China Needs to Hit Peak Oil Long Before It Reaches Net-Zero Emissions
(Bloomberg) -- On a freezing December morning, hundreds of oil traders, industry researchers and government officials battled bumper-to-bumper congestion as they headed to a hotel north of Beijing’s Forbidden City for an annual conference hosted by the country’s top energy producer.
The city’s notorious traffic had returned in full force, the latest sign that China’s economic activity was bouncing back after its early containment of the coronavirus. In the hotel’s ballroom, a China National Petroleum Corp. official shared the good news: road-fuel consumption had surpassed pre-virus levels, after taking a brutal hit during the nation’s sweeping lockdowns.
In fact, demand for most oil products had fully returned to normal levels as early as May, reflecting the resilience of the only major economy that managed to grow last year. But the speedy comeback also complicates a parallel push by Beijing to reach peak fossil energy consumption in this decade and turn the country into a nation of net-zero emissions less than 40 years later.
Drastically cutting its consumption of coal, which is responsible for the majority of China’s emissions, will be crucial. But in the shorter term it will also have to reduce the usage of crude. While the government hasn't laid out detailed milestones to reach the 2060 carbon neutrality target set by President Xi Jinping, the country's three state-owned oil titans—CNPC, Sinopec Group and China National Offshore Oil Corp.—agree that consumption of their core product has to peak as soon as 2025.
“It’s important for oil consumption to peak by 2025,” said Yang Fuqiang, a Beijing-based senior adviser to Natural Resources Defense Council, a leading U.S. environmental group. The Chinese appetite for oil does less to drive global warming than coal, but it still accounts for roughly 20% of greenhouse gases from the nation’s energy sector, making it a strong climate lever. Coal consumption, though large, peaked in 2013. Oil, on the other hand, has been rising.
Arresting that trend will be integral to reaching China’s target of having a quarter of its energy come from non-fossil fuel sources by 2030. The nation has been putting forward deadlines to cap oil demand since 2016. Each year, in their planning documents, the oil giants have stuck to a rough timeline of 2025 to 2030, while raising their estimates for the level at which demand will peak to account for aggressive growth in oil consumption.
The prospects for peak demand in China are also crucial in determining when global consumption will peak, seen as a key milestone in the world's fight against global warning. Over the last three decades, China has been the dominant driver of the global oil market: demand has risen almost seven-fold to more than 14 million barrels a day, according to BP Plc data, turning from an exporter into the world's largest importer.
The latest prediction for peak oil, announced at CNPC’s December meeting in Beijing, was 740 million tons, or 14.9 million barrels day. That’s about 1 million barrels per day higher than its own estimate four years ago. Burning that much extra oil could add 110 million to 146 million metric tons of CO₂ to the atmosphere a year, as much as the annual emissions of Qatar or Nigeria.
About 54% of China’s oil is used for transportation. So far, the government has focused on shrinking that segment by boosting a nationwide electric vehicle fleet that’s already by far the biggest in the world. Retail sales of new energy vehicles, including electric autos, soared more than 200% in January. And there’s plenty of room to grow. There are only about 275 million automobiles in use in China, a country of more than 1.4 billion people.
More than half of Chinese consumers planning to buy a new car would prefer a new energy vehicle over an internal combustion engine automobile, according to a survey by researcher CLSA that included 1,600 respondents. They cited lower prices, better subsidies, easier access to license plates and government subsidies as incentives. By 2025, the government wants one in every five new cars sold to be a new energy vehicle, up from just 5% now. It plans to grow that share to more than 50% by 2035.
Explosive growth in electric vehicles may help achieve peak emissions in line with the country's goals, but it won't be enough to cap oil demand by 2025. That milestone is more likely to only arrive in 2034, according to Sengyick Tee, an analyst at SIA Energy in Beijing.
New energy vehicles have to make up more than half of car sales for at least a decade to change the structure of China's fleet, he said, and there's no economical alternative energy for aviation and freight transportation in the short to medium term. Oil demand is only likely to fall significantly from 2036 to 2060 as the country pivots more strongly to renewables, Tee said.
As consumer demand slows, China’s oil companies are shifting more of their businesses to refining and chemicals manufacturing, which turns oil and gas into everyday products from washing powder to plastic. Both are emissions-heavy activities. An Exxon Mobil Corp. petrochemical plant to be built in Huizhou is expected to produce as much as 3.7 million metric tons of carbon dioxide equivalent emissions, which is about how much Iceland emits in a year.
While China’s oil titans have publicly embraced Xi’s net-zero campaign, they also argue that crude has an important role to play in China’s geopolitical strategy. All three companies prioritized boosting oil and gas production in their 2021 work plans, citing the need to reinforce energy security. From now until 2025, operations will start on 10 mega-refining projects able to process more than 200 million tons of crude a year. The country’s total refining capacity is set to grow to 1 billion tons a year by 2025, according to CNPC.
The plans illustrate a common challenge Beijing faces when trying to implement major reforms. Local officials and industry executives often pay lip service to directives from the central government, while finding ways to skirt the new policies. At the CNPC meeting, one of its oil researchers argued that boosting crude production and refining doesn’t run counter to the goal of peaking oil demand because China may choose to put some oil into storage and also a growing share of the new capacity will be used for petrochemicals.
The companies are also exploring alternative fuels, including ethanol and hydrogen, but many of these projects have encountered roadblocks from high infrastructure costs or otherwise failed to gain traction. Last year, China attempted to roll out what it calls the “E-10 fuel,” a mix of 10% corn-derived ethanol and gasoline. The campaign failed as grain prices surged, propelled by a recovery in the country’s pig-breeding industry, and imports of ethanol were essentially suspended as the country’s trade war with the U.S. resulted in prohibitive tariffs.
The industry’s track record shows how far it has to go to match Xi’s climate ambitions. “It may take a long cycle for a new energy to replace an old one, which may be 70 to 100 years based on historic experience,” said Jin Zhijun, dean of Peking University’s energy research institute and a professor with Sinopec’s petroleum exploration and production research institute. “It takes time to switch the infrastructure and consumption habits. Also there’s the employment concern.”
Whether the oil industry aligns with Xi’s 2060 vision, with a demand peak coming in the next decade, will be a key test for how the much bigger coal industry will fare. There’s even a risk that long-range coal policy drives an occasional uptick for oil. In December, as the coldest winter in decades spread across China, factories in Zhejiang’s export hub Yiwu turned to diesel to keep their production lines running. They had reached the cap on coal they were allowed to burn in accordance with China’s emissions-reduction policies.
What started as an effort to cut pollution from burning coal instead led to emissions generated from diesel, at higher prices. The situation shows how China’s state-led approach can sometimes backfire. Eager to please Beijing, officials focus on meeting hard targets rather than developing policies that serve the end goal. The same could happen with the oil industry: their emissions could peak much later than consumer demand for their products.
The winter energy shortages “highlight the challenges associated with the top-down campaign style system of reaching targets,” said Michal Meidan, director of the China Energy Programme at the Oxford Institute for Energy Studies. “China will not stop producing oil products even after its demand has peaked.”
This article is part of Bloomberg Green’s Carbon Benchmarks series, which analyzes how countries plan to reach net-zero emissions. Click here to get e-mail alerts when new stories are published.
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