Energy Security, Climate Change and China's Energy Mix: Policy Recommendations by CASS Prof. Xue Li

"[We] need to learn from Europe’s lesson and limit the share of natural gas imports from Russia to within a certain range not exceeding, I suggest, one-third of all imports."

Dear Everyone,

Against the backdrop of the war in Ukraine and growing tensions with the West, energy and food security continue to be widely discussed topics in the PRC. Today’s article focuses on China’s energy mix and dependence on foreign resources and provides an unusually explicit set of policy recommendations in this regard.

For the many new subscribers to this newsletter, I am including a piece by Fudan University Prof. Feng Yujun (冯玉军) on how Beijing should “get rid of its outdated ideas” about energy security that was shared in Sinification last December.

Today's excerpts were translated by dxh, a journalist who wishes to remain anonymous. Thank you very much to them for contributing to this newsletter.

1. Xue worries about what he calls the West’s “civilisational rivalry” with China. He anticipates that the western world will increase its targeting of countries which do not align with its values and interests, and predicts that local conflicts and proxy wars are set to rise. This will affect the global energy landscape, he argues.

2. Pursuing “energy independence” does not mean aiming for “energy self-sufficiency”. Rather, it implies achieving a “diversified, stable and reasonably priced” supply of energy so as to ensure China’s “sustained economic development”.

3. Increasing significantly the proportion of natural gas in China’s energy mix is the only way for Beijing to achieve its “dual carbon goal”.

4. China’s share of natural gas imports from Russia should be limited to one-third. Imports from Turkmenistan, Qatar and Iran in particular should be significantly increased. LNG imports from Australia and the US should also be expanded somewhat.

5. Oil imports from the Middle East should no longer rise, but should even be reduced slightly.

6. No country should exceed 20% of China’s total oil imports. The share of imports from the US and its allies should be kept under 5%.

7. Faced with increased Western antagonism, “maintaining sufficient coal production capacity, limiting coal consumption and using clean coal and gas whenever possible” should become major guiding principles for China when readjusting its coal consumption.

8. The share of nuclear power in China's electricity production should be increased from around 6% to 10-20%.

9. Xue naturally emphasises the need for China to increase the share of clean energy in its energy mix, but also highlights the constraints that the main types of renewable energy currently present.

Name: Xue Li (薛力)
Position: Researcher at the Department for International Strategy Research, Institute of World Economics and Politics (IWEP); Professor, University of Chinese Academy of Social Sciences (CASS).
Previously: Director of the IWEP’s Department for International Strategy Research (2016-2020).
Research focus: China's international strategy; Chinese diplomacy; energy politics; the PRC’s maritime policy; and the BRI.
Education: BA Fujian Medical University (1987); MA Tsinghua University (2004); PhD CASS (2007)
Experience abroad: Unknown

THE CIVILISATIONAL RIVALRY UNDERPINNING ENERGY POLITICS IN THE CONTEXT OF THE RUSSO-UKRAINIAN CONFLICT: FEATURES AND RECOMMENDATIONS
Xue Li (薛力) in The Paper
(March 2023)

Civilisational Rivalry and Energy Politics

“The Russia-Ukraine conflict that erupted in February 2022 disrupted the course of the global economy’s recovery. Global economic growth in 2022 was lower than in 2021. The Russia-Ukraine conflict has become the central issue in energy politics. Using energy as a tool, Europe and the US unleashed unprecedentedly tough sanctions against Russia. The world’s energy supply and demand map has been redrawn [调整], especially between EU countries and Russia.”

“A world war is unlikely to occur, but local conflicts are set to arise repeatedly, with proxy wars being a major feature [of this]. The Russo-Ukrainian conflict, the Libyan civil war and the situation in Syria are all cases in point.”

“In the era of civilisational rivalry [文明竞争], the US, Europe and other countries of the Protestant-Catholic civilisation sphere are eager to draw in [拉拢] certain countries in order to establish an exclusive ‘new club of Western countries’ and push aside, as well as suppress, countries of a different civilisational sphere. Following the Russia-Ukraine conflict, the particularly harsh and unprecedented sanctions that were imposed on Russia with the aim of crippling it is an example of this.”

“The global energy landscape is facing its toughest test in half a century. Oil and natural gas prices have been highly volatile, while the global oil and gas supply chains have been altered significantly. This has been primarily reflected in the disruption of Russia's westward oil and gas export dynamic and the shift towards Eastern markets and transport by sea. However, sales volumes have clearly fallen.”

“The Russia-Ukraine conflict has already reached its one-year anniversary, and the energy contest [博弈] between Russia and the EU will continue to worsen. Russia is intensifying its war mobilisation, and the U.S. and other Western countries are increasing their military support for Ukraine. The odds are that the Russia-Ukraine conflict will be prolonged.”

