CHINA: SCENARIOS OF LONG-TERM OIL CONSUMPTION

• Document Type: FOIA
• Collection: FOIA Collection
• Document Number (FOIA) /ESDN (CREST): 0005304571
• Release Decision: RIPPUB
• Original Classification: U
• Document Page Count: 15
• Document Creation Date: June 23, 2015
• Document Release Date: September 10, 2009
• Case Number: F-2008-01057
• Publication Date: June 22, 1998

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Intelligence Report
Office of Transnational Issues
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Subject: China: Scenarios of Long-Term Oil Consumption
We have examined three scenarios for China's long-term oil consumption that vary
key assumptions of GDP growth, real oil prices, and vehicle ownership as China's
economy matures. The scenarios allow us to examine broad trends and to assess the
implications of different oil consumption paths through 2015.
? Our reference case--which is in line with most industry and government
studies--projects consumption in 2015 at more than double current levels,
reaching about 9 million barrels per day (b/d).
? In our low consumption case, China suffers from a deep and prolonged
economic crisis in Asia, which lowers oil demand in 2015 to 7.3 million
b/d.
? A takeoff in vehicle ownership and a significant increase in demand for
transport fuels--similar to what happened in Taiwan and South Korea--is
the basis of our high demand scenario in which oil consumption increases
sharply to about 14 million b/d between now and 2015.
In all scenarios China becomes increasingly dependent on oil imports to meet its
needs because of the country's bleak oil production prospects. China currently
produces about 3.2 million b/d.
? China has not found sufficient new oil reserves to substantially boost
stagnant domestic oil production, and exploration in the highly touted
Tarim Basin and in offshore areas generally has been disappointing.
? China will rely heavily on Persian Gulf suppliers for its imports, which
may induce Beijing to step up its foreign search for oil, thereby
increasing competition for US firms in areas such as the Caspian.
scenario to take account of China's growing import needs.
China's growing oil import requirements will play an important role in future oil price
trends. We have assumed some strengthening of world oil prices in our high demand
APPROVED FOR
RELEASE DATE:
04-Sep-2009
-S+erret-_
 ? There could be even more upward pressure on oil prices, however, if oil
supplies are tighter than most industry experts expect in 2015.
and increase ninefold-from 33 to 290 million tons--under our high demand scenario.
Higher oil use in China has serious environmental consequences. Carbon emissions
from road transport would double between now and 2015 under our reference case
investment opportunities could be substantial over the next
oil consumption needs.
decade as China looks for tens of billions of dollars in foreign investment for building
and upgrading refineries and for oil exploration and development to meet its expected
 Recent Slowdown in Demand After Strong Growth
China's oil consumption has grown steadily over the past decade along with the
country's strong economic performance, and China is now the world's third largest
oil-consuming country behind the United States and Japan.' Oil consumption
increased on average 5.7 percent annually over the past 10 years, going from
2.2 million barrels per day (b/d) in 1987 to 3.9 million b/d last year, while GDP
growth averaged about 10 percent annually over the period.
? A driving force behind China's robust oil consumption has been strong
demand for transport fuels, which at 1 million b/d in 1996 accounted for
about 30 percent of total oil demand (see Figure 1). The number of
vehicles in China increased from 5.8 million in 1990 to 10.4 million in
1995, the last year for which complete data are available.
Industry's oil use grew from 600,000 to 900,000 b/d from 1986-1996,
mainly because of strong demand for oil feedstocks in the petrochemicals
and chemicals industries.
? We estimate China's income elasticity of oil demand at 0.6 during 1987-
1997, which is below the 1.0 or higher ratio for most developing countries.
China's low income elasticity of oil demand reflects an emphasis on coal
in its energy mix
This year China has seen its economy and oil demand growth slow largely because of
Asia's regional economic crisis; GDP growth slowed to 7.2 percent in the first quarter
of 1998, down from 9.6 percent in first quarter 1997, according to Chinese press
reports.
? If China's GDP growth rate remains at 7 percent this year, oil demand
would register a 5-percent increase this year, compared with growth of
about 9 percent in 1997, assuming an income elasticity of oil demand of
0.7.2
sluggish oil demand and burgeoning
inventories of unsold oil recently forced the China National Petroleum
Corporation (CNPC) to announce a 5-percent cut in oil production--about
2 The 10-year average income elasticity of oil demand in China has risen over time from 0.2 in
1987 to 0.6 in 1997, and an income elasticity of oil demand in 1998 of 0.7 reflects the recent
production plus net imports and is used interchangeably with the term demand.
1 For the purpose of this paper, the term consumption refers to apparent consumption or
 Figure 1
China: Oil Consumption by Sector, 1996
 prices to halt the influx of cheap imports.
