MARCH 1987 - VOLUME 8 - NUMBER 3
C H I N A : T H E L O N G M A R C H T O D E V E L O P M E N T
Powering the People's Republic
by John Boatman
When China first opened its doors to foreign companies in the 1970s, one of the few avenues for making commercial contacts was the Guangzhou (Canton) Trade Fair, held two times a year in the capital of southern China's Guangdong Province.
Although it has since been eclipsed by a proliferation of specialized trade exhibitions in every major Chinese city, the fair in its heyday attracted large numbers of international businesspeople excited by the prospect of a huge untapped market. What those first flocks of traders did not know at the time, however, was that whole sections of the province had to be deprived of electricity just so there would be enough power for the bright lights and dazzling displays of the trade fair itself.
China, in short, needed more energy. Without adequate power supplies, the argument went, the country's ambitious modernization drive would fizzle almost before it began.
There is no doubt that China has abundant energy resources. Huge coal deposits, significant reserves of oil and natural gas, and powerful rivers testify to the country's energy potential.
Early development of the country's coal and oil did much to fuel the country's industrialization efforts of the 1960s and 1970s. But the newer reserves in many cases are far from industrial and population bases, and such basics as rail lines to carry coal and transmission lines for electricity are few and far between. Moreover, China simply does not have the cash to bring all sectors up to their full potential without some external assistance. The result is that foreign companies and multilateral institutions such as the World Bank have been invited to provide technological, material and financial assistance, and are now actively engaged in helping China develop its energy industry.
But China, anxious to meet its energy needs, is determined to be in full control of its energy future. Chinese officials have only recently admitted that some exploration and development practices of the past may have done more harm than good. And such revelations are sure to increase the debate over China's energy policy.
China's Seventh Five-Year Plan (1986-1990), released in March 1986, sets out the following growth targets for energy: coal production is expected to increase to one billion tons or ' more per year by 1990 - a growth of at least 3.3 percent per year; crude oil output in 1990 is expected to reach approximately 150-160 million tons - an increase of 3.7 percent annually; China will develop an additional 810 cubic meters of natural gas by 1990 - growing 3.1 percent per year; and electricity is slated to hit 550 billion kilowatt-hours (kwh) , in 1990 - a yearly rise of 6.2 percent. '
Energy remains a high priority in the country's development plans, despite drastic spending cutbacks on the heels of a massive depletion in foreign exchange reserves. In what officially was described as a hemorrhage, reserves that had been assiduously saved over the years streamed out in a matter of months in 1985-86 as the government decentralized commercial decisionmaking and the country went on a spending spree. Reserves have since leveled off and Beijing is back in control. Although a project may appear in the five-year plan, there is no guarantee it will go through - even after complete review of its benefits and drawbacks has been conducted. Not surprisingly, some energy projects already are being crowded out of the competition for official attention and development money.
COAL IS STILL NUMBER ONE
China's vast bureaucracy is at home in the coal sector. The Ministry of Coal Industry, the Ministry of Railways and the Ministry of Water Resources & Electric Power, along with the State Planning Commission and various provincial coal boards and research facilities, all have a voice in how China goes about finding, producing, transporting and selling its coal.
Coal now accounts for roughly 75 percent of China's primary energy consumption and its place in China's energy future is secure. But the Chinese leadership still faces questions on how to proceed with coal development. The low cost of oil throws the government's plan of substituting coal for oil wherever possible into question. And the leadership must still decide whether to stick to a few large projects or go with numerous small mines, where most of the recent increases have been registered.
Some decisions have been made. There will be a more "concentrated" use of foreign capital for construction of mines and related facilities, the government says. The trend in the current five-year plan shows the government is moving away from capital-intensive open-pit projects, with their high upfront investment, and toward development of less expensive underground mines and renovation of existing mines.
The big exception is the Antaibao No. 1 open-pit coal mine at the Pingshuo field in north-central China's Shanxi Province. A joint venture of Occidental Petroleum Corp. (U.S.), Bank of China Trust & Consultancy Co. (a unit of the Bank of China), the China National Coal Development Corp. and the China International Trust & Investment Corp. (CITIC) will develop the mine, which is expected to produce 15 million tons of coal annually when it opens in 1988. Occidental holds 25 percent of the 30-year joint venture and three Chinese partners hold the rest. Japan will buy a significant amount of Pingshuo coal, and the remainder is likely to be sold domestically.
