(UNTITLED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T01017R000605900001-0
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 9
• Document Creation Date: January 12, 2017
• Document Release Date: March 7, 2011
• Sequence Number: 1
• Publication Date: March 28, 1986
• Content Type: MEMO

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Central Intelligence Agency Ti' / G
DATE 3
DOC NO ~ '(p ~oZoO I/
OCR 3
P&PD
DIRECTORATE OF INTELLIGENCE
28 March 1986
China's Energy Picture in 1985: Good
Performance, Uncertain Prospects
Summary
China's energy sector turned in a strong performance in 1985, with
record production of coal, oil, and electric power. Energy growth of 8
percent, supplemented by improved efficiency and conservation, helped
sustain China's double-digit industrial growth last year. Nonetheless,
chronic problems with power shortages and coal transport continued to
disrupt the economy, and offshore oil exploration showed little promise of
providing a new long-run source of supply.
This memorandum was prepared byl (Office of East Asian
Analysis. Information available as of 28 March 1986 was used in its preparation.
Comments and queries are welcome and may be directed to the Chief, China Division,
OE
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China's future energy prospects are further clouded by budget and
foreign exchange problems that may reduce funds needed for expansion.
Planners are taking a hard look at planned "big ticket" items like the
civilian nuclear program and the Three Gorges dam, and have already
cancelled a major coal venture with Japan. In the short run, US exports to
China of energy technology and equipment may be hurt by these cutbacks,
but the United States is likely to remain China's principle foreign investor
in the energy sector and a key source of energy technology crucial to its
modernization.
Last year's energy growth of 8 percent (down slightly from 9 percent in 1984)
was enough to sustain an 18.4-percent increase in China's gross industrial output (see
table 1). Even so, the Chinese claim that one-fifth of their industrial capacity is idled by
chronic power outages. Industry is using energy more efficiently, but these advances
are more the result of better resource management than of technological improvements.
Because these are largely one-time gains, China's ability to maintain double-digit
industrial growth with single-digit energy growth remains highly doubtful.
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Table 1. China's Energy Production in 1985
Growth
Share of
China's Energy
1985
1984
(%)
(%)
Total energy*
840
780
7.8
100.0
Coal (million
metric tons)
850
789
7.7
72
Oil (million
barrels per day)
2.496
2.286
9.2
21
Natural gas
(billion cubic meters)
12.86
12.43
3.5
2
Electric power (billion
kilowatt hours)
Of which:
407.3
377.0
8.0
**
Hydropower (bkwh)
91.0
86.8
4.8
5
* In million tons of coal equivalent, or standard coal; it is equivalent to 1.4 tons of coal,
.014 b/d of oil, 752 cubic meters of natural gas, or 2,421 kwh of electricity.
**Electric power's share of China's energy is included under primary sources--coal, oil,
and hydropower.
Last year's runaway industrial growth--which taxed domestic resources and
contributed to a drain in China's foreign exchange holdings--threatens Beijing's ability to
expand energy supplies. Indeed, despite the high priority the Chinese have given the
energy sector over the past few years, proposed energy investments face stiff
competition from other rapidly growing sectors of the economy for scarce state funding,
foreign exchange, and building materials.' With less money likely to be available, China
will be forced to weigh carefully decisions on expensive, long-term projects such as
nuclear plants and the massive Three Gorges hydroproject against the construction of
cheaper, coal-fired power plants that are faster to build. China may also have to cut
imports of Western technology that are critical to its efforts to expand oil and coal
production. Transport improvements--essential to moving energy to consumers--could
also be hit by the budget and foreign exchange crunch. The net effect of lower
The funding shortage will be exacerbated by the drop in world oil prices, which could
cost Beijing $1.6 billion in earnings in 1986.
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investments in energy and related transport projects over the longer run would be to
impose further constraints on economic growth; similar cuts in 1981 dampened later
energy output and ,economic growth and are still being felt.
The United States--which to date is China's largest foreign investor in the energy
sector and a key supplier of energy-related technology--is likely, in turn, to be affected
by any cutbacks.2 In fact, the United States already appears to be out of the running in
supplying China with nuclear power plants, despite passage of the nuclear cooperation
agreement. We still expect US firms to account for a major share of China's
energy-related imports for some time. Just as China presses Japan to meet US levels
of direct foreign investment, however, it will continue to prod the United States to
match Japan's lower-cost project and equipment financing.
We believe that reforms in mine ownership, wages, and prices have been the
primary reasons for the strong growth in China's coal output. Beijing's decision in 1983
to allow individuals and collectives to mine coal did much to encourage peasants, eager
to profit from small-scale industries, to increase production. Last year, 62,500 such
small mines produced about one-fourth of China's coal; another quarter came from
medium-sized mines owned by provinces or localities, and China's large state-owned
mines produced the remaining half. According to preliminary figures issued by Beijing,
production last year at small- and medium-scale mines grew two and a half times
faster than at the state mines, largely because of the opening of 12,500 new small
mines.
