Energy sector development and reform in prc with special reference to the oil industry
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ENERGY SECTOR DEVELOPMENT AND REFORM IN PRC With Special Reference to the Oil Industry. Presented by Dr. Cherng-Shin Ouyang Research Fellow Chung-Hua Institution for Economic Research 75, Chang-Hsin St.,Taipei, Taiwan 29 th September 2008 at Economic Department of Moscow State University.

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ENERGY SECTOR DEVELOPMENT AND REFORM IN PRC With Special Reference to the Oil Industry

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Energy sector development and reform in prc with special reference to the oil industry

ENERGY SECTORDEVELOPMENTAND REFORM IN PRCWith Special Reference to the Oil Industry

Presented by

Dr. Cherng-Shin Ouyang

Research Fellow

Chung-Hua Institution for Economic Research

75, Chang-Hsin St.,Taipei, Taiwan

29th September 2008

at Economic Department of Moscow State University


Part 1 overview of china s energy sector development part 2 reform and market opening

Part 1: Overview of China’s Energy Sector DevelopmentPart 2: Reform and Market Opening


Chart 1 international comparison of energy consumption efficiency 2006 toe 10 000 us gdp

toe: ton oil equivalent

Chart 1 International Comparison of Energy Consumption Efficiency, 2006 (toe/10,000 US$GDP)

source: The Industrial Map of China Energy, 2006


Chart 2 energy consumption gdp of prc tce 10 000 rmb 1980 2005

tce: ton coal equivalent

Chart 2 Energy Consumption / GDP of PRC (tce/10,000 RMB), 1980~2005

source: Chart 1


Table 1 structure of primary energy consumption selected countries 2005

Table 1 Structure of Primary Energy Consumption – Selected Countries, 2005

%

Source:BP(2006), Statistical Review of World Energy, http://www.bp.com.。


Chart 3 strategic oil reserve days selected countries 2005

Chart 3 Strategic Oil Reserve (days) – Selected Countries, 2005

source: various

* Author estimate


Chart 4 primary energy production and consumption of prc 1989 2005

Domestic energy consumption

Domestic energy production

Chart 4 Primary Energy Production and Consumption of PRC, 1989~2005

100 million tce


Table 2 economic growth and energy consumption of prc 1981 2005

Table 2 Economic Growth and Energy Consumption of PRC, 1981~2005*


Chart 5 energy consumption elasticity e of prc 1994 2005

Chart 5 Energy Consumption Elasticity (e) of PRC, 1994~2005

Asian Financial Crisis

Notes: 1999~2005: revised figures

normal: 1>e>0 (rest)

abnormal: e<0 (1998)

abnormal (inefficient): e>1 (2003,2004)

Source:Chinese Statistics Bulletin, Chinese Energy Statistics Bulletin, DRC State Council


Table 3 primary energy structure forecast prc 2005 2050

Table 3 Primary Energy Structure Forecast – PRC, 2005~2050


Table 5 energy consumption forecast prc 2000 2020

Table 5 Energy Consumption Forecast – PRC, 2000~2020

sources

Projection

Projection

consumption


Table 6 energy final consumption according to sectors and energy types 2000 2020

Table 6 Energy Final Consumption According to Sectors and Energy Types, 2000/2020

year

year

Energy Type

Sector


Table 7 oil and natural gas production consumption prc 1995 2006

Table 7 Oil and Natural Gas Production & Consumption – PRC, 1995~2006

years

Source: BP (2007), Statistical Review of World Energy, 2007


Chart 6 imported oil dependence prc 1965 2005

Chart 6 Imported Oil Dependence – PRC, 1965~2005, %

Source: Chart 1


Table 8 area country concentration ratio of crude oil import prc 2005 2006

Table 8 Area/Country Concentration Ratio of Crude Oil Import – PRC, 2005/2006

Source: China Custom Statistics, 2006/07


Future prospect

Future Prospect

  • Domestic oil consumption continue to rise

  • Imported oil reaching 50% of domestic consumption

  • Gas consumption expected to increase at two digit

  • Energy/oil security a serious policy concern

  • Future growth likely to be impinged by “resources” and “environment” constraints


