No longer content with economic progress at all costs, Chinese citizens have increasingly mobilized to demand more sustainable growth. Using social media, ordinary citizens have challenged government plans to build chemical and other potentially hazardous plants. In 2012, in Shifang, a western Sichuan town that suffered badly during the 2008 earthquake, high school students researched the potential adverse health effects of a molybdenum copper plant planned for the town. Through sites such as We-Chat and weibo (China’s equivalent of Twitter), they posted information about their findings, galvanizing large-scale protests that turned violent in confrontations with the police. Although journalists had little access to the area, pictures of bloodied protesters were widely disseminated over the Internet, contributing to the decision by Chinese authorities to suspend plans for the copper plant after two days of protests.
Such incidents are increasingly common. Yang Chaofei, the vice chairman of the Chinese Society for Environmental Sciences, claimed that the number of protests related to the environment rose by nearly a third each year from 1996 to 2011, and increased by 120 percent from 2010 to 2011 alone. A 2013 survey conducted in China found that four-fifths of respondents wanted the government to prioritize the environment over economic growth and nearly the same percentage vowed to join protests if a polluting facility were planned near their residences.
Under the right conditions, the new energy abundance should help China with this very real challenge—and the threat it poses to the legitimacy of the Chinese Communist Party. More abundant natural gas—whether from within China or outside it—could be an important ingredient in China’s drive to grow in a more environmentally sustainable way. China’s current energy mix is heavily dependent on coal. This dirtiest of the fossil fuels has met an overwhelming 70 percent of China’s overall energy needs each year between 1980 and 2014, although the last several years have seen a gradual decline in this percentage. According to the U.S. EIA, “China consumes and produces almost as much coal as the rest of the world combined.” Curbing pollution, as well as carbon emissions, will require the realization of the much heralded, but as yet undiscovered “clean coal,” or, more realistically, the switch away from coal toward cleaner fuels such as natural gas, renewables, or nuclear power. Even factoring in slowing economic growth today, the scale of this challenge is massive, given China’s current energy needs and its expectations for future demand.
The Chinese government has worked hard to ensure that natural gas will meet an ever-growing portion of Chinese energy demand. Multiple obstacles have existed to the greater adoption of natural gas, which met 6 percent of China’s overall energy demand in 2015. For starters, the fuel has no bureaucratic champion in a complex, state-run system. Moreover, China’s reserves are far removed from likely demand; the Tarim Basin in the northwest province of Xinjiang is roughly the same distance from gas-thirsty Shanghai as New York is from Los Angeles. Perhaps most important, the pricing system for natural gas has provided few incentives for producers, given that it was often sold for less than the price of production. Nor has natural gas been particularly attractive for consumers, given the much cheaper alternative of coal.
Recognizing many of these hurdles, and interested in promoting natural gas for environmental and energy security reasons, the Chinese government has taken steps in recent years to help increase the role of this fuel. Its goal is for gas to account for 10 percent of overall energy consumption by 2020, by both meeting new demand and squeezing out some of the current demand for higher-polluting coal. This may sound like a small amount of natural gas, given that, on average, the rest of the world uses natural gas for 25 percent of its energy mix. But China’s targets would equal more than twice what Russia exported to Europe in 2014, or about the same amount that Russia’s Gazprom produced for both domestic consumption and export in the same year. To keep the country on track to meet its 2020 targets, the government in 2015 lowered natural gas prices in some sectors and will permit industrial providers to charge up to 20 percent more for natural gas than government benchmark prices. Partially in response to such efforts, natural gas has begun to make inroads into the energy mix, broadening beyond its traditional use in fertilizer and chemical plants to be used in industrial, residential, and even the transportation sectors.
