1. China has one of the world's fastest growing industrial economies. Its GNPgrowth over the past decade has averaged 13% per year, and is expected to remain strong
(8-9% per year) for the rest of this decade. The country, the third largest producer of
energy in the world, depends heavily on the use of (domestic) coal in satisfying its ever
growing energy demand. In 1992, the total consumption of commercial energy in China
amounted to 1,090 NIMtcel; of this total, coal accounted for 75%, oil for 18%,
hydropower for 5%, and natural gas contributed for only 2%, equivalent with a gas
consumption of 16 billion cubic meters (bcm) in that year. The largest consumer of energy
is the industrial sector (70%), followed by households (14%), services (10%) and
agriculture (5%).
2. The country's rising coal consumption (from 435 NIMtce in 1980 to 8 16 MMtce in
1992) is a major source of environmental pollution, the atmospheric damage stemming
mainly from airborne particulate and emissions of sulfur dioxide (S02) and carbon dioxide
(C02). It is generally accepted that in the foreseeable future China will not have a realistic
alternative for its strong dependence on coal as its primary energy source. At the margin,
however, in order to meet the needs of a growing industrial economy, a rational use of the
available domestic natural gas reserves would provide a cleaner and more efficient fuel. The
nation's growth in energy demand has outstripped the growth in energy supply in recent
years, causing energy shortages in the country. Enhancing the supply of cleaner energy
resources and the efficiency of energy use is, therefore, the cornerstone of the country's
energy policy. Chinese National Petroleum Corporation (CNPC) expects to increase the
share of primary energy supplied by gas to 6-10% by 2010 from approximately 2% today.
3. Despite China's projected gas potential, until recently the gas exploration and
production activities have been relatively small scale operations. Financial constraints and
limited access to advanced technologies have impeded a thriving gas development. The
recent Bank loan for the Sichuan Gas Development and Conservation Project (primarily
focused on enhancing upstream developments) will certainly help in reversing this
situation.
1 1 MMtce= 1 billion kg coal of 7000 kcallkg
Energy Resources
4. Coal. China has large coal deposits, with recoverable reserves of about 900 billion
tons, of which 30% are proven. In 1992, the country produced 1.1 billion tons of raw
coal. China aims to produce 1.4 billion tons of coal yearly as from the year 2000. The best
quality coals are found in North China, where Shaanxi and Inner Mongolia provinces each
have reserves of 200 billion tons. Insufficient transport capacity, however, makes it
extremely difficult to move sufficient coal to the large consuming centers in Central and
East China.
5. Oil. China's ultimately recoverable reserves of crude oil are estimated at some 80
billion tons, of which 16% are proven. The country produced 142 million tons of crude oil
in 1992, and the target output for the year 2000 is 200 million tons. The refining capacity in
the country is the sixth largest in the world. China used to be a significant exporter of oil.
In recent years, however, its net exports of 17, 9 and 4 million tons in 199 1, 1992 and
1993, respectively, were an indication that the tide is turning and China is about to become
a net oil importer, probably in 1995. Most of the major oil producing fields are considered
mature and some have already experienced production decline. Various projects for
enhanced oil recovery of existing fields are, therefore, currently underway. The increase in
the projected domestic oil production will be wholly absorbed by the even higher increase
in domestic demand for oil and oil products.
6. Hydroelectric Potential. China is rich in water resources, and has a long
tradition of utilizing them for energy purposes. The country's hydro potential is estimated
at 1,900 TWh a year, but only a 9% of it has been developed. Most of the potential is
located in the Southwest, about 1,500 km. away from the main demand centers. The long
construction lead time for hydroelectric projects has also inhibited a rapid development and
utilization of the hydroelectric resources.
7. Natural Gas. China's natural gas resources are estimated at 33,000 bcm, of
which 3 - 5% are proven. In 1993, China produced 16.6 bcm, resulting in a
reserves/production ratio of just over 60 years. The main market for the gas is fertilizer and
chemical production, while only small volumes of natural gas are used in power generation
and in the residential sector. Production of non-associated gas in 114 fields is 9.6 bcm,
mostly in the Sichuan province. The remaining gas production is associated with onshore
crude oil production. Exploration is promoted with the objective of diversifying the supply
sources and increasing the non-associated portion of domestic gas supplies. By 2000,
production is expected to be around 25 bcm. Future gas production is expected from fields
in the Shaanxi and Tarim regions and offshore Shanghai.