Major strategy responses

Major Strategy Responses

  • Drafting “Energy Act” (to be promulgated end of 2007)

  • Unifying energy governing body: plan to reinstate Energy Ministry (abolished in 1992)

  • To develop renewable and alternative energy resources

  • To enhance energy conservation while emphasizing clean energy: End of 11 FYP to reduce unit output energy consumption by 20%

  • Global oil hunt coupled with increased international cooperation


Energy sector development and reform in prc with special reference to the oil industry

Major Strategy Responses (cont.)

  • To initiate Three-Phase Program in building strategic/commercial oil reserve (Target: 60 days of annual consumption)

  • Undertaking comprehensive market-directed energy sector reform

  • Overhauling energy (oil) administration structure


Evolution of china s oil market four phases

Evolution of China’s Oil Market –Four Phases

I. Pre-reform period (before 1981)

  • Incorporated within national economic plan, resources allocation based on overall balance

  • State intervention: at various levels of the oil sector /government

  • Self-sufficient in oil consumption: have surplus for export until 1993

    II. Reform Period (after 1981)

    1. Plan & market coordination (1981~1994)

  • Adopting production responsibility System (PRS)

  • Dual pricing allowed: above-target crude (exceeding 100 mt) and allocated input quota conserved be freely disposed at market price

  • Emergence of social entities in oil business

  • Oil futures market set up in Beijing & Shanghai (1996)


Evolution of china s oil market four phases cont

Evolution of China’s Oil Market –Four Phases (cont.)

2. State Domination (1994~1998)

  • Oil sector reform

  • Production/import: subject to state allocation plan

  • Abolishing dual pricing

  • Closure of oil futures trading

    3. Reform and Opening (1998~)

  • Building international linkage

  • Price mechanism adjustment

  • Import liberalization

  • Access to wholesale & retail oil products market


Energy sector development and reform in prc with special reference to the oil industry

Main Feature of the Pre-reform Oil Industry Management System- An Integral Part of the Traditional Planned Economy

  • Ownership, management, and control entrusted to the state

  • The governing body and the governed-state enterprises- are intermingled, both represent administrative units at different levels of the oil industry complex

  • Despite incessant administrative restructuring the oil business management system remained largely intact

  • Production based on quota within a vertically integrated command system; resources allocation and intra-industry coordination followed bureaucratic rules


Oil industry management system reform three phases

Oil Industry management System Reform – Three Phases

  • Phase 1 (1982~1998)

    • Bureaucratic organs divorced from Enterprises

  • Phase 2 (1998~2003)

    • Restructuring and enhancing professional management competence of the three state oil groups: CNPC, Sinopec and CNOOC

  • Phases 3 (2003~)

    • Market oriented reform taking place


Brief history of the three state oil groups

General Oil Administrative Bureau of State Fuel Industry Ministry

1950, 4

China National Petroleum Corporation / 中國石油天然氣總公司

1988, 9

China National Petroleum Corporation / 中國石油天然氣集團公司(CNPC)

1998, 7

Oil Industry Ministry

1955, 4

State Fuel-Chemical Industry Ministry

1975

China National Off-Shore Oil Corporation - CNOOC

1982, 2

Oil Industry Ministry

1978

China Petroleum and Chemical Corporation- Sinopec

1983, 7

Brief History of the Three State Oil Groups


Increasing flexibility in domestic oil pricing

Increasing Flexibility in Domestic Oil Pricing

  • Formation of domestic oil price (particularly oil product prices): traditionally fixed and regulated by the government to safeguard the livelihood of people

  • However, oil as a strategic commodity withstood pressure of liberalization until the late 1990s

  • Growing import of crude and spiraling world oil price enabled the authority to adopt more flexible approach in the shaping of oil prices

  • Since 1998, government-sponsored adjustments in the mechanism of oil price formation has undergone five stages


Major policy responses

Major Policy Responses

A. 1st Stage (1998,7~2000,5): Reform Agenda of the Crude and Oil Product Prices

  • Pricing Formula: lagged floating (by one month)

  • Measures:

    • Crude benchmark: taking monthly average of “Singapore, London and Rotterdam” quotations as the base

    • Oil products pricing: crude benchmark + premium (floating band: 5%~8%)

    • Oil products retail prices: based on import prices + circulation charges

  • Main drawbacks: encourage inventory speculation due to predicable (home and foreign) price differentials


Major policy responses cont

Major Policy Responses (cont.)

