destabilizing groups in China could Beijing’s biggest fear be a green movement? It certainly would have a unifying, widespread, popular appeal not seen since the early days of the Communist Party. And a Chinese green movement would dig deep into cultural and historic precedents in China often used by the Communist Party for legitimacy, making such a movement double dangerous to party rule. The development of China’s green movement in relation to government environmental policy is a dynamic worth monitoring given the potential outcomes. Perhaps one day the east will be green.

Environmental Protests in Guangdong

Several protests took place over the past week in Guangdong Province in response to a proposed petrochemical plant in the city of Maoming. The plant would be an addition to a Sinopec refinery in the city and would produce paraxylene (PX), a known environmentally hazardous material.

The first protest occurred on 30 March 2014 in Maoming, with an estimated 1000 people gathered outside the local party headquarters to show disapproval of the project.  Sometime around 10:00PM local time, the peaceful protests turned violent. Both protesters and the local government blame each other for initiating the violent outbreak. Unconfirmed reports of civilians being killed have circulated on Chinese social media along with images of beaten and bleeding protesters. On 1 April, supporters of the Maoming protests gathered in Guangzhou, the provincial capital. The Guangzhou gathering was nonviolent and lasted until 2 April. Smaller protest continued in Maoming throughout the same time period although they have not been marred by violence. Somewhere between 18 and 44 people were arrested by 3 April in connection with the 30 March event.

Anti-PX protests have previously occurred in other Chinese city. In all cases, the primary concern of citizens was the environmental impact of the PX plants. After the recent violence in Maoming and the spread of popular support to Guangzhou, the local government is beginning to soften on the project. A final decision has not been made but it is likely the plant may not be built. Environmental issues are increasingly becoming a  source of unrest in China. Figures from 2012 put overall protests actions in China at 500 per day or 180,000 per year. While environmental protests are not the majority of such events, some systemic issue exists that contributes to such high numbers national and year-on-year increases in environmental specific protests. If a long-term solution is not found by Chinese government entities on all levels, Chinese energy policy and other key policy areas could create knee-jerk reactions once the public learns of a policy initiative. Discussing solutions to rising unrest is beyond the scope of this article, a suggestion for a potential starting point could be increasing public input on particular policy initiatives. Chinese energy policy itself is not a lighting rod subject, however given the connection energy and environmental issues share, popular unrest is likely. Constructively minimizing such event not only allows the Chinese government and Chinese energy companies to reach their goals but also allows the public to achieve outcomes it desires as well.