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Oil report

COLUMN-China's national security and carbon-neutral target: John Kemp

(John Kemp is a Reuters market analyst. The views expressed are his own)

LONDON, Sept 23 (Reuters) - China will adopt more vigorous policies to ensure carbon dioxide emissions peak before 2030, and carbon neutrality is achieved before 2060, President Xi Jinping told the United Nations on Tuesday.

Xi’s announcement was obviously intended to draw a sharp contrast with policies pursued by U.S. President Donald Trump as political and diplomatic rivalry between the two countries intensifies.

But it also makes strategic sense for a country that has plentiful domestic resources of coal, wind, solar and hydro, but is short of both oil and gas and is increasingly reliant on imports.

China would be the world’s biggest beneficiary from an accelerated energy transition towards an electrified system based on renewables, nuclear and hydro, plus coal coupled with CO2-capture technology.

For China, ambitious plans to re-orient the energy system away from imported oil and gas to domestic energy are not just about climate change and urban air pollution but also economic and national security.

DOMESTIC RESOURCES

China was a net importer of coal, oil and gas in 2018, the National Bureau of Statistics (“China Statistical Yearbook”, NBS, 2019) shows.

But while it relied on net imports to satisfy just 5% of coal consumption, net imports accounted for 43% of gas consumption and 69% of oil consumption (tmsnrt.rs/3mKX61M).

Oil and gas imports have risen relentlessly over the last two decades. Increasing car ownership and conversion of heating systems to gas have boosted domestic use while production has lagged behind.

As a result, oil and gas have become an increasing burden on the country’s balance of payments, accounting for 11% and 2% of all merchandise imports in 2018.

Oil was the second-largest merchandise import cost, after semiconductors, while gas ranked ninth (“International trade statistics yearbook”, United Nations, 2019).

China’s energy consumption is set to increase further over the next two decades, which will worsen its dependence on imports, unless government policy changes the energy mix.

STRATEGIC THREATS

Import dependence is a source of strategic vulnerability. Most current and future imports come from adversaries (United States, Australia) or countries within the U.S. sphere of influence (the Gulf states).

Most oil and gas imports arrive via long sea routes and through maritime chokepoints in the Malacca Strait, South China Sea and the East China Sea that could be threatened by the U.S. Navy in the event of a conflict.

The likelihood of a maritime blockade short of an all-out strategic conflict between China and the United States has probably been overstated.

A sustained blockade would be so serious (a casus belli) it is hard to envisage circumstances in which could be enforced that would not lead to a further escalation targeting both countries fleets and other military assets.

But China has attempted to reduce the risk by creating its own strategic petroleum reserve and encouraging refiners and traders to accumulate their own commercial crude stocks.

China will continue to encourage the development of alternative oil and gas resources in the Middle East, Africa and Latin America outside the U.S. sphere of influence.

Nonetheless, there is a compelling strategic case for limiting the growth, and even reducing, oil and gas imports to reduce vulnerability in the case of strategic or sub-strategic conflict with the United States.

U.S. sanctions on China’s technology companies (ZTE, Huawei, TikTok, WeChat) have underscored the need to onshore supply chains and reduce the country’s vulnerability to economic pressure.

ENERGY TRANSITION

For more than a decade, China’s central government has prioritised increasing oil and gas output, so far with limited success, and most suitable large-scale hydro sites have already been developed.

The focus has therefore shifted to electrifying the energy system and increasing the share of generation from domestic wind, solar and nuclear power.

Primary electricity generation from wind, solar, hydro and nuclear increased by almost 10% per year in the decade between 2008 and 2018.

The country also has abundant reserves of coal, which is likely to remain an important source of secure domestic energy, probably coupled with carbon capture and storage technology.

There is no strategic incentive to replace domestic coal production with imported oil and gas, which would worsen energy security as well as create significant regional unemployment.

ELECTRIFICATION

As a country with few high-quality oil and gas resources, China has a strong economic and strategic interest in the development of electric vehicles to replace the internal combustion engine.

Most energy for residential and commercial heating as well as industrial use could be supplied from an electric system based on renewable energy supplemented by coal, nuclear and hydro.

The country’s giant State Grid Corporation has already built a nationwide ultra-high voltage grid to connect plentiful wind, solar and hydro resources in the west with megacities in the east.

In the mid-2010s, State Grid promoted even more ambitious plans for a continent-spanning ultra-high voltage networks linking up much of the Eurasian landmass (“Global energy interconnection”, Liu, 2015).

The plans may have been a statement of aspiration more than reality; continental super-grids have not emerged anywhere in the world. But they illustrate the direction of the country’s high-level strategic thinking.

SWITCHING PLACES

In the three and a half decades before the shale revolution, the United States became increasingly dependent on imported oil and reducing that dependence became a key priority for policymakers.

The United States responded with the creation of a strategic petroleum reserve; energy efficiency and conservation programmes; biofuels mandates; and a focus on increasing domestic coal, oil, gas and renewables output.

The shale oil and gas revolutions transformed the U.S. strategic position, turning the country’s primary focus from consumption and imports to production and exports.

China now finds itself in the same position as the United States before 2005, and is responding with very similar policies to improve its economic and military security, as well as tackle climate change and air pollution.

Related column:

- U.S.-China cold war would redirect energy flows (Reuters, July 20, 2020) (Editing by Barbara Lewis)

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