By Liu Shijin, Vice-Minister of Development Research Center of the State Council (DRC)

Research Report No 1, 2011

I. Has Opening Policy Made China's Energy Supply More Insecure?

The extensive concern over energy security can be traced back to the first world oil crisis in the 1970s. The International Energy Agency defines energy security as the physical availability of the supply that can meet energy demand at given prices. An interpretation of energy security more acceptable to the academic community is a sufficient, reliable, multi-channel and affordable supply of oil and natural gas and an availability of sufficient infrastructure facilities to carry these supplies to energy markets. A stable energy supply and a reasonable price constituted the core contents of energy security. As the situation changes, the definition of energy security also widens. Environmental protection is included into the scope of energy security. In addition to oil and natural gas, electricity, nuclear energy and other new energies also enter the field of energy security. There are more factors that affect energy security. They include both the traditional factors such as regional wars and conflicts, political instability in energy-producing countries and security threats to energy facilities and also the non-traditional factors such as spreading terror activities.

Of all factors that affect energy security, opening to the outside world has been a protracted and arguable factor. Since China became a net oil importer for the first time in 1993, its dependence ratio on foreign crude oil has skyrocketed from 6% in 1993 to 45% in 2006 and more than 50% in 2009. China's natural gas import has also increased sharply and has even become a net coal importer. The high dependence ratio on foreign energies and especially on foreign oil has triggered social concern. This is quite natural. When there is serious supply instability or a drastic price fluctuation in imported energy, China is always a highly passive acceptor and finds it difficult to avoid the shocks to the stability and development of its economy and society.

But every coin has two sides. The opening of the energy sector has also created favorable conditions for energy supply security, some of them being impossible when China was closed to the outside world.

-- Energy supply has increased. Ensuring the stability of energy supply is an essential part of energy security. If China has a limited capacity for the reserve and production of domestic oil and other energy products and refuses to increase supply by taking advantage of its opening up, its economic development will be restrained. This in itself constitutes serious energy insecurity.

-- Energy supply is diversified. Compared with relying solely on domestic resources, global energy supply offers a much wider and diversified space in terms of regions, sources and varieties.

-- Common interests with potential competitors have been formed and expanded through opening up. These competitors include both some major powers that are in global and long-term competition with China and also the energy-exporting countries. In particular, some countries may very well cause insecurity to China's energy supply in a specific situation. If China can form interest integration with potential competitors through opening up in energy production, transport, sale and demand, the competitors will have to face high costs when they make trouble and even find it difficult to cause trouble. In fact, refusing to cooperate constitutes a basic condition for both sides to feel insecure.

-- Promoting technological exchange and cooperation in energy supply, energy conservation and new product development and encouraging innovations can increase long and medium-term energy security.

-- It can help strengthen international cooperation in energy security. In today's world, the energy and economic interdependence between countries has been unprecedentedly strong. The energy market has become a global one, and energy security, which is inter-related and highly exclusive, often becomes internationalized. A wider opening to the outside world is a precondition for a country to participate in international cooperation. An individual country will find it growingly difficult to address the challenge of energy security, and staying away from international cooperation is in itself a prominent insecure factor.

Overall, higher dependence on foreign energies and especially on foreign oil when a country opens to the outside world has brought major challenges to its energy security. But there are more positive factors that can be utilized to ensure energy security. Opening up has visibly widened, rather than narrowed, the space to ensure China's energy security. And the practical and potential capacities for China to ensure energy security have been visibly increased, rather than weakened. In fact, China's dependence on foreign energies is relatively low among major powers. For example, the dependence on foreign crude oil is more than 60% for the United States and 100% for Japan. Emphasizing energy security is not in conflict with opening up. The key element is to make full use of favorable factors, avoid the unfavorable ones, and consolidate the cornerstone of China's energy security through opening up.

II. Strategic Priorities to Ensure Energy Security through Opening up

To ensure its energy security in the new situation of opening up, China must proceed from its practical conditions, earnestly study and draw on international experiences, and identify several strategic priorities.

-- Diversification. Diversification means not to place all eggs in one basket, but to spread the potential risks arising from overdependence on a specific aspect. It means to diversify the import of oil and other strategic energies and increase oil supply from Central Asia, Africa and South America. It means to diversify the structure of energy supply by actively developing hydropower, nuclear power and other new energies and by reducing dependence on oil import. It also means the diversification of energy technologies.

-- Mutual integration. China should take integration with potential competitors as one of the important tactics to ensure its energy security. For example, China may cooperate with international oil giants in developed countries in overseas oil development. This can not only reduce security risks, but also ease some political resistance in the near future. This has been proved by PetroChina and other Chinese enterprises in their overseas development efforts. The links of oil transport, storage, processing and sale can easily become attack targets in a special time. If possible, China should encourage joint-venture and cooperative development and operation with foreign partners. It should continue to attract foreign capital and promote oil demand-end mutual integration. At present, more than half of China's export products are produced by foreign-invested enterprises. It is not inconceivable that once oil supply encounters a major problem, the interests of foreign investors and their home countries will inevitably be affected.

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