“For more than two years, competition between countries has increasingly taken on a new character consisting of group competition [抱团竞争] among different civilizations. The U.S.-led Western world is less interested in, and less capable of, leading global affairs. It is increasingly inclined to strengthen its own civilisational identity [文明认同], drawing in its allies and close partners to establish ‘a new club of Western countries’ (i.e. ‘a small courtyard with high walls’), thus suppressing countries in different areas that do not conform to its values and interests – especially China, Russia, Venezuela, Iran, Cambodia, Hungary, Cuba, North Korea and other countries that dare to confront its bullying and coercion.”

“Following the first half of 2022, global oil and natural gas prices fell back, indicating that the restructuring [调整] of global oil and gas supply chains will gradually settle [到位] and that oil and gas prices will be relatively stable. The impact of increasing fossil fuel consumption, especially coal, on the ‘dual carbon’ targets of developed countries won’t last long. These countries (such as Germany) have already established technological and industrial advantages in the field of new energy and have the motivation to advance the world’s new energy industry. In terms of long-term global trends, both competition and cooperation between civilisations will be the norm and globalisation will continue to advance slowly. The US and Europe will continue to build ‘small courtyards with high walls’ and a ‘new club of Western countries’ based on Christian values so as to safeguard their civilisational sphere’s interests. This will be clearly evident in the energy sector.”

“Based on the above assessment, I make a number of policy recommendations:”

“Maintain our composure and determine the appropriate pace for the restructuring of our energy [mix]. ‘Emissions reduction’ and ‘decarbonisation’ have already become the new ‘politically correct’ [mantras] in international politics. In accordance with China's overall long-term interests, China has also made corresponding international commitments. However, it is necessary to realise that this is a long-term process and there will be both big and small twists and turns [along the way]. Economic development and promoting international cooperation are powerful tools in China's march towards rejuvenation. China should adjust its energy mix steadily and according to its own actual circumstances so as to achieve a stable and clean energy supply [实现能源供应的稳定与清洁化].

“For China, ‘energy independence’ is not about achieving energy self-sufficiency, but about achieving a diversified, stable and reasonably priced energy supply system in order to ensure [our] sustained economic development.”

“Drawing up a plan for the restructuring of our fossil fuel mix:”

1. In the area of natural gas. As a relatively clean source of fossil fuel, significantly increasing the proportion of natural gas [in our energy mix] is the only way to achieve our ‘dual carbon goal’. The share of natural gas in China's energy consumption mix is less than 10%, which is significantly lower than the global average of 24%. As the world's top energy consumer and as a country whose consumption is still growing rapidly, this kind of situation is, without a doubt, unreasonable. In terms of diversifying the provenance [of our energy], since domestic output is far from meeting [our] needs, increasing imports and diversifying [their] provenance is a necessary choice. [We] already have a preliminary pattern of importing pipeline gas from the north, west and southwest, and liquefied natural gas (LNG) from the sea. Pipeline gas and LNG [imports] from Russia are increasing rapidly. This is reasonable considering the strategic partnership between Russia and China. However, [we] need to learn from Europe’s lesson and limit the share of natural gas imports from Russia to within a certain range not exceeding, I suggest, one-third of all imports. [We should also] significantly increase the share of natural gas imports from Central Asia and the Middle East, especially Turkmenistan, Qatar and Iran, and increase appropriately [our] LNG imports from Australia and the United States.

2. In terms of oil, the long-term trend [continues to be] a reliance on imports for most of [our] oil consumption. A pattern has emerged in which pipeline oil imports from the North (Russia) and the Southwest (the China-Myanmar oil pipeline) are in a minority [占少数] and imports by sea are the norm [占大部分]. In terms of provenance, the Middle East has reached 50% [of our oil imports]. Other major sources include Russia, Angola, Brazil, Malaysia, Norway, etc. Three suggestions:

   1. First, [our] imports from the Middle East should no longer increase, [but should] even decrease slightly. [We should] significantly strengthen [大力强化] imports from other regions, especially Africa, South America and East Asia.

   2. Second, the share from any one country should not exceed 20% of our imports. From this perspective, [we] already have limited room to increase the shares from Saudi Arabia (17%) and Russia (15%).

   3. Third, the share of imports from the US, its allies and close partners should not exceed 5%. Based on this criterion, Iraq's share (11%) is on the high side [偏高].