Despite these and other ongoing efforts, it is not certain that natural gas will meet its potential and help China manage the enormous challenges it faces in managing its economy and its environment simultaneously. One possibility is that natural gas may continue to lose out to coal. The global glut in natural gas and China’s price reforms notwithstanding, coal still remains three times cheaper than natural gas for the generation of electricity in China. Without additional policy interventions, a large-scale shift from coal to gas—as was seen in the United States—will not occur. China could continue to bring down the price of natural gas to make it more competitive with coal—or China could increase the relative price of coal. The latter could be achieved through China’s plans to develop the national carbon emissions cap-and-trade system that was part of Beijing’s pledge in the Paris climate agreement. However, if MIT researchers Sergey Paltsev and Danwei Zhang are correct, such a system on its own could actually curb natural gas use, given that resource’s own related carbon emissions. Instead, if natural gas is to make a positive contribution to China’s energy mix, Paltsev and Zhang conclude a cap-and-trade system will need to be accompanied by a subsidy for natural gas.
Another possible future for natural gas in China is that its expansion gets squeezed out by renewables. China spent $90 billion on renewables-based electricity generation in 2015, making it number one in the world; this amount was more than double the sum that China invested in electricity generated by fossil fuels in the same year. According to the IEA, electricity generated by certain types of solar energy is now cheaper than some forms of natural gas–generated electricity. Dropping costs are expected to make renewables even more cost competitive in the coming decade. Particularly given the need to build more infrastructure to support the greater use of natural gas, investors may come to see putting money into natural gas today to be similar to investing in floppy disks in 2000. Nevertheless, the cost differentials that favor renewable energy to some extent depend on China’s continued subsidization of such forms of energy—and assume that policy support for natural gas does not materialize.
Ultimately, China will need both natural gas and renewables to successfully transition to a more sustainable energy mix and economy. Even acknowledging China’s slowdown in economic growth and energy intensity, China will need vast amounts of new energy from diversified sources in the future. Moreover, it will need to have non-coal energy sources that can generate power around-the-clock—a need renewables cannot yet meet until there are better options for storage.
“Expect the unexpected” is a common saying in Chinese. It is only in this way that President Xi and the Chinese Communist Party could have anticipated the boon they have received from the new energy abundance. At a time of significant challenge to the legitimacy of the Communist Party and the government, a dramatically changed energy landscape whose roots lie outside China’s borders opens new opportunities to help manage some strikingly difficult domestic challenges. The strategic benefits to China of the new energy abundance, however, are not limited to the homefront domain. They extend well beyond the Great Wall to shape China’s emerging role in the international arena.
An Opening to a Different Kind of Foreign Policy
The line of angry motorists snaked along the steamy streets of Shenzhen, a large city in China’s southern Guangdong Province, for more than two kilometers. Fuel rationing and closed service stations suddenly became the norm, as the province battled shortages of gasoline in the dead heat of the 2005 summer. Concerned about the possibility for social unrest as hot and frustrated drivers jostled to fill their tanks, the Chinese government sent thousands of public security officers and paramilitary police to more than five hundred g
as stations across the province.
Analysts attributed this particular crisis to pricing policies that made it unprofitable for refiners to process crude, given rising oil imports and increasing global oil prices. Nevertheless, such scenes rattled the nerves of Chinese leaders, who are ever vigilant about sparks that could ignite larger social discontent. As Zheng Bijian, a senior advisor to then–Chinese president Hu Jintao, explained in 2005, “China has a population of 1.3 billion. Any small difficulty in its economic or social development, spread over this vast group, could become a huge problem.” The energy shortages of that summer reinforced the already acute sense of the ironclad link between access to energy, economic growth, and social stability—and ultimately, the legitimacy of Communist Party rule.
It was exactly to prevent such moments of public turmoil that Chinese officials had turned their attention a few years earlier to securing energy resources abroad. Shortly after assuming office in 2002, President Hu Jintao and Premier Wen Jiabao decided that securing reliable supplies of oil and other resources should be considered not simply an issue for development, but also an element of national security. In 2004, Li Junru, the vice president of the Communist Party’s Central Party School, named competition for energy resources as the most important factor shaping China’s “peaceful rise,” placing it ahead of Taiwan. And one year later, Zheng Bijian, Hu’s advisor, cited the shortage of natural resources as a growing obstacle to be overcome in China’s development.