8. Coal Bed Methane. Coal bed methane is increasingly recognized as a potential
important energy source. China is the largest producer of coal in the world, and some
Chinese estimates indicate that 20 to 25 cubic meters of methane is released for every ton of
coal mined. Only a small fraction of the estimated 25 billion cubic meters of methane
released is recovered. China's National Environmental Protection Agency has been
identifying ways to promote the use of coal bed methane.
9. Biomass. Non-commercial biomass energy use currently amounts to about one
quarter of total energy consumption in China. Fuel wood and agricultural waste (straw and
stalks) are consumed almost entirely by rural households. China is promoting a variety of
measures to achieve environmentally sustainable biomass supply and consumption levels,
including more efficient use of biomass, tree planting, and substitution of other fuels for
traditional biomass fuels.
Energy Sector Organization
10. Until 1988, the Ministry of Petroleum Industry (MOPI) was in charge of all the
upstream activities in the oil and gas subsector; the Ministry of Water Resources and Power
and the Ministry of Coal oversaw the respective subsectors of power and coal. As part of
the administrative reform in 1988, the responsibility for overseeing the entire energy sector
was consolidated under the Ministry of Energy (MOE). As a first step in its major
restructuring policy, the government transformed the former MOPI into a state-owned
enterprise, the China National Petroleum Corporation (CNPC), which has continued to
report directly to the State Council. In May 1993, the MOE was disbanded during a broad
government reorganization, and a new Ministry of Electric Power was established, along
with a Ministry of Coal. The newly established Economic and Trade Commission oversees
the overall national economic policy. The State Planning Commission, on behalf of the
State Council, has the responsibility for review and approval of the strategic plans,
investment programs, and pricing policy of the energy sector.
Proposed Study
11. It is evident that a more prominent position of natural gas in the overall energy
picture in China would alleviate some of the environmental problems that exist today. It
would also contribute to reduce China's future import requirements for oil, if the additional
quantities of natural gas substitute for corresponding quantities of domestic demand for oil.
It would finally imply a more balanced use of the hydrocarbon resources that are available
in the country. It is proposed to carry out a Gas Development Study in two phases.
Phase 1
The objectives of the initial phase are to:
(i) Recommend a strategy framework for the development of natural gas in China.
(ii) Evaluate the economics of increased use of gas.
(iii) Determine institutional barriers and financial options for gas investments in China.
12. The upstream development strategy would be based on an assessment of gas
reserves in different geographical areas and their producibility. Downstream, a
development strategy would include a review of gas transmission and distribution facilities
to estimate the capacity of the present network in certain regions and expansion
requirements to meet future demand. In addition, imports of LNG and gas by pipelines
will also be examined. The development strategy will be based on an evaluation of the
economic benefits of investing in gas infrastructure to supply existing and new markets
with gas. Moreover, the report will discuss and evaluate gas development strategies in
other countries and their relevance for China. To materialize the Gas Development Plan
potential barriers to expanding the gas market would be examined, including a review of
gas pricing and financing new projects.
Phase 2
It is proposed to use the results of the previous phase in this phase and examine in
much more detail the pre-feasibility of gas-related infrastructure projects in two highpriority gas consuming markets to be selected by our Chinese counterparts ( for example,
Beijing andor large cities in the south-east coastal region). Specifically, the main
objectives of the second phase of the study are to determine:
(i) detailed gas demand market survey for each of the selected markets;
(ii) optimum gas supply scenarios for those markets;
(iii) investment requirements for gas-related infrastructure;
(iv) financial options for realization of the projects; and
(v) potential roles of Chinese Government, the private sector, the World Bank and
other multi- and bilateral agencies as a catalyst for the development of gas-related
infrastructure projects in China.
Organization
13. It is proposed to conduct a study between ESMAPfWorld Bank and the Chinese
National Petroleum Company and potentially other parties to be named by the Chinese
Government. All parties will be actively involved in the design and management of the
project. In the World Bank, the study will be co-managed by EA2lE and IENOG, and
staffed by specialists from Oil and Gas Division. Local Chinese consultants will be
effectively utilized throughout.
Timetable
14. The objective is to complete Phase 1 of the study in six months after reaching an
agreement with CNPC et a1 on its contents. Phase 2 is expected to last eight months from
when it is started.
Budget
15. As shown in Annex 1 the budget for Phase 1 will be approximately $4000,000 and
the total budget will be $1.3 million for both phases