At all levels, the use of piece wages and special bonuses continued to improve
productivity. Beijing has also raised the average price of coal to encourage production.
While the official price of coal remains low, prices are negotiable for above-quota
production from large-scale state mines and for all coal from smaller mines.
The United States is the largest foreign investor in China's energy sector. China's
two biggest joint ventures--the Pingshuo open-pit coal mine and the offshore natural
gas field near Hainan -- both involve US firms. The United States also has provided
key energy technologies that helped China to find more oil and accelerate oil
production, to upgrade hydro and thermal power plant construction and operation,
and to develop safety procedures for new nuclear plants.
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Last June, China signed a $650 million joint venture with the US firm Occidental
Petroleum to jointly develop the world's largest open-pit coal mine--Pingshuo--located
in Shanxi Province. The project, which will produce 15 million tons a year beginning in
1988, would have been signed several years ago, but the declining international price of
coal made financing difficult. Falling prices also recently contributed to Royal Dutch
Shell's cancellation of an open-pit mine project in Shandong Province, and to Japan's
indefinite postponement of another large open-pit mine planned for Inner Mongolia. If
international prices stay low, China may find it difficult to market its coal abroad, and
could be forced to dip into its foreign exchange reserves to pay off foreign investors.
Oil--Offshore Exploration
Foreign oil companies exploring China's offshore basins began trial production of
oil from offshore wells in 1985, with commercial production and export scheduled for
later this year. Even so, offshore efforts continue to be a major disappointment for
China's long-run energy planning. The Chinese originally hoped to find a 1 to 2
million-barrels per day (b/d) supply offshore, both to meet growing consumption and
export needs and to offset expected eventual declines at mature onshore fields.
Production this year will reach only 20,000 b/d, from sites developed by the Japanese in
the Bohai and by the French in the Beibu Gulf. In the absence of a now-unlikely major
find, we believe China will be lucky to eventually produce one-tenth the amount it
anticipated offshore.
The big financial losers in the offshore effort, of course, are the foreign oil
companies who bore all survey and exploration costs, spending almost $2 billion. Three
US firms found oil, but all will carry out more drilling before committing themselves to
commercial production. Most firms fared much more poorly; China had to give some
unsuccessful participants additional acreage to keep them from quitting.
China in 1985 offered for bid a second set of exploration blocks, before foreign
interest had waned any further. Of the 19 blocks available, contracts have been signed
for six of the more promising areas. Declining world oil prices and continued poor
showings from first round drilling are, however, likely to dampen Western enthusiasm
and leave most of the remaining blocks unsigned.
China's 9-percent increase in crude oil production during the past year came as a
result of new finds, improved recovery techniques, and greater productivity at existing
onshore fields. The Shengli oilfield, located in Shandong Province, has made particularly
impressive production gains and provided almost 40 percent of last year's total growth.
The Chinese predict that Shengli's major new finds will double the field's production by
1990 to 1 million b/d. Over 50 Western technicians are working at Shengli to find and
develop new wells.
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Recent discoveries on the periphery of several existing fields led Beijing to
predict that China's oil output will grow by 5 percent per annum through the current
Seventh Five-Year Plan, reaching 3 million b/d in 1990. We believe China can reach this
goal, but sustaining it will require additional new finds to replace declining production at
older fields.
China's ambitious oil production goals hinge on maintaining output at China's
largest field, Daqing, a mature field in Heilongjiang Province. Almost half of China's
current oil supply is produced at Daqing. We believe production at Daqing could start
declining in the next few years, despite recent Chinese claims that they can sustain
Daqing's current production for another 10 years.
In March 1985, China opened 1.83 million square kilometers in 10 southern
provinces to oil exploration by foreign firms, in the wake of the offshore program's
disappointing results. The areas Beijing opened have few existing fields and are largely
unexplored. An Australian consortium signed the first--and to date only--onshore oil
exploration contract in May 1985 for an area on Hainan Island. In July China opened its
first onshore basin to international bids--the Subei Basin in Jiangsu Province.
Meanwhile, Beijing continues to contract with foreign firms, including ones from the
United States, to provide seismic survey crews and equipment to search for oil in
China's northwest.
Almost all of China's increased oil production last year was exported as either
crude oil or petroleum products. We estimate that China exported 580,000 b/d of crude
oil and 120,000 b/d of petroleum products in 1985, worth $6.4 billion, almost 25 percent
of China's exports. Beijing has nearly doubled the volume of its crude oil exports in the
last two years by undercutting OPEC prices, marketing aggressively, and conserving
domestic supplies. But in February, China announced that it will freeze the volume of its
oil exports at the 1985 level to help support the falling international price of oil. If
China sustains a freeze and crude oil prices average $18 per barrel, we believe China's
foreign exchange earnings from oil could decline by $1.6 billion this year.