The pressure to secure resources from abroad led China to massively expand its diplomatic ties over the first decade of the twenty-first century, with a clear focus on energy-producing countries and regions. It led to a transformation of China’s historical ties with Africa and a rejuvenation of relations with the Arab world after a lull of hundreds of years. Energy needs also spurred at least a partial thaw in affairs with its northern neighbor, Russia, and a careful and deliberate construction of ties between Beijing and the countries of Central Asia. And, over time, China—through investment and its appetite for commodities—became one of the primary drivers of growth in Latin America.
As helpful as it has been, the new energy abundance has not freed China from the quest to secure resources from abroad. True, the prospects for greater Chinese energy self-sufficiency have improved with the discovery that China has the greatest technically recoverable shale gas reserves in the world—almost twice those of the United States. But difficulties in extracting this gas on a large scale dampened the initial enthusiasm of the Chinese government and caused it in 2014 to scale back its expectations by half for how much shale gas will contribute to the Chinese energy mix over the rest of this decade. While China may well become a shale gas powerhouse over time, it will first need to contend with tough geological realities, find ways to increase the incentives Chinese national oil companies (NOCs) and private companies have to produce shale gas, and address obstacles such as water scarcity, lack of infrastructure, discouraging property rights, and insufficient environmental regulation. China’s shale oil resources—also believed to be substantial—are even further from development.
Even if the new energy abundance will not change China’s massive need for resources from abroad, it will dramatically change the context in which that pursuit occurs; China will seek to satisfy its more modest energy demand growth in a context of relative plenty, not scarcity and cutthroat competition. Chinese and other leaders now know that huge quantities of oil and gas can be produced at prices that are higher than the troughs of 2016, but lower than the $100 a barrel that seemed “reasonable” to both consumers and producers just a few years earlier. Oil prices will rise and fall depending on a range of factors, but the scenario of great powers competing for limited oil resources—so prevalent only a few years ago—now seems like the discarded storyline of outdated movies or novels.
The price plunge beginning in late 2014 made the oversupply of oil evident to the world, and, a few years later, a surfeit in natural gas emerged. U.S. shale gas production alone has had positive knock-on effects for China. LNG exports once destined for the United States ultimately made their way to Asia, where they added to the liquidity of the market and helped keep prices from rocketing even higher at a time of growing Asian gas demand. As discussed in Chapter Three, pressure mounted on suppliers to revise their contracts and move natural gas prices away from a near total linkage with very high oil prices to reflect spot prices to some degree. In this positive economic environment, China emerged, seemingly overnight, as the third largest LNG importer in the world, increasing its appetite sixfold from 2008 to 2013. The oil price plunge of 2014–2015 provided some added relief, as the combination of adequate supplies and lower oil prices drove down once sky-high natural gas prices to Asia significantly.
China and other consumers of imported natural gas look ahead and see a natural gas landscape even more suited to their needs for the next decade or longer. Australia and the United States together could bring nearly 50 percent more LNG to global markets by 2020. Looking out two more decades, LNG supply appears set to increase by more than two-thirds. Lower than expected increases in demand growth—owing to dampened Chinese growth or the resumption of nuclear power by Japan—could further deepen this glut. China now finds itself in a surprisingly comfortable position: it has contracted for more natural gas in the coming years than it expects to use, even if it meets its objective of transitioning to a more natural-gas-intensive economy.
The critical link between energy, growth, and the legitimacy of Chinese Communist Party rule is still strong, and as a result Chinese leaders will not become complacent about securing needed energy from abroad. But much of the urgency and anxiety around procuring these resources has been moderated. This change in temperature has subtle, but extremely important, repercussions for China’s foreign policy, given the central role that securing energy has played in the past. As we will see, the new energy abundance gives China an opportunity to rethink and revise core elements of its foreign policy, as well as provides more leeway for China to focus on objectives other than securing energy. In doing so, The new energy realities further align China with the current international order, rather than pitting it against it.
