IEEJ: March 2014

World Energy China Outlook 2013-2014

Excerpt Version

World Energy China Outlook
2013-2014

I. World Energy Trends: A Chinese Perspective
World Energy China Outlook 2013-2014 offers an insightful review and aunique preview of world energy trends through comparing China with the restof the world.
The year 2013 has witnessed a continuous grand shift in energy demand
towards the Eastern Hemisphere amidst an economic slowdown in such
emerging economies as China, India, the Middle East and African countries.
New energy sources of supply have reshaped the energy production
landscape in the past eight years, presenting a terrain differing from what wasseen in 1960s through 1990s. Existing supplies mainly from the Middle East
have been jeopardized and diluted as new energy sources come on-stream in
the US, the rest of North America and beyond.
A possible advent of the New Middle East in the wake of the Energy
Independence in the U.S. is repositioning the growing importance of supply
from North America, which seemingly indicates the western bound shift ofsupply worldwide. Piecing all types of energy sources together, be it
conventional or unconventional, onshore or offshore, it is obvious that the shiftof supply is not limited to western bound one as a matter of fact. Instead,multiple sources from multiple supplying centers gain polycentric momentumsof developments in the energy world, e.g., oil renaissance in Iraq, oil and gas
exports from the Caspian Sea/Central Asia, gas discovery in East Africa, andupward production in the deep waters around the world in addition to theadvent of the New Middle East described above. The landscape of worldenergy is featured by multiple supplies against eastern bound demand. Sucha trend will continue for years to come.
Concurrently, supply lags behind demand in world energy. Short ofinvestments and infrastructure backup required, and supply constraints
pushed oil price highly positioned between $100-110/bbl in 2013. There is no
existence of global gas pricing because of regional gas network and separate
pricing systems. With intensified interactions between regional markets,
however, it is observed that differentials in regional gas pricing could benarrowed down as we see gas price at Henry Hub in the recovering process
while LNG price in Asia Pacific rim will be re-justified. Also, it is unavoidable
that the gas prices in the form of LNG remain high until the year 2018 whensellers competition is intensified.

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World Energy China Outlook 2013-2014

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2. Neo-energy revolution is on the horizon. This observation is resulted fromour broader review of changes in energy mix starting from the Industrial
Revolution in 1870s to reorganization and substitution of main energy sourcesfrom coal to oil thereafter, which is closely tied up with waves of industrial
revolution and advancement of human civilization. We believe that theupcoming Neo-Energy Revolution would lead to unprecedented innovations
and transformations in thoughts, technology, and management and trigger a
new round of de-carbonization on the ground.
Therefore, we have to tackle a number of challenges and hardships facing us
today. We believe such an energy transformation is in sight in selecteddeveloping countries. However, the new round of energy revolution has
revealed brand new prospects: (1) traditional patterns of energy utilization areabout to be terminated; (2) hydrocarbon fuels (coal, oil, gas) could co-exist
instead of being replaced by one another continuously, being developed infavor of ecological and environmental protection and utilized in cleaner, more
efficient, globally competitive manners; (3) natural gas and renewable energy
sources will be joining these forces to grow on the stage reflecting higher
human expectations and environmental requirements around the world.
Hence,, every country has to live with the new expectations and explore a
new development pattern through all types of innovation and systematicreforms in order to fit new realities. China is to restructure its current energy
strategy, policy and management system under its new leadership, launchinga new round of industrialization, urbanization, informationization andagricultural modernization with wider and deeper implications and in keepingwith global trends and realities.
3. After revisiting energy policies executed in mainland China in the past six
decades, we concluded that although China’s current energy policies andregulations prioritize security of supply, domestic and international production,energy savings, structural change, green and low carbon growth, andtechnological and systematic innovation, they fail to satisfy ecological andhuman expectations because they are designed to serve the state interests ofkeeping higher economic growth, which is, in our view, one of the reasons
behind its failure.
To remedy the problem, we have made the following recommendations in thisreport:(1) Energy constraints on economic growth have to be taken into account ineconomic and social developments featured by new drives to industrialization,
urbanization, informationization and agricultural modernization;(2) Ecosystem and human environmental costs have to be factored into
economic and social developments when pursuing economic benefits;(3) Participation in global energy governance and coordination with the rest of
the world have to be outlined responsibly when planning its short term andlonger term development at home.