Electric Power: Shortages Force Equipment Imports
Faster power growth in 1985 stemmed from improved coal shipments to power
plants, good rainfall in hydropower areas, and accelerated power plant completions.
Nevertheless, chronic shortages remained serious as the economic policies encouraging
industrial growth collided with inadequate power capacity--fallout from ill-conceived
investment cutbacks in the early 1980s that slowed power plant construction through
China added 6,100 megawatts of new capacity in 1985, the most in one year
since the late 1970s and the direct result of power budget increases of 25 percent in
1983 and 35 percent in 1984. About 90 percent of the new plant capacity came from
thermal plants in the power-starved east and northeast, many brought to completion
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Hydroplant construction problems--only one major generator became operational
in 1985--have forced Beijing to emphasize construction of coal-fired plants that are
cheaper and faster to build, even though they are more expensive to operate. China's
ability to supply power generation equipment is still not up to the task, however.
China's three major power equipment factories have all imported US technology but are
still unable to meet demand. Meanwhile, China has said it will import 10,000 MW of
thermal generators over the next five years, over half of its planned capacity additions.
Reportedly, China will buy up to 6,000 MW of these imports from the USSR and Eastern
Europe as part of its efforts to expand trade with the Soviet Bloc.
Beijing already recognizes that even these additions will not solve the power
crises in its eastern cities. In 1985, China established the Huaneng Energy Corporation
to negotiate imports of complete power plants outside of the state plan. On 26
February, a consortium led by the US firm General Electric signed contracts in Beijing to
provide Huaneng's first two whole-plant imports for Nantong in Jiangsu Province, and
for Shijiazhuang, the capital of Hebei. The Chinese are unlikely to award all Huaneng
contracts to a single source--and Tokyo is considering new low-cost financing
--but prospects for additional US
China's Nuclear Power Program
Progress has been slow in China's efforts to begin commercial nuclear power
production. In March, China signed letters of intent with France to supply reactors for
its planned 1,800-megawatt nuclear plant at Daya Bay in Guangdong Province, but final
contracts have not yet been signed. Work continues on a small (300 MW), domestically
built reactor at Qinshan that relies substantially on components and technology
imported from Japan and West Germany. Meanwhile, China has postponed or cancelled
plans for additional nuclear plants at Sunan (Jiangsu Province), and in Liaoning and
Fujian; China will probably scale back its plans to have 10,000 MW of nuclear power
operational by the year 2000.
Natural gas production had its best year since 1980; the discovery of a massive
offshore natural gas reserve by the US firm Arco bolstered China's interest in gas as a
source of energy. The Chinese in 1985 signed a $500 million agreement with
Arco--China's second-largest joint venture after Pingshuo--to develop the field off
Hainan Island and bring the gas ashore. China expects the project to yield 3.25 billion
cubic meters of gas per year--equal to one-fourth their current output--for about 20
years, beginning in 1992. Beijing also plans to accelerate growth of onshore gas
exploration and production while awaiting development of the Arco find. China
announced recently that it will double production by 1990 at gasfields in Sichuan
Province, the source of half of China's natural gas.
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China has also stepped up efforts to collect oil-associated gas at oilfields like
Huabei and Liaohe and is adding to pipelines that transport the gas to eastern cities.
China hopes to expand its use of natural gas at smaller power plants and in urban
households for heating and cooking, to reduce coal consumption and urban pollution.
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China's Energy Picture in 1985: Good Performance, Uncertain Prospects
1 - Mary Yee, Office of East-West Economic Policy, Room 4450, Department of the
Treasury
1 - Joan Plaisted, Office of Chinese Affairs, Room 4318, Department of State
1 - William B. Abnett, Director of China Affairs, USTR, Room 316, 600 17th St., NW,
Washington, DC
1 - Myna Stoltz, Office of East Asia and the Pacific, Room 3820, Department of
Commerce
Central Intelligence Agency
2
- C/OEA/CH
1
- C/OEA/CH/FOR
1
- C/OEA/CH/DEF
1
- C/OEA/CH/DOM
1
- OEA/Production Officer, 4G-48
1
- D/OEA, 4F-18
1
- DDI, 7E-44
1
- Senior Review Panel, 5G-00
1
- PDB Staff, 7F-30
1
- NIO/EA, 7E-62
1
- C/PES, 7F-24
1
- FBIS/NEAAD/China Branch,
306 Key
1
- C/EA05E-18
1
- CPAS/ILS, 7G-50
5
- CPAS/IMC/CB, 7G-07
1
- Author
1
- Chrono
OEA/CH/DEV~ 27Mar86
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