Many analysts suspect the only reason the project is going through at all is because it has the personal backing of Deng Xiaoping, China's pre-eminent leader.
Most of the other major open-pit projects have been scaled back - most notably the Huolinhe and Yiminhe lignite mines. Others have been canceled altogether - reportedly the fate of the Yuanbaoshan and Junggar mines in Inner Mongolia. Even the ubiquitous World Bank, which was gearing up to assist several new coal projects in China, has been asked to focus instead on renovating existing mines.
To increase foreign exchange, more coal is to be sold abroad as well. Already the world's largest coal exporter, China stopped collecting a tax on foreign coal purchases from the first of the year. This and other measures, such as the opening last December of a quality control center to monitor coal exports, will greatly help the government achieve its goal of boosting coal exports this year by 60 percent to 16 million tons.
ELECTRICITY - STRAINING TO CATCH UP
Coal is also an important component in the development of thermal power - the new kid on the block and by all accounts one of China's energy "winners." In line with government plans, nearly 75 percent of all new thermal plants will be coal-fired. Most of the new capacity will be in the form of 300- and 600-megawatt (MW) plants.
Relatively inexpensive to build, thermal plants are likely to be favored over hydroelectric and nuclear power as the energy source of the next decade. The State Planning Commission has launched a drive to lower the fixed investment per unit of energy output, and thermal power fits neatly into these plans: besides being relatively cheap, thermal plants can be built in three to six years, far quicker than it would take to bring a nuclearor hydroelectric facility on line.
Another indication of the primacy accorded to thermal power is the recent creation of the Huaneng International Power Development Corp., a powerfully-backed, wellfinanced operation that has been involved in most of the country's recent thermal plant purchases. The following projectswith foreign involvement are now underway:
The seventh five-year plan also calls for an additional 8,000 MW of hydroelectric capacity by 1990, and for construction to begin on a further 10,000 MW. The ambitions for hydropower seem geared for the long term, and more than one Chinese technocrat has said hydropower will join thermal power in the 1990s as the energy form of choice. For now, however, the largest hydroelectric project in China -Three Gorges Dam in Hubei Province - is not even in the five-year plan.
First proposed in the 1950s, Three Gorges has been postponed a number of times and is currently on hold. Concerns that have prevented the proposal from making it off the drawing boards include its massive cost (and the likelihood of cost overruns), social disruptions ruptions and the environmental impact.
Despite all these obstacles, Three Gorges still could get underway, possibly as soon as early 1988. Prospects for the green light will be easier to determine at the completion of a feasibility study now being conducted by a Canadian consortium led by the SNC Group, Lavalin and Acres International, and including the Canadian provincial utilities Hydro-Quebec and British Columbia Hydro. The $9 million study, which will be reviewed by a panel of experts funded by the World Bank, is scheduled to be finished by fall 1987.
THE OIL INDUSTRY TAKES A BEATING
Pennzoil Co. of the U.S. announced last October that it would close its exploration base at Zhanjiang (Guangdong Province), one of the towns set up as a logistics center for the South China Sea oil boom that never materialized. While Zhanjiang and other oil bases are not ghost towns just yet, foreign enthusiasm for exploring off China's coast has all but evaporated.
China's original drive to convince foreign companies to drill exploration wells all over the South China and Yellow Seas resulted from a conviction that this was the fastest route to foreign exchange. The Chinese certainly could have developed the technology and done their own drilling - and probably would have preferred to. But the foreigners, they believed, could do it better and faster. Thus, armed with what seems in retrospect to be an almost blind faith in existing Chinese offshore drilling data as well as liberal doses of hope, the foreign oil drillers arrived.
In the first round of offshore bidding, 19 contracts were finalized; in the second round, half as many foreign companies signed on. A combination of drastically reduced oil prices and the absence of a truly viable oil find eliminated much of the initial excitement at gaining access to huge expanses of unexplored continental shelf. Although firms like Exxon, Shell, British Petroleum and Texaco will continue searching for oil, China has had to offer them better terms in the more recent contracts.
Foreign companies also want to see better terms before they commit to on-shore oil exploration. In March 1985, the central government opened 10 southern provinces to foreign exploration, but the response so far has been lukewarm. One of the only contracts to date was signed in May 1985.
Like coal, exports of oil are likely to increase starting this year. Already, foreign buyers have noticed a change in pricing terms, as China learns how to drive a hard bargain. Still China's non-OPEC oil is more attractive than what the cartel is selling these days. All of which goes to show that the Chinese, especially Sinochem - the state-owned company now is fully in charge of oil trading - have become astute oil merchants and probably are in the market for keeps.