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World Energy China Outlook 2013-2014

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As a result, an Eco-friendly Energy Strategy (EES) is envisaged to optimize
energy mix by reducing coal consumption, stabilize oil demand, accelerate
developments of natural gas and renewable energy sources and stimulateenergy saving and efficiency sector to serve public interests. With thesecampaigns in place, China will be in a better position to meet both ecologicaland human expectations at home and globally. The EES is therefore used as
the central scenario approach in this report, comparing with new policy
scenario, current policy scenario and 450 scenario prepared by the Parisbased International Energy Agency.
4. Natural gas sector in China will step into its Golden Age in the years after
2020, especially in the period of 2025 through 2035 featured by rapid increasein output, sound policy in place and public interests secured. The key
evidences behind the gas boom are: unconventional gas will be an engine of
the increase in gas production into 2035 while conventional gas has reached
its peak output in 2015-2020 and will witness its decline thereafter in ouroutlook period. It is expected in our report that unconventional gas could
reach 67 percent of total gas output in China instead of the IEA’s prediction of
45 percent in 2020 from current 39 percent instead of the IEA’s 12 percent
and continue to increase up to 72 percent in 2035 instead of the IEA’s 83
percent indicating the country is stepping into its full age of unconventional
gas. Obviously, how to stimulate the sub-sector in China is a central point forthe country to renew its hydrocarbon industry policy and the green driven
economy and could be an issue for its upcoming industrial reform, accordingly.
There are a number of uncertainties, however. For instance, shale gas
production remains at its nascent time, although it has larger resources
potential than that in the U.S. in statistical term. It is less possible to reach its
said output targets for shale gas (as reported, 6.5 billion cubic meters for 2015
and 60-100 bcm in 2020) in China. There is no way for China to copy the
success of shale gas in the U.S. And no fast development could result any
time soon. By contrast, tight gas and coal bed methane would take leadbased on their sizable production combined (currently calculated into
conventional gas output statistically) and ever-enhanced technologies
employed. There is a set of questions to be answered in terms ofdevelopment pattern for the sub-sector, policy issues and environmental
concerns over the possible unconventional gas boom. In addition, coal-to-gas(CTG) projects are under experiment due to debates on their high costs andpricing.
5. Renewable energy is taking a bigger pie in the energy mix in developed
world. Western experiences are recognized in terms of energy saving andmarket orientation in conjunction with technology and investment innovationby the sector and stimulated by their authorities. Comparatively, in China,
state policy took over market orientation to propel new renewable energy(especially solar panel and wind farms) to grow. Solar energy, currently underrestructuring, was over invested and expanded being short of domestic
consumption backup, which is a good case in point.

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World Energy China Outlook 2013-2014

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In this report, we predict that non-fossil fuel energy demand in China will
increase up to 15 percent in 2020 and 24.5 percent (higher than that of oil) in
2035. We believe that hydro-energy will be stable while nuclear energy will
resume its fast track under stricter regulations and safety circumstances.
Notably, new renewables (solar, wind and bio-energy combined) will gain theirfastest growth momentum above 100 percent, as their current capacity athome remains small in its entirety. Evidently, energy policies for thesesources have to be soundly designed and balanced to deal with market force
and the state hands. Eventually, home consumption and market competition
have to be fostered to lead these energy developments under the guidance ofa sound policy. Consequently, market potential and growth can be tapped andstimulated.
II. Energy Development in China and Repercussions on the World
6. Energy consumption in China will grow at rate of 2.23 percent in the outlook
period (2011-2035), higher than the IEA’s growth rate of 1.9 percent under its
new policy scenario (CPS) while energy production will grow at 1.97 percent,higher than the IEA’s growth rate of 1.4 percent. Consequently, China will bein a higher position leading the world energy growth, both in demand andsupply at large. A greater impact on the world energy industry, world economy,
and geopolitics will be widely felt onward in the course of its new four drives
mentioned above. The world energy system and landscape have been redrawn, accordingly. The EES is envisaged to conduct readjustment, reformand enhancement in policy innovation campaign in order to reduce high CO2emission (mainly from coal consumption), mitigate environmental concernsand social costs, and coordinate with the rest of the world.
7. It is a fact that different types of energy mix lead to different impacts ofcarbon emission on the eco-system and global warming. The IEA’s 450
scenario aims to curb global warming with temperature increase within 2 °C
while its NPS and CPS will come with results 3.6 °C and 5.3 °C temperature
increase. The EES is designed as a better scenario than the IEA’s NPS but
worse one than the 450 scenario. CO2 emission growth from coalconsumption in our outlook period will be negative 0.4 percent, at much lower
rate than IEA NPS in both 2030 and 2035. As a result, Chinese contribution
under the EES will obviously improve the environment and global warming
concern within 2-4 °C by 2050.
8. Energy demand is subject to demographic evolution and economic growthin the past but will be curbed through energy saving and energy efficiency
partially today, plus new economic pattern and innovative management
system being effective. Energy consumption per GDP unit in China was
reduced steadily in the past two decades thanks to an enhancement of energy
efficiency as many scientific authorities recognized. We believe that policy
makers in Beijing will continue to exert greater pressure on increases in both
energy efficiency and technology innovation in order to tap its great potential
in the rest of its 12th Five-Year Plan (i.e., 2014-2015).

