Page 2 of 2 New life for coal in quake's aftermath
By Jianjun Tu
when it would be able to refine 10 Mt of crude and annually produce 0.8 Mt per
annum of ethylene. If PetroChina's reassessment is based solely on technical
considerations, its Sichuan refinery plan is likely to be scrapped as building
a petrochemical facility in an active earthquake zone would make the
construction costs escalate far beyond its original $5.7 billion budget.
Moreover, a greenfield refinery in Sichuan is not the only viable option to
supply oil products to the land-locked province: PetroChina Lanzhou (10.5
Mt/annum), PetroChina Guangxi Greenfield refinery (10 Mt/annum in 2010),
Sinopec Jinmen (5.5 Mt/annum) and Sinopec Wuhan (5 Mt/annum) could all be
expanded to cover Sichuan's petroleum consumption growth in the future.
Nevertheless, political considerations for conforming to western development
methods and pressure from the Sichuan provincial government may eventually
influence PetroChina's decision-making process. Moreover, in the wake of the
earthquake, escalating demand for diesel for electricity generation, coupled
with refinery underutilization due to regulation on oil-product prices and
stockpiling before the Olympics to be held next month in Beijing, resulted in
2.89 Mt worth of diesel imports during the first five months in 2008 [3].
Not surprisingly, the year-over-year 916.5% growth in diesel imports has
further disturbed the sensitive world oil market, contributing to elevated
global energy prices.
Sichuan has long been the leading natural gas producer in China - the
infrastructure damage during the earthquake is unlikely to hold back the
investment enthusiasm of both PetroChina and Sinopec. Nevertheless, as part of
the decrease in demand from local industry will be permanent, the rapid output
growth witnessed in the past may be slowed unless PetroChina and Sinopec
quickly find new markets for their lost gas capacity.
After PetroChina's Zhongxian-Wuhan gas pipeline (design capacity – 1.5 billion
cubic meters per year) went into operation in December 2004, the lack of gas
storage capacity was a constant headache for pipeline operators [4]. In the
wake of the Sichuan earthquake, the importance of strategic gas storage for end
users to alleviate the risk of supply disruption became self evident. As a
result, the planning of China’s long-awaited strategic gas storage is likely to
be accelerated.
Similarly, the earthquake, coupled with the financial success of China’s first
four strategic reserve bases at Zhenhai (Ningbo), Daishan (Zhoushan), Xingang
(Dalian) and Huangdao (Qingdao), will add momentum for China to speed up the
second and third phases of its strategic oil reserve development. Finally,
removing subsidies for gas prices may be speeded up if Beijing considers price
deregulation a necessary step for the economical recovery of the earthquake-hit
regions.
Window of opportunity
Much of the aforementioned impact is related to the energy supply side.
Nevertheless, if the endemic illness of the communist party's economic
development philosophy at the local level revealed by the earthquake is fully
recognized by the central government, the potential influence on the country's
energy demand would be very significant.
With a population of 81.7 million, Sichuan is China's major source of migrant
workers. The province is also one of China's top tourism destinations, with
five UNESCO World Heritage Sites. Its geographical setting, surrounded as it is
by the Himalayas to the west, Qinling Range to the north, and mountainous areas
of Yunnan and Hubei to the south and east, mean that it is difficult for
environmental contaminants such as air pollutants to dissipate out of the
basin. As a result, local economic development should focus on the
labor-intensive agriculture, the service industry including tourism, and
less-polluting light industry.
However, heavy industry is a key component of the Sichuan provincial
government's economic development portfolio. To name a few examples,
petrochemical plants, fertilizer industry, cement manufacturing, metal
smelters, and iron and steel facilities in Sichuan have all been analyzed by
Chinese financial analysts recently [5].
If most Chinese provinces continuously stick with the current GDP-first
development philosophy without due consideration to their unique circumstances,
economic gains are expected to come together with increasingly higher
environmental costs. Moreover, if no provincial governments is willing to
follow a soft development path, Beijing's ambitious energy conservation goal of
lowering national energy intensity by 20% between 2005 and 2010 will be
extremely difficult to meet.
In sum, the damages on energy infrastructure during the recent earthquake were
substantial on the regional level. Nevertheless, given Sichuan's relatively
small share in the national total and China's long history of dealing with
severe natural disasters, the impact so far has been controlled well by both
government officials at various levels and state energy companies.
As a result, the overall effect of the earthquake on national energy supply and
demand is modest. However, the long-term impact on China's energy development
will be more substantial. While Beijing's ambitious nuclear and hydro
development plans are likely to be more conservative, the extra strain on
China's tight coal supply chain has created a unique opportunity for the
township village enterprise mines. The importance of a healthy private sector
in the coal mining industry may eventually be recognized by Chinese decision
makers. Moreover, in the wake of the earthquake, the development of the
long-awaited strategic gas storage and the second and third phases of China's
national strategic oil reserve are expected to be accelerated.
Finally, while both the exploitation of resource-rich hinterlands to subsidize
developed coastal regions and relentless heavy industry development across the
country have become increasingly unacceptable, it would require both bottom-up
complaints from the hinterland provinces and top-down retrofication of China’s
promotion standards for government officials to fix the endemic illness
embedded in the country's energy and economic systems.
Notes
1. NDRC, 2007, Mid- to Long-term Nuclear Power Development Plan: 2005-2020.
2. China Electricity Council, January 11, 2008, Latest Statistical Report on
China's Electricity Industry in 2007.
3. China Customs.
4. PetroChina Central China Gas Marketing Company, January 15, 2007, available
at http://www.cnpc.com.cn.
5. Ge Jun, "Impacts on the Metal Smelting Industry by the Sichuan Earthquake
Are Relatively Modest", ChangJiang Securities, May 12, 2008. Cui Jingyi and
Jiangqiu, "Post Earthquake Construction will Stimulate Demand for Iron and
Steel", Guotai Junan Sicurities, May 14, 2008. Qiu Yamei, "Impact on the Cement
Industry by the Wenchuan Earthquake in Sichuan", Donghai Securities, May 13,
2008. Yang Yue, Sichuan Earthquake's Impacts on China's Economy: Confidence in
the Petrochemical Industry Was Hurt, Finance, Issue 212, May 26, 2008.
JianJun (Kevin) Tu (jjtu@mkja.ca) is a Vancouver-based senior
energy and environmental consultant, and a research associate of the Canadian
Industrial Energy End-Use Data and Analysis Centre.
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