The average world oil price has dropped by more than $3 per barrel since the
beginning of the year, making crude oil imports cheaper than price-controlled
domestic supplies; China's crude imports rose to about 650,000 b/d during the first
quarter, up from year-earlier levels of 590,000 b/d. China recently announced that it
will peg future prices for domestically produced crude oil and products to world oil
payments, and lay off oilfield workers to control costs.
about 150,000 b/d. CNPC also has had to cut salaries, postpone salary
Scenarios of Demand Over the Longer Term
We have examined three scenarios for long-term oil demand in China that vary the
assumptions for average annual GDP growth, real oil prices, and the demand for
transport fuels: a reference case in which China's economy weathers the Asian
economic crisis this year and is able to avoid a slowdown in the medium term; a low
consumption scenario in which China's economic growth slows as a result of a deep
and prolonged crisis in Asia; and a high demand scenario in which China's GDP
growth remains the same as in the reference case but demand for transport fuels grows
well above our reference case because of a takeoff in vehicle ownership as the
economy matures. We have assumed an increase in real oil prices from $13 per barrel
(1998 dollars) to $21.50 per barrel between now and 2015 in the reference case and a
moderately higher real oil price increase to $24 per barrel (1998 dollars) under the
high demand case, which takes into account China's growing import needs
(see Figure 2). These real price assumptions imply that world oil supplies will meet
increases in Chinese demand. Our scenarios are meant to be illustrative of key
variables, not exact forecasts.
? In our reference case, China's GDP growth does not slow further because
of the regional economic crisis, and the other Asian economies begin to
recover in 1999. Under this scenario, we assume China's GDP grows at
an average annual rate of about 7 percent between now and 2015. As a
result, the country's oil consumption more than doubles, from about
4 million b/d in 1997 to 8.6 million b/d in 2015; demand for transport
fuels remains at about a third of total demand in this scenario, and
industry's share grows from 26 to 30 percent, reflecting the continued
importance of oil feedstocks to industrial production. Our reference case
is consistent with other US Government and industry forecasts, which put
China's oil consumption at close to 7 million b/d in 2010, increasing to
about 9 million b/d in 2015 (see Figure 3). It contrasts sharply, however,
with public projections by a senior Chinese oil official who said Chinese
demand will be closer to 5 million b/d in 2010, 2 million b/d lower than in
our reference case.
 Figure 2
China: Oil Demand Scenarios, 1998-2015
Key Assumptions
Low Consumption Reference Case High Demand
Average Annual GDP
Growth Rate
5%
7%
7%
Income Elasticity
Y
gradually from
reflecting
0.7 to 1.1
of Oil Demand
0.7
0.7
,
increased oil intensity,
Real oil price increase
Real oil price increase
from $13 per barrel
from $13 per barrel
Real Oil Prices
Same as reference
(1998 dollars) to $21.50
(1998 dollars) to $24 per
case.
per barrel (1998 dollars)
barrel (1998 dollars) in
in 2015.
2015.
 Figure 3
Forecasts of China's Long-Term Oil Consumption
Million bid
our reterence case assumes a r atlvely low Income elasticity of oil demand of 0.7.
3. Energy Information Agency, US Department of Energy.
 ? Our low consumption scenario assumes the Asian economic recovery
takes longer and that China is not immune from the slowdown. In this
case, we assume lower average annual GDP growth of about 5 percent,
which cuts average annual oil demand growth to 3.5 percent, or to
7.3 million b/d in 2015.
? Under a high demand case, the Asian crisis has only a minimal impact on
China's economic growth and the transportation sector experiences rapid
development similar to what happened in Taiwan and South Korea. In this
scenario, we assume that as per capita GDP increases from its current level
of about $3,500 (purchasing power parity) to $9,500, vehicle ownership
per 1,000 people follows a similar path to that in Taiwan and South Korea,
and vehicle ownership per 1,000 people tops 110 by 2015, more than four
times what it would be in our reference case (see Figure 4). Under these
circumstances, demand for transport fuels could be 8.2 million b/d in
2015, pushing total oil consumption to about 14 million b/d.3 The higher
Chinese demand, together with anticipated consumption growth elsewhere
in the world, causes real oil prices to increase to $24 per barrel in 2015,
and income elasticity of oil demand would rise from 0.7 to about 1.1, more
typical of ratios in developing countries and reflecting a pattern of rising
oil demand to GDP growth over the past decade in China.
Bleak Domestic Oil Supply Outlook
In contrast to growing oil demand, China's oil production has increased by less than
2 percent a year in 1987-1997, according to official Chinese statistics. China has not
found sufficient new oil reserves to substantially boost domestic production that
averaged some 3.2 million b/d last year, and recent exploration activity has been
disappointing.