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World Energy China Outlook 2013-2014

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9. According to our outlook, China’s foreign energy dependency will increase
to 11 percent in 2015 and 26 percent in 2020 from current 9 percent, but
become stabilized thereafter and possibly decline to 15 percent in 2035.
Foreign oil dependency will increase to 60 percent in 2015, 65 percent in
2030 and 68 percent in 2035 from the 55 percent in 2011 while foreign natural
gas dependency will be 35 percent in 2015, 40 percent in 2020 before
declining to 24 percent in 2035. All above-mentioned dependencies are lower
than those envisaged by the IEA. However, these dependencies resulted fromlooming bigger gaps between demand and supply will push the country toenlarge its oil and gas imports globally. Neighboring oil and gas imports willthen be emphasized as its cross border trunk lines and related facilities werebuilt when pursuing its diversification of energy sources from abroad. Energy
trade and investments will be globally expanded, both bilaterally andmultilaterally. To take an active attitude towards cooperation security being apart of global energy governance is not only a vision but an action as well.
10. Energy security is a special focus under closer scrutiny in our report. An
evolving concept on the energy security was discussed, covering security ofdemand, supply and cooperation at both regional level and global one. Suchan energy security was furthermore explored at a bilateral level by taking
Sino-Russian hydrocarbon ties as an example. And multilateral level review
was done by examining Chinese practices towards the regional and global
energy governance.
In our report, we reviewed the history of Sino-Russian cooperation in theenergy sector and identified the multi-faceted nature of the bilateral
cooperation based on common interests for long-term development. In
addition to their commonly identified interests, however, there exist interest
differentials and even conflicts of preferences between the two powers.
Consequently, strategic game exercises were executed for their own best
benefits on sensitive issues including gas pricing. The game will continue
under the strategic partnership as long as their commitments are alive. The
tipping point of transformation, however, may emerge around 2020.
Multilateral cooperation is a combination of bilateral cooperation regionallyand globally. China is actively participating in such cooperative activities
including its contribution to re-building up the Energy Club under theframework of Shanghai Cooperation Organization in 2012 and its
involvements in the G20 activities in 2013. In 2014, China will play its bigger
role in APEC Meeting in the outskirt of Beijing where the country will be well
examined in terms of its cooperation with other countries in the EES strategic
framework.
11. Crude price in China is tied with the world market, while oil product prices
remain subject to adjustment by its national planner NDRC from time to timeat present. Gas price inside the country is far below the level of its importpricing. Gas market is immature, although some regional gas markets aredeveloped where infrastructure, trading activities and competition are being
expanded and witnessed both in form of liquefaction natural gas (LNG) and inform of pipeline natural gas (PNG). Gas-to-gas competition and free access