3. In the area of coal. As a fossil fuel that is highly polluting and costly to decarbonise, reducing the share of coal in [our] energy mix is [one of our] long-term tasks. Its current share still reaches 56%, which is significantly higher than the global average of 30% … China's coal reserves rank among the world’s top three. Furthermore, [we] are facing challenges such as cross-Strait unification and suppression by the U.S. and other Western countries. So ‘maintaining sufficient coal production capacity, limiting coal consumption, and using clean coal and gas whenever possible’ should become a major principle of China’s adjustment of its coal consumption.

4. Steadily develop nuclear power ... In 2022, the share of nuclear power in China's electricity production was 6%, while the global average was 10%. 22 countries had a share of more than 10%. Therefore, it would be suitable to increase the share of nuclear power to 10-20%.

Comment: Xue goes on to discuss renewable energies in a little less detail. He of course stresses the need for China to increase the share of clean energy in its energy mix (“加速提升清洁能源在能源消费中的比重”) but also highlights the constraints that the main types of renewable energy currently present. To read the article in full: https://www.thepaper.cn/newsDetail_forward_22288283.

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FENG YUJUN (冯玉军) ON HOW CHINA SHOULD “GET RID OF ITS OUTDATED IDEAS” ABOUT ENERGY SECURITY
(September 2022)

The following was published in this newsletter on 16 December 2022:

1. China should not be overly concerned about its energy security.

2. China’s oil and gas resources are indeed limited but technological innovations and renewable energies will increasingly provide China with the energy independence that it seeks.

3. China should consider liberalising its domestic oil and gas markets.

4. The security threat posed by the Strait of Malacca to China’s energy security has been overstated.

5. Beijing must realise that oil and gas exporters now need China’s market more than China needs them and that this provides China with considerable leverage.

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Name: Feng Yujun (冯玉军)
Position: Director of the Centre for Russian and Central Asian Studies and deputy director of the Institute of International Studies, Fudan University
Formerly: China Institutes of Contemporary International Relations from 1994 to 2016. CICIR is an influential think tank linked to China’s Ministry of State Security.
Research focus: Russia and international relations
Education: BA Hebei University (1991), MA Jilin University (1994), PhD China Foreign Affairs University (2001)
Experience abroad: Two years in Russia and one year in Japan

“The Russo-Ukrainian conflict and its aftermath have led to a mismatch between the global supply and the demand of energy resources. [As a result,] the world’s existing oil and gas supply chains are undergoing major disruptions and restructuring … The world's energy markets and the geopolitics of energy are becoming unstable and the unpredictability of such risks is on the rise. This will not only put continued pressure on the world's energy landscape and economic growth and make the global energy transition a bumpy one, but it will also bring completely new and complex challenges to China's energy security.”

Safeguarding China's energy security requires “getting rid of outdated ideas about energy security”

“As the world energy landscape undergoes major changes and as the global energy transition gathers pace, China's energy security setup is also facing a new environment as well as new demands. In reality, however, some outdated ideas about energy security still constrain, to varying degrees, [our] way of thinking about the logic behind and the measures towards [China’s] strategic planning and policy formulation in the field of energy. With an eye on global trends and grounded in China's specific characteristics and current context [国情], an important prerequisite to improving China's energy security is to break away from our old ways [破旧立新] and fundamentally broaden our perspective and way of thinking.”

Feng on liberalising China’s domestic oil and gas market

“The perception of oil and gas as being scarce and expensive sources of energy has led to their being classed as important industries for China’s energy security. [Beijing] has only allowed a handful of firms to operate [in these sectors] and has restricted the involvement of a wider range of companies. This has resulted in a lack of sufficient market competition, [thus] making it difficult to bring about a shale revolution similar to that driven by SMEs in the US. Moreover, oil and gas prices have long been set by [the Chinese] authorities, making it difficult to mirror market elasticity, further reducing the scope for oil and gas consumption and thus also weakening the possibility of significantly reducing coal consumption.”

“The value of both assumptions [Feng is referring to the Hubbert curve and to the Club of Rome’s 1972 ‘Limits to Growth' report] is in recognising the overall finite nature of a given resource and suggesting the need to delay its [production’s] peak by consuming less of it.”

“In reality, technological advances are constantly increasing the possibilities for mankind to exploit and make use of natural resources. The continued harnessing of unconventional hydrocarbons (e.g. shale oil and gas, flammable ice), solar, wind and hydrogen energy will provide mankind with unlimited possibilities to make use of energy resources.”

