Commentary on Political Economy

Monday, 7 September 2020


Beijing May Be More Addicted to Coal Than Oil

PetroChina's “near-zero” target for emissions by 2050 is about national security rather than climate.

A green-hued future?
A green-hued future? Photographer: Lucas Schifres/Bloomberg

There’s one surprise entrant in the group of oil companies announcing plans this year for how they’ll reduce emissions: PetroChina Co.

China’s oil companies, unlike their peers in the U.S. and particularly Europe, don’t traditionally treat climate targets as a major issue. Beijing, after all, isn’t even promising to hit its emissions peak until 2030.

The large fund managers that have been pressuring Western oil companies to improve their carbon commitments don’t make much difference, either. PetroChina’s chairman, Dai Houliang, is a Communist bureaucrat whose more significant job is party secretary of state-owned parent China National Petroleum Corp. His main role at PetroChina is to make sure it plays its part in guaranteeing energy security, one of Beijing’s most critical issues. As shareholders will no doubt be bitterly aware, their interests are neither here nor there:

Dry Well

The 10-year total return on PetroChina's shares is far behind other oil companies

Source: Bloomberg

So PetroChina’s announcement in its half-year results last week that it would seek a “near-zero” target for emissions by 2050 is unexpected. With China preparing its 14th five-year plan — probably the most crucial document in determining whether the planet can avoid devastating climate change — that might be taken as a sign that the winds of change are blowing through Beijing.

It’s probably best not to get too excited, though. In most countries, the chief objective is to minimize reliance on the worst-polluting of fossil fuels: coal. In China, however, bureaucrats are more preoccupied with self-sufficiency, so limiting oil imports is a bigger concern. In that sense, PetroChina’s announcement may just be further confirmation that it’s national security considerations, rather than climate, that’s driving energy policy in Zhongnanhai.


PetroChina's spending on developing new petroleum wells is among the highest in the industry

Source: Bloomberg

Note: Shows three-year average all-in finding and development costs.

Have a look at what’s happening to PetroChina’s core business and it’s obvious why the company may have other reasons for pivoting to renewables. Oil output from its domestic wells has been more or less flat for four years, despite strong demand growth. While gas production has increased in line with government policy, the cost has been enormous, as we’ve written: Three-year average all-in finding and development costs for its petroleum wells are running at $21.74 a barrel, well above most Western oil majors. 

PetroChina isn’t alone in this. Getting more hydrocarbons out of China’s unpromising soil has been getting harder for some time. Despite domestic demand increasing by about a third between 2015 and 2019, production from local wells fell 11%. As a result, the country went from importing 31% of its crude in 2002 to 72% last year, at a cost of some $220 billion.

Tanked Up

China is depending on imports for a growing share of its apparent oil demand

Source: National Bureau of Statistics of China, China Customs General Administration, Bloomberg

There’s no shortage of policy ambition to reduce this dependence. China has some of the world’s most generous and long-standing subsidies for electric vehiclesnearly half the world’s electric car fleet and about 99% of its electric buses. Concerns that a rival power could turn off the lights by blockading the Strait of Malacca in the event of war also appear to have driven the construction of a multibillion-dollar pipeline to the coast of Myanmar.

Coal is a very different picture. Thanks to vast domestic reserves and demand that’s down about 9.2% since peaking in 2013, China has consistently been able to source around 95% of its solid carbon domestically. Just last year it completed a 1,814 kilometer (1,127 mile) railway to shift soot south from its main mining regions north and west of Beijing toward destinations further south, which have traditionally been dependent on imports. Premier Li Keqiang has repeatedly promoted “cleaner and more efficient use of coal” in speeches about the country’s energy policy.

In the Black

Despite being one of the biggest players in the seaborne coal market, China sources the vast majority of its solid fuel domestically

Source: Bloomberg

Solid fuel still has problems in China. The gradual deregulation of the country’s power market is resulting in spot prices in key provinces far below costs for coal-fired power stations, according to BloombergNEF analyst Hanyang Wei — though their dependence on long-term power purchase contracts will soften that blow for a while. Despite having some 98.5 gigawatts of new coal-fired power stations under construction, the generation sector has been plagued with overcapacity for years, too. As a whole, the country’s fleet runs less than half the time, levels at which it’s hard to turn a profit. Nonetheless, in contrast to China’s relatively strong government policies to limit oil demand, coal remains a favored sector.

That’s a tragic mistake. If China is worried about energy security, there’s no type of power less import-dependent than renewables. More to the point, emissions are a present and future danger to the Chinese people. Some 47,240 lives each year have been saved by a crackdown on particulate emissions between 2013 and 2017, according to one study. The devastation wrought by this summer’s flooding of the Yangtze is a small foretaste of what's to come in a future where higher global temperatures lead to heavier, more damaging rainfall episodes.

PetroChina’s near-zero ambition may be less than meets the eye. Its peers in the state-owned coal and power sector would still do well to match — and exceed — it.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. 

No comments:

Post a Comment