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IEEJ: March 2014

World Energy China Outlook 2013-2014

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by the third parties have been recognized but not developed until 2014-2015
in favor of market based pricing. Given multiple gas supplies on-stream as
observed for the years in 2018-2020, we believe that gas prices (for LNG,
PNG, and CTG) across China could be justified and set at some benchmark
level similar to those in Europe by then.
12. Uncertainties remain, however, in addition to those mentioned concerning
shale gas, CTG issues. Some factors instituted by our IWEP Energy
Database remain to be identified such as energy demand growth into 2035,
carbon emission factors, nuclear energy, solar, wind and nuclear utilization,plus CCS effectiveness. Carbon taxes remain uncertain whether they are
executed in 2020.
III. Policy Recommendations
13. Our review on energy policy and findings suggests that energy policy inline with the EES has to constitute a set of constraints on economic
development while satisfying economic and social requirements and dealing
with repercussions of energy dependency and carbon emission. Policy
makers have to face new challenges and uncertainties with care.
Above all, China has to continue to stress home supply and home market
development given greater potential and less touched potentials and areas indeeper onshore exploration, deep waters, unconventional hydrocarbon, as
well as some new renewables. The country calls for cleaner coal andintensive investments on gas activities while stabilizing oil supplies. It isimperative at present for China to explore home-based consumption andmarket development pattern for renewable energy sources.
In addition, technology advancements in energy saving and efficiency have to
be factored into the energy policy, while management innovation and market
competition being key elements to energy policy making.
14. We believe that energy issues in China are those of the world, vice versa.
For security reason, China has to make its energy policies ready to deal with
its interactions with relevant countries and parties involved on energy security,
energy governance, and the global warming. Active engagements and open
dialogues with all stakeholders are required in order to be a responsible party.
A set of logistic settings including required institutions, staffing, rules,
education, and information sharing are necessary and should be in place
beforehand to enhance China’s cooperation capabilities.
15. Energy policy set by the government is by no means dominated by thestate. Those national interests have to be in line with the public requirements,
especially those growing expectations for clean and green energy, safety andhealth. Hence, transparency, accountability and social acceptance are
required in the policy-making process and policy execution. Therefore, a typeof “social license” is badly needed to all energy projects.

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World Energy China Outlook 2013-2014

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Appendix
Table of Contents

Foreword
Executive Summary
Introduction
1. Report nature, elements and frameworks
2. Approaches, Methodology and Modeling
3. Scenario Analysis and Assumptions
4. Limitations
Part One: World Energy Trends: A Chinese Perspective
Chapter One: Global Energy Trends and Impacts of U.S. and China
1. Global Energy Trends
2. U.S. and China Repercussions
Chapter Two: Neo-Energy Revolution and Its Implications
1. Energy substitution and Characteristics
2. Energy shifting in the wake of the industrial revolution
3. Neo-Energy Revolution and implications
Chapter Three: China’s Eco-Friendly Energy Strategic Approach
1. World energy development and strategic orientation
2. Chinese current energy strategy and policy review
3. Eco-friendly Energy Strategy
4. Scenarios analysis
Chapter Four: Regional Natural Gas Trends and China’s Role
1. Global natural gas market trends
2. Regional natural gas market analysis
3. Asia Pacific market
4. Golden age of unconventional gas
5. Natural gas outlook and implications

Chapter Five: Non-Fossil Fuels and China Options
1. Non-fossil fuels and investment evaluation
2. Technology and investment
3. Scenarios analyses
4. Non-fossil fuels in China

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World Energy China Outlook 2013-2014

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Part Two: Energy Security: A Multidimensional Investigation
Chapter Six: Neo-Energy Security: Perspectives and Situations
1. Energy security: from conventional wisdom to contemporary one
2. Scenario approach at global level
3. Scenario approach at China/country level
Chapter Seven: Bilateral Energy Security: The Case of Sino-Russian
Hydrocarbon Nexus
1. The nature and process of Sino-Russia oil and gas cooperation
2. Scenario analysis and outlook
3. Strategic game and policy demand
Chapter Eight: Multilateral Mechanisms and Capability Building
1. Significance of multilateral cooperation
2. Shifting from bilateral requests to multilateral frameworks
3. Scenario analysis
4. Infrastructure settings
Appendix One: IWEP Energy Database Framework
Appendix Two: Acronyms, Statistical Units and Formulas
References
Acknowledgements

Tables, Figures and Boxes
Table 0-1 Eco-Energy Strategy Scenario and IEA New Policy Scenario

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World Energy China Outlook 2013-2014