Downsizing the Gallery of Rogues
After months of careful consideration, extensive study, and vigorous debate within the U.S. State Department, Secretary of State Colin Powell was ready to issue a verdict. The date was September 9, 2004, and he was seated in front of the Senate Foreign Relations Committee, testifying on recent events in Sudan. After detailing the situation there and the administration’s response, Powell wound his way to the key moment: “We concluded—I concluded—that genocide has been committed in Darfur and that the government of Sudan and the Janjaweed bear responsibility—and that genocide may still be occurring.” This was the first time the executive branch of the U.S. government had ever used the word “genocide” in relation to an ongoing conflict.
Nine days later, the paltry fruits of American efforts to get the United Nations to pressure Khartoum to protect civilians and cooperate with African Union monitors were announced to the world. The title of the U.N. press release sums it up: “Security Council Declares Intention to Consider Sanctions to Obtain Sudan’s Full Compliance with Security, Disarmament Obligations on Darfur” (italics added). China, which ultimately abstained, managed to dilute the resolution referred to in the press release so as to make it almost meaningless, and threatened to veto any subsequent efforts to sanction Sudanese leaders.
China’s position toward Sudan, which it maintained for much of the rest of the decade, had two main drivers. Beijing sought to shield Khartoum’s domestic behavior from international scrutiny, in the hopes that it could similarly dissuade the world from peering into China’s own internal affairs. Equally important, China aimed to protect its substantial investment in Sudan’s oil industry, even after shareholders had forced out Western companies on moral grounds. By 2004, China had invested substantially in Sudan’s oil ind
ustry and was importing more than four-fifths of Sudan’s oil output. China’s deputy foreign minister, Zhou Wenzhong, was unapologetic about China’s stance. “Business is business,” he stated. “We try to separate politics from business. Secondly, I think the internal situation in the Sudan is an internal affair, and we are not in a position to impose upon them.”
While China’s approach to Sudan drew more international attention and outrage than its policies toward other countries, it was not one of a kind. In fact, at the time, Beijing’s policy toward Sudan was fairly representative of China’s long-standing “going out” strategy. In essence, the “going out” approach was and is an effort by the Chinese government to encourage Chinese companies—state-owned ones in particular—to seek investment opportunities in a wide array of resources beyond China’s borders. This encouragement was not just rhetorical but came in many forms. These included arranging high-level visits by government officials to countries where Chinese companies were seeking deals, tying development aid and other financial assistance to resource-wealthy countries to the completion of deals, and extending preferential credit to Chinese companies seeking to compete with international firms. Adding to the attractiveness of such deals was the Chinese government’s indifference to the domestic policies of the country in question. Investment, finance, and aid were predicated on ownership of oil and other resources. Human rights, fiscal policies, domestic subsidies—none of these things appeared to matter to prospective Chinese investors and their government backers with deep pockets.
First articulated in 1997, China’s “going out” strategy originally seemed geared toward diversifying China’s investments and introducing competition to some of China’s largest state-owned firms. But by the early 2000s, a sharper objective had come into focus. The Chinese government and China’s NOCs joined forces to seek and obtain equity oil investments worldwide, particularly in Africa and Latin America. Chinese presidents, premiers, and development ministers crisscrossed the vast continents of South America and Africa in the company of Chinese oil executives. Almost without fail, they left in their wake dozens of signed trade, investment, and even military cooperation agreements as well as billions of dollars of investments, many of them in equity oil. In 2010 alone, Chinese NOCs spent nearly $30 billion on acquiring oil and gas assets globally, with nearly half that sum invested in Latin America. In the decade following 2004, China invested more than $45 billion in exploring and producing oil and gas acquisitions in continental Africa. At least initially, China seemed to believe that equity ownership of African or Latin American oil would help insulate it from growing international competition for resources. Anticipating an ever-more-competitive energy landscape, the duo of the Chinese government and the country’s NOCs aggressively sought equity investments with the expectation that, in some future time of crisis, China would be able to ensure this oil flowed in its direction.
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