? Production from the country's three aging onshore fields--Daqing, Shengli,
and Liaohe, which account for about 65 percent of total output--declined
in 1996, according to a CNPC report. Press reports citing attempts at
Shengli to slow the rate of decline and similar pronouncements about
efforts at Liaohe to maintain current production rates suggest that the
downward trend in output from these fields continued in 1997.
? Chinese exploration of the Tarim Basin in Xinjiang Province, which many
Chinese and foreign geologists believe has the country's "last, best chance
Even this number assumes a major reduction in fuel use per vehicle in China--from 26
barrels per vehicle currently to 17 barrels per vehicle by 2015. Fuel use per vehicle in China
is likely to decline over time because of a combination of factors, including a lower proportion
of trucks, lower intensity of vehicle use, and higher vehicle efficiency.
--Seer-
5
 Figure 4
Evolution of Vehicle Ownership with GDP
in Taiwan, South Korea, and China
-er Taiwan
+South Korea
-Best Fit Regression Line
---China History
-#F- Reference Case
-x-- China High Transport Path
6,000
GDP per capita
 for large undiscovered fields" has not been successful . Most major
foreign oil companies suspended exploration in late 1996 citing poor
results from exploratory drilling and Chinese bureaucratic impediments,
according to press reports.
? Exploration elsewhere in China has also been a disappointment. Offshore
production in the South China Sea, which represents about 90 percent of
China's total offshore output of about 300,000 b/d, is at its peak level and
will begin to decline in a few years unless large new fields are discovered,
Imports, as a result, have been rising. Last year China's net oil imports were some
700,000 b/d, twice 1996 levels, of which more than half were refined products. Crude
oil imports came mainly from suppliers in the Persian Gulf, Southeast Asia and
Africa. Meanwhile, Beijing turned to Kazakhstan, Iraq, and Venezuela in a search for
secure, long-term oil supplies.
? Last year CNPC signed two oilfield development deals with Kazakhstan
that reportedly include construction of a $3.5 billion, 3,000-kilometer
pipeline to western China. Progress on the proposed pipeline is uncertain,
however, and the project has moved little beyond a recent announcement
by Kazakhstan's President Nazarbayev that a "final" agreement will be
signed soon.
? China also has signed a $1.2 billion postsanctions production-sharing deal
with Iraq to develop the Ahdab field and two, 20-year contracts to develop
fields in Venezuela, an investment of about $350 million.
? CNPC has smaller development deals in Peru and Sudan and is pursuing
projects in Canada, Russia, Thailand, Papua New Guinea, and Mongolia.
China hopes its overseas ventures can deliver 400,000-500,000 b/d by 2000 and
1 million b/d by 2010, according to :]press reports. These volumes,
however, will not be sufficient to meet China's oil requirements which we estimate at
some 6-10 million b/d in 2010 (see Table 1). If domestic oil production remains
around 3 million b/d at that time, China's oil import requirements from the spot
market would be 3-7 million b/d by 2010; this would represent 30-70 percent of
consumption needs under our high demand case.
Secret
6
 (Million b/d)
1998
2000
2005
2010
2015
Low Consumption*
4.0
4.2
5.1
6.1
7.3
Reference Case"
4.0
4.5
5.7
7.0
8.6
High Demand-
4.3
4.9
7.0
10.1
13.9
Range of Estimated
Oil Demand
4.0-4.3
4.2-4.9
5.1-7.0
6.1-10.0
7.3-13.9
Implied Import Requirements
0.8-1.1
1.0-1.7
1.9-3.8
3.1-7.0
4.8-11.4
Assumes average annual GDP growth of 5.0 percent, a real oil price increase from $13 per
barrel (1998 dollars) to to $21.50 per barrel (1998 dollars) between 1998 and 2015, and an
average income elasticity of oil demand of 0.7.
Assumes average annual GDP growth of about 7.0 percent, with real oil price increases and
income elasticity of oil demand the same as in the low consumption case
...Assumes average annual GDP growth of 7.0 percent, with a gradual increase in income
elasticity of oil demand from 0.7 to 1.1 over time as oil intensity increases. Assumes
moderately higher real oil price increase than in the reference case--from $13 per barrel (1998
dollars) to $24 per barrel (1998 dollars) between now and 2015.
 Implications of Robust Oil Consumption
Prospects for strong oil demand as China's economy continues to mature coupled
with a poor outlook for a big upturn in domestic production and supplies from
overseas ventures will mean that China will be increasingly dependent on oil imports-
-particularly from the Persian Gulf region. Nearly half of China's crude oil imports of
about 600,000 b/d last year came from Oman, Iran, Saudi Arabia, and Yemen,
? Beijing is looking to Iran and especially Iraq to supply much of its future
oil import needs. Iran is slated to increase its crude shipments to China
from 120,000 b/d last year to 200,000 bld in 1999; the increase may come
from an expected boost in offshore production.