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Table 0-2 GDP and Urbanization Assumptions in China and the World
Table 0-3 World Oil and Gas Prices
Table 0-4 Technology Advancement Categories
Table 0-5 Energy Industry, Policy, and Public Interests in China
Table 1-1 World Primary Energy Demand under IEA New Policy Scenario
Table 1-2 Regional Energy Demands under New Policy Scenario
Table 1-3 Fossil Fuels Reserves and Recoverable Resources
Table 1-4 New Middle East Oil Production
Table 1-5 Regional Natural Gas Prices
Table 1-6 Global Energy Infrastructure Investment Requirements in 20122035
Table 2-1 Industrial Revolution and Evolving Energy and Industries
Table 3-1 World Energy Demand Outlook
Table 3-2 World Energy Demand Mix and Compound Growth into 2035
Table 3-3 World CO2 Emissions Outlook
Table 3-4 World CO2 Mix and Compound Growth into 2035
Table 3-5 Green Growth Index Comparison in China
Table 3-6 Chinese Energy Demand Outlook
Table 3-7 Chinese Energy Demand Mix and Compound Growth into 2035
Table 3-8 CO2 Emissions Outlook in China
Table 3-9 CO2 Mix and Compound Growth in China into 2035
Table 4-1 Natural Gas Demand Outlook by IEA
Table 4-2 Natural Gas Supply Outlook by IEA
Table 4-3 Natural Gas Trade under IEA New Policy Scenario
Table 4-4 Natural Gas Supply and Demand Outlook in North America by IEA
Table 4-5 Pipeline Gas Ex/Imports in North America in 2012
Table 4-6 LNG Ex/Imports in North America in 2012
Table 4-7 Natural Gas Supply and Demand Outlook in Europe by IEA
Table 4-8 Natural Gas Production in Europe in 2012
Table 4-9 Natural Gas Demand in Japan, South Korea and Chinese Taiwan
Table 4-10 Russian Gas Outlook under IEA New Policy Scenario
Table 4-11 Unconventional Gas ratios into 2035 by IEA
Table 4-12 Scenarios Approach towards Gas Supply and Demand in China
Table 4-13 Unconventional Gas Ratio and Production Assumptions in China
Table 4-14 Natural Gas Imports Planning around 2020
Table 5-1 Global Renewable Energy Investment Trends
Table 5-2 World Renewable Energy Demand by region and Scenario
Table 5-3 World Renewable Energy Consumption by Sector
Table 5-4 World Renewable Generation Comparison
Table 5-5 Relevant New Energy Policy and Regulations
Table 5-6 Renewable Energy Generation Comparison
Table 5-7 Typical Wind Farm Investment Costs and Electric Pricing in China
Table 5-8 Wind Power Investment Estimated in China
Table 5-9 House Land, Solar Power Utilization and Market Potential
Table 6-1 Scenario Approach toward Energy Security
Table 7-1 China’s Oil and Gas Ex/Imports
Table 7-2 Russian Oil and Gas Ex/Imports
Table 7-3 Sino-Russian Oil and Gas Cooperation Outlook

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World Energy China Outlook 2013-2014

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Figure 1-1 U.S. Primary Energy Dependency
Figure 3-1 Energy Intensity by GDP Unit in Leading Countries 1990-2009
Figure 3-2 Carbon Emission Trends under Eco-Energy Strategy Scenario
Figure 4-1 Natural Gas Consumption in Europe in 2012
Figure 4-2 Littoral Natural Gas Production in North Sea
Figure 4-3 Natural Gas Demand Outlook in Asia Pacific Region under IEA
New Policy Scenario
Figure 4-4 Natural Gas Production and Demand Trend in China
Figure 5-1 Technological Contribution to Global Warming
Figure 5-2 Annual Average Generation Investments against Global Warming
below 2 Degree
Figure 8-1 Chinese Participation in Non-Western dominated Multilateral
Cooperation Frameworks, A Comparative Approach
Figure 8-2 Chinese Participation in Non-Western dominated Multilateral
Cooperation Frameworks, An Interactive ApproachBox 1-1 Chinese New Industrialization Targets
Box 3-1 Chinese Energy Orientation
Box 4-1 Natural Gas Market Evolution in Asia Pacific Region
Box 4-2 Japanese JCC Pricing Formulas
Box 4-3 IEA Golden Rules for Unconventional Gas
Box 5-1 Non-Fossil Fuels Definition
Box 5-2 New Energy Technology PlanningBox 6-1 Chinese New Security Concepts
Appendix Table 1 Assumptions for Energy Demand Growth
Appendix Table 2 Assumptions for Energy Supply Growth
Appendix Table 3 Carbon Emission Factor
Appendix Table 4 New Energy Generation Growth Rate
Appendix Table 5 Energy Demand Growth Comparison 2011-2035
Appendix Table 6 Chinese Energy Demand Mix 2011-2035
Appendix Table 7 Chinese Energy Production and Growth 2011-2035
Appendix Table 8 Power Generation Structure
Appendix Table 9 Fossil Fuels Carbon Emission Trends 2011-2035
Appendix Table 10 Carbon Emission under Eco-Energy Strategy Scenario
Appendix Figure 1 IWEP Chinese Energy Demand and Supply Outlook
Database Framework
Appendix Figure 2 IWEP Chinese Energy Demand Constraints
Appendix Figure 3 IWEP Chinese Energy Supply Constraints

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