LITTLE FUTURE IN NUCLEAR POWER
Backed by the Reagan administration, U.S. companies pushed hard for congressional approval of a bilateral nuclear cooperation agreement with China. Approval came in November 1985, but it came too late for U.S. companiies to take part in bidding for one of China's only foreign-suplied nuclear plants.
The plant is now under construction by several European companies at Daya Bay (Guangdong Province), some 30 miles northwest of Hong Kong. The project, worth approximately $4 billion at current rates, took eight years to negotiate and was finalized last fall. It is scheduled for completion in 1993. Two 900-MW pressurized water reactors will be supplied by the French firm Framatome at a cost of approximatley $1.03 billion. The turbine generators and other conventional equipment are to be furnished by GEC of the U.K., no relation to the U.S. firm of the same name. The total value of the GEC contract is approximately $382 million. Electricite de France is to provide engineering services at a cost of $213 million. The Guangdong Nuclear Power Joint Venture Co. (GNPJVC) will run the plant.
Hong Kong will own 25 percent of GNPJVC, with China holding the other 75 percent. China will be the sole owner by the year 2005. When completed, Daya Bay will supply 10 billion kilowatt hours of electricity annually to Guangdong Province and Hong Kong. The territory will take 70 percent of the output, helping the plant to earn foreign exchange.
Daya Bay's proximity to Hong Kong had residents of the territory up in arms over the potential dangers of a nuclear mishap, and the uneasiness grew after the Chernobyl accident in April 1986. (See Nuke Plant Heats Up Hong Kong p. 12)
Prospects for other nuclear plants are also grim. The few that will be built are to be situated in the southern and eastern provinces, where underdeveloped transportation facilities have made coal and oil hard to come by. The 300-MW Qinshan reactor in Zhejiang Province seems to be going ahead, but it now looks as if it will be handled mostly by Chinese companies, following a recent government campaign for nuclear self-reliance.
Two additional 600-MW reactors reportedly will be built at Qinshan, but foreign involvement has not been mentioned. Sunan, some 85 miles northwest of Shanghai in Jiangsu Province, has been "postponed indefinitely." There may be other plants built in the electricity-short coastal provinces like Guangdong, Zhejiang, Fujian, Jiangsu and Liaoning, but probably not for some time.
The industry that not too long ago confidently predicted a market of $20 billion for foreign companies is now described as a mere "complement" to other energy forms. The accident at Chernobyl has dampened the nuclear aspirations of more than one developing country, including China. Moreover, there is little prospect, apart from Daya Bay, of foreign exchange earnings from Chinese nuclear power. Nuclear plants are simply too expensive to build and there is too much lead time between when construction begins and the plants finally start producing power. Nuclear plants in China are expected to take at least twice as much foreign exchange to build as fossil fuel plants and will produce only half the capacity. Finally, there is reportedly serious opposition within China's leadership to the development of nuclear power.
CHINA'S ENERGY FUTURE
It was only at the beginning of this decade that China's rulers began taking a serious look at the country's chronic shortages of fuel and power. High-level Chinese officials suggested that the unprecedented decline in petroleum production in the late 1970s was caused by an overemphasis on production without sufficient attention to exploration and development of new fields, a sentiment that was echoed in other energy sectors as well.
China's energy policy for the next few years in all likelihood will emphasize development of inexpensive and efficient energy at home and increased exports of the old standards - coal and oil. In addition, there will be further progress toward more efficiency in development, management and allocation of energy. This will prompt efforts to improve intersectoral coordination, which in turn could lead to a reimposition of central control over decisionmaking in the energy arena. While competing interests still will have influence, the number of influential bodies is likely to diminish.
Tension between China's desire for self-sufficiency and its need for foreign assistance is unlikely to dissipate any time soon. International energy suppliers, already hurt by falling prices and shrinking worldwide markets, will have to endure similar kinds of hardships in China. This is all the more true in light of current political uncertainties at the highest levels of the leadership, which have slowed the reforms that opened the market initially. But there is little question that foreign aid in some form will be needed before China can achieve the kind of growth it predicts for the next five years.
John Boatman, formerly editor of the biweekly newsletter China Business & Trade, is currently editor of East Asian Executive Reports, a Washington-based monthly magazine.