B. 2nd Stage (2000,6~2001,10): Price Setting Mechanism Reform

  • Pricing Formula: lagged floating (by one month)

  • Measures:

    • Crude benchmark: reverting instead to Singapore monthly average price of oil products as the base for official price adjustment

    • High frequency in price adjustment: 17 times in total

  • Main drawbacks: ditto


Major policy responses cont1

Major Policy Responses (cont.)

C. 3rd Stage (2001,11~2005): based on “Notification of the State Planning Commission for tying to International Price and for Oil Products Price Adjustment”

  • Pricing Formula: lagged floating (by one month) combined with partial enterprise pricing autonomy

  • Targeting instead to the monthly (weighted) average oil products price of “Singapore, New York and Rotterdam” according to the weights: 60%, 20% and 20%

  • Asymmetrical targeting: lifting domestic prices when weighted average goes up but resisting downward adjustment the other way round

  • Enterprises granted some flexibilityin retail trade at self-made prices

  • Main drawbacks:

    • Oil product prices trend upward but remain sluggish compared to crude price rises

    • Lagged floating distorts resource allocation and consumption behavior

    • Price gaps encourage export thus aggravate shortages at home


Major policy responses cont2

Major Policy Responses (cont.)

D. 4th State (2006~ ): Continue to raise domestic prices accompanied by the implementation of loss-compensating policy packages and compulsory profit tax on crude producers

  • Abolishing “direct” linkage with foreign benchmark prices; resorting to “indirect” linkages

  • Introduce four compensating measures

    • Establishing inter-industry redistributing mechanism in realigning “profits and losses” of up- and down- stream enterprises, i.e. between crude and oil product suppliers

    • Establishing horizontal price-coordinating mechanism to even out the negative impacts of distorted price spectrum

    • Establishing mechanism for subsidizing agriculture, utilities of public interest and socially weak groups

    • Introducing (redistribution) financial mechanism in taxing windfall gains (threshold for ultra profit tax: 40US$/b)


Major policy responses cont3

Major Policy Responses (cont.)

E. 5th State (2007,1~ ): Begin to implement <Measures for Regulating Oil Market> and <Measures for Regulating Oil Products Market>

  • Suppressing time gap arising from delayed foreign market targeting; aim at synchronizing price setting

  • Targeting “oil futures” and shifting to three anchors: “Brent, Dubai and Minas”


Dilemma in official pricing policies objectives

Dilemma in Official Pricing Policies—Objectives

  • In principle, gradually tying domestic oil price to international benchmark is the right step because it may

    • Rationalize allocation of resources,

    • Ensure that industries delivering tradable and non-tradable stand on equal footing, and

    • Obviate suboptimal resources diversion abroad


Dilemma in official pricing policies consequences

Dilemma in Official Pricing Policies—Consequences

  • Price Perversion (價格倒掛): yet due to disproportionate and retarded price movements of oil products, crude distributors (upstream on the intra-industry chain) benefit from rises in international oil prices and able to reap huge profit, while refineries and oil products distributors suffer both from the controlled floating band and the delayed “cost-plus” transfer to final consumers

  • Efficiency v.s. Egalitarianism: Current price – setting mechanism evokes contradiction in macroeconomic goal-fulfillment. There is an inherent, textbook-type trade-off between the pursuit of “efficiency” in energy use and ad hoc “egalitarianism” (including control of inflation). Upon the inception of the 5-stage price adjustments, the above-mentioned drawbacks remain, though less conspicuous than it would otherwise have been


Dilemma in official pricing policies consequences cont

Dilemma in Official Pricing Policies—Consequences (cont.)