“In recent years, China's rising oil and gas dependency has raised further concerns about [its] energy security. In 2016, 2018 and 2021, China's dependence on foreign oil [imports] reached 62%, 69.8% and 72.2% respectively, while its dependence on foreign gas reached 35%, 45.3% and 46% respectively. At the same time, the US has significantly reduced its dependence on foreign oil and gas, and has to a large extent achieved 'energy independence'. ‘The security of oil and gas supplies is thus seen as a weak point in China's energy security. The contrast between China's and the US's dependence on foreign oil is bound to affect their foreign policies and their stance towards global energy security.’ [Feng is quoting Lin Yikai 林益楷 a researcher at China National Offshore Oil Corporation]”

Overemphasising the security threat posed by the Strait of Malacca is a mistake according to Feng

“The 'Malacca conundrum' [‘马六甲困局’], which has been frequently raised in Chinese energy strategy circles over the years, is a typical case of energy 'insecurity'. The argument is that the Malacca Strait is a 'maritime lifeline' [‘海上生命线’] for China's energy supply, and that whoever takes control of the Strait and the Indian Ocean would be able to cut off China's energy lifeline at any time, thereby posing a great threat to China's energy security. It is on this basis that several onshore oil and gas pipelines have been built. Although it is certainly a wise decision to diversify energy imports, the logical premise of the "Malacca dilemma" presents a number of questionable points:

1. First, if a major power wanted to cut off China's oil supplies from the Middle East, it would be more straightforward and effective to do so in the Persian Gulf;

2. Second, under modern warfare conditions, it would be easy to destroy long onshore oil and gas pipelines using long-range precision-guided missiles.

3. Third, the vast majority of onshore oil and gas pipelines leading to China pass through high-risk areas. The non-traditional security threats to China's energy supplies are increasing rather than decreasing.”

“We must establish a dynamic and relative view of energy resource security and deal correctly with the relationships between fossil and clean energy, domestic and foreign, peacetime and wartime. There is no one set of indicators for energy security that is absolutely correct. This can only be a dynamic arrangement that is constantly changing and being adjusted.”

The higher the share of China’s renewable energy, “the more energy independent and secure the country will be”

“It is [also] important to fully recognise China's endowment of energy resources. Although China's oil and gas resources are insufficient, it is also important to recognise the enormous potential of China's abundant non-fossil energy resources, particularly of those renewable energy sources that have not yet been fully exploited. China's share of non-fossil energy in primary energy [consumption] has already reached 15.3%. As technical possibilities and cost-effectiveness increase, renewable energy will move from being a complementary source of energy to a primary one. Moreover, the higher the share of renewable energy, ‘the more energy independent and secure the country will be’. [Feng is quoting Du Xiangwan (杜祥琬), a member of the prestigious Chinese Academy of Engineering]”

Realising that oil and gas exporters need China’s market more than China needs their resources

“Many people are concerned that China's dependence on foreign oil and gas is too high and that this presents a huge security risk. The underlying logic of this view is that oil importers are inherently more vulnerable than oil exporters. However, the reality is that this energy ecosystem is a complete supply and value chain. Supply disruptions would not only threaten the interests of energy-importing countries but would also have a huge impact on energy-exporting countries, damaging their export revenues and financial stability.”

“With the new energy revolution, and especially with the transformation of the international oil market from a 'seller's market' to a 'buyer's market', China's huge energy consumer market is becoming an important 'structural power' [结构性权力] at our disposal. This could become a crucial bargaining tool in the context of [China’s] international energy cooperation and an important means of ensuring China's energy security.”

“It is important for us to realise that when we need the oil and gas resources of energy producers, they need our market more. Second, we should further improve the dynamic balancing between ‘energy security’ and ‘commercial interests’ and prevent oversensitivity to ‘security’ issues from raising the commercial costs of China's energy imports.”

Ecological security and the diversification of China’s oil and gas imports

“We should develop a reasonable layout of our international energy cooperation, focusing on the Middle East, Eurasia, North America, Latin America, Africa, Oceania and other regions. We should strive to maintain the diversity and sustainability of China's imports of energy resources as well as obtain maximum benefits at the lowest cost. The concept of ecological security should be emphasised, with more energy imports from distant regions with advanced production techniques and greater capacity for ecological restoration, and with correspondingly fewer imports from [China’s] neighbouring regions in order to protect [our] local environment and reduce the ecological hazards that these might pose to us.”

“At the bilateral level, while consolidating traditional sources of oil and gas in the Middle East, Eurasia and Africa, we should strengthen our oil and gas cooperation with the oil and gas production centres in the Western Hemisphere: the United States, Canada, Mexico, Venezuela, Brazil etc. At the multilateral level, efforts should be made to increase our voice and influence in international energy affairs through our participation in global energy cooperation.”

Comment: Feng does not mention China’s recent increase in gas and coal imports from Russia. However, he would probably argue that such a strategy is in line with his view that individual energy exporters (and particularly Russia) need China more than China needs them and that his country should avoid “oversensitivity to ‘security’ issues from raising the commercial costs of China's energy imports.”

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