? China hopes to be a major foreign producer in Iraq once economic
sanctions are lifted, according to industry press reports. The Persian Gulf
region could supply more than 90 percent of China's crude oil imports by
2015,
China's foreign search for long-term oil supplies probably will continue and may
intensify given the country's bleak domestic production outlook, and US firms could
face increasing competition from CNPC in areas such as the Caspian.
? If Beijing is willing and able to provide financial support to CNPC for
these ventures, the company would be a formidable competitor. A US
firm lost its bid to develop Kazakhstan's Aktyubinsk field to CNPC, in
part because CNPC came armed with a signing bonus of $365 million.
China's growing oil import requirements will play an important role in future oil price
trends. Our scenarios assume that world oil prices do not increase substantially--a
view shared by market experts who project supplies will be adequate to meet world
demand over the next 15 years with only moderate growth in oil prices. Their outlook
assumes substantial capacity increases in the Middle East and Caspian Basin.
? There could be even more upward pressure on oil prices, however, if oil
supplies are tighter in 2015 than most industry experts anticipate.
? Sharply higher oil prices, combined with other factors such as the
elimination of oil price subsidies, lack of infrastructure development,
restrictions on vehicle ownership, or technological improvements, would
work to dampen oil consumption growth in China and elsewhere to keep
 Demand).
Substantially higher oil use in the transportation sector would have serious
environmental consequences.
? If demand for transport fuels tops 8 million b/d in 2015 as we project in
our high demand scenario, China's carbon emissions from road transport
would increase nine times--from 33 to 290 million tons, closing in on the
current US level of 450 million tons, according to our estimates. Even in
the reference case, carbon emissions are twice current levels.
? Increased emissions from Chinese vehicles, coupled with projected large
increases in emissions from growing coal use, would be a severe setback
to international efforts to control CO2 emissions.
nvestment opportunities in China's oil sector over the
next decade could be substantial, especially for additions and upgrades to refining
capacity. Moreover, investment opportunities in China's upstream sector will likely
improve as concerns about its eroding energy security induce Beijing to seek foreign
help for indigenous oil exploration and development.
China will need to build 7 million b/d of
refining capacity between now and 2015--nearly twice its current level--to
ensure higher output of transportation fuels and will have to upgrade
refineries nationwide to handle expected large volumes of high-sulfur
Middle East crudes. China will also need more pipelines to move products
to distribution centers. Overall investment in the refining sector could
reach $80 billion by 2015, $16 billion of which is expected to come from
foreign sources.
? In March 1998, CNPC announced plans to open new areas in the west and
northeastern regions to "cooperative enterprises" with foreign companies.
According to press reports, China currently has more than 150 exploration,
development, and service contracts with foreign oil companies, worth
more than $6 billion, and recent oil industry reform in China is designed to
make the investment climate more attractive to foreigners.
 Other Factors That Could Lower Oil Demand
Our projections do not take into account the following factors that would dampen
Chinese oil demand and lower our consumption estimates.
High real oil prices. China's oil demand in 2015 would be lower than we currently
estimate with higher real oil prices. For example, if real oil prices rise to
$35 per barrel in 2015--compared to $21.50 and $24 per barrel in our reference case
and high demand scenario, respectively--Chinese oil consumption would be
700,000 to I million b/d lower.
because of price subsidies
Elimination of oil price subsidies. China recently announced that it has decided to
eliminate price subsidies on domestically produced crude oil and products and will
peg future prices to market oil prices. Gasoline prices have been about 5 percent
lower than in the United States, while diesel prices were about 20 percent lower
Lack of infrastructure development. Road infrastructure is a key factor in demand
for transportation fuels, and a slow pace of roadbuilding could slow oil consumption
growth in the transportation sector and reduce per capita oil use. China's per capita
oil consumption already is low--1 barrel (42 gallons), compared with about 25 barrels
(1,015 gallons) per capita in the United States.
Restrictions on vehicle ownership/imposition of fuel taxes or rationing. A policy
by Beijing to curb vehicle ownership or impose gasoline taxes or rationing would
slow demand for transport fuels. Such policies, however, would face stiff opposition,
according to an industry expert. A recent Chinese magazine survey found that
75 percent of Beijing's families plan to buy a car within the next five years.
Technological improvements and efficiency gains. Aggressive pursuit of new,
energy-efficient technologies for motor vehicles, aircraft, industrial boilers, electricity
generation, and petrochemical processes would help slow oil consumption.
there is considerable potential for efficiency
higher proportion of trucks.
gains, particularly in the transportation sector, where consumption of diesel fuel is
about 30 percent higher per vehicle mile than in developed countries. Vehicles in
China currently use an average of 26 barrels per year, compared to 15 barrels of oil
per year in the United States, although the higher average in China partly reflects a