On October 24th, the State Council of the People’s Republic of China published China’s Energy Policy 2012, which is the 2012 edition of a white paper on the country’s energy policy (the “Policy”).  The Policy emphasizes the need to develop China’s domestic energy resources including oil and gas (from both conventional and unconventional sources) as well as renewable and new energy resources and promotes energy conservation and efficiency whilst reiterating the Chinese government’s commitment to promoting market-oriented reform to reduce barriers to private and foreign investments in the energy sector.

According to the Policy, China is not only one of the world’s largest energy consumers but is also the largest overall energy producer. In 2011, the output of primary energy in China included 3.18 billion tons of standard coal, 3.52 billion tons of raw coal, 200 million tons of crude oil, 270 million tons of refined oil products, 103.1 billion cubic meters of natural gas and 4.7 trillion KWH of electricity, presenting an attractive market for investment.

Over recent years, the People’s Republic of China has made significant progress towards developing its new and renewable energy resources. According to the Policy, in 2011 the installed generating capacity of hydropower in China reached 230 million KW, ranking first in the world for hydropower generation, and fifteen nuclear power generating units were put into operation whilst another 26 nuclear power generating units remain under construction. Also in 2011, the installed generating capacity of wind power connected to the country’s power grids reached 47 million KW, whilst photovoltaic power generation reached 3 million KW by installed capacity. The government has encouraged the use of biogas, geothermal energy, tidal energy and other renewable energy resources and in 2011, non-fossil fuel energy accounted for 8 percent of total primary energy consumption.

Aside from renewable energy resources, estimates suggest that the capital gap for unconventional shale gas development is likely to reach between 400 billion and 600 billion RMB by 2020. In September of this year, the Ministry of Land and Resources announced the second round bidding for exploration rights for 20 shale gas blocks in China. In comparison to the first round of bids for shale gas blocks, private companies and Sino-foreign joint venture companies have been invited to participate in the bidding for the second round. Such an invitation creates many opportunities for shale gas development in the People’s Republic of China and is likely to encourage bidding from foreign companies with technical strengths in shale gas development. To date, both CNPC and Sinopec have cooperated with foreign companies to explore shale gas plays in Western China and in September, Schlumberger formed a joint venture with the Chinese leading oilfields service company Antonoil in order to target the emerging shale gas market.

Despite recent progress in developing the energy sector, energy security remains a challenging issue facing the Chinese government for the near, medium and long term. In 2011, the import of crude oil and natural gas accounted for 57% and 21% respectively of total consumption, and the numbers are expected to grow steadily over the next decade.

The Policy outlines the future of China’s energy development plan and focuses upon the need to move towards an economical, clean and secure development of energy resources with a focus on growing domestic production of energy resources. The Policy also outlines a need to develop domestic reserves of shale gas and shale oil as well as a need to reduce overall energy demand through energy conservation and efficiency improvements, development of smart grids, increasing energy management contracting and developing clean coal technologies so as to support sustainable economic and social development. It is hoped that the Policy will encourage private and foreign capital to participate in such development of domestic resources as well as encouraging overall investment in oil and natural gas pipeline networks, the electric power industry, coal processing and oil refining thereby helping to minimize energy security concerns.

Louis Peng