  • Heated debate over both the “speed” and “dimension” of continued price reform (liberalization) is going on all the time in China (predominantly at the academic level)

  • Socialism with Chinese characteristics implies that “gradualism” still outweighs “radicalism” in seeking to converge to international practice in the pricing policy of oil business.


Market opening in sphere of circulation

Market Opening in Sphere of Circulation

  • Meet WTO market opening time frame: transient phase expires on December 11, 2006 for domestic and foreign oil products distributors/retailers.

  • Trade liberalization: curtailing import tariff combined with loosening of quota limitations


Energy sector development and reform in prc with special reference to the oil industry

Table 9: Time Schedule of Oil Market Opening

Source: Dan Shi (2006), Report on Market-Oriented Reform of china’s Energy Industry, pp.224-225.


Summary and evaluation

Summary and Evaluation

  • In 2005, China’s energy self-sufficiency stands at 92.2%, a noticeable improvement over the year 2000 (78.5%), notwithstanding the deteriorating trend persists since the breakeven year—1992.

  • China’s energy efficiency raised by a factor of 2.8 in the last 25 years; energy consumption elasticity remains “volatile” on annual basis which contradicts the FYP configurations (real GDP growth surpasses growth of primary energy consumption by a wide margin, except for the 10th FYP which is negative – Table 8)

  • Aggregate primary energy imbalance would have been worse by now if the authority failed to carry out reform and to push for investment in the energy sector.


Summary and evaluation cont

Summary and Evaluation (cont.)

  • Domestic energy supply-gap has many origins: structural, institutional, administrative, etc.; “price, quantity and quality” represent the three dimensions to which the various causes of supply-gap reduce - given the vigorous growth – induced demand for energy; among them “quality” is a hybrid notion.

  • Statistical aberrations: the observed low energy efficiency of China after the new millennium may be exaggerated (due to currency undervaluation) much as the unusually low “e” prior to the new millennium (energy consumption figures yet to be revised).

  • According to ERI forecast, there are three growth scenarios up to the year 2010 and 2020: “baseline, sustainable growth, and green GDP”; based on the “11 FYP” projection, unit output energy consumption be reduced by 20% while per capita GDP doubled in year-2010 (base year, 2000).


Summary and evaluation cont1

Summary and Evaluation (cont.)

  • According to ERI projection, the share of transport in energy consumption pattern will expand from 15.4%(2000) to 20.2%(2020); on the sources of energy use, both coal and oil are projected to decline by around 10%, while natural gas, electricity and others (renewable + alternative) to increase substantially over the same period (Table 6). Both projections appear to be realistic and theoretically attainable in view of the record of Chinese leadership’s competence on target-fulfillment.

  • Oil faces serious supply bottleneck more than any other energy sources largely because domestic production of oil is stagnating for years, its import dependence is growing and, worse still, international oil prices are skyrocketing beyond imagination.

  • Dating from the early 1980s, the oil sector has undergone three-phase system reform involving “administration, market structure, company management and the price mechanism”.


Summary and evaluation cont2

Summary and Evaluation (cont.)

  • Generally speaking, system reform of the oil sector is on the right track, but there are still formidable obstacles lying ahead.

  • State-enterprises: CNPC, Sinopec and CNOOC, radically transformed and listed on the Hong Kong and New York Stock Exchange by now; CNPC and Sinopec face perpetual conflicts of interest between (a) the government and the oil industry they represent, (b) themselves as holding companies and the many subsidiaries / branches they control, and (c) their crude producing units and the down-stream refining/distributing chains they sit on.

  • Incomplete Reform: Perfection of the oil pricing system and market opening partly alleviate the supply shortage and the potential negative impact on the economy but they are inadequate. More thoroughgoing system reform and coordinating measures aimed at correcting the primary energy imbalance are called for in the future.


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