Energy Implications of the 2008 Sichuan Earthquake

The May 12, 8.0-magnitude earthquake that struck southwest China with its epicenter at Wenchuan County in Sichuan province imposed a heavy death toll that so far has reached almost 70,000 with more than 17,000 still missing (People’s Daily, June 17). More than a month after the earthquake, the attention of Beijing’s leaders as well as the media has gradually shifted from the direct damages caused by the disaster to its potential corollary impacts on China’s fragile growth and maintaining President Hu’s “scientific outlook on development,” as well as other key strategic issues. Not surprisingly, while China is the world’s second largest energy producing and consuming country—and recently overtook Japan to become the second largest importer of crude oil—the energy implications of the recent earthquake, including its impacts on the global oil market, have become a topic of interest under the international spotlight.

Modest Impact on China’s National Economy

Due to the relatively small share that Sichuan contributes to the Chinese economy, the overall economic impact of the earthquake at the national level is expected to be modest at most. According to the National Bureau of Statistics, Sichuan’s GDP only accounted for 4.2 percent of the national total in 2007, and the shares of major quake-hit regions including Dujiangyan, Pengzhou, Deyang, Mianyang, Guanyuan and Aba Tibetan and Qiang Autonomous Prefecture were even smaller, between them only representing 0.7 percent of China’s GDP. Industrial production of the province and major quake-hit regions was 3.8 percent and 0.7 percent of the national total, respectively (New Express, May 22). Moreover, the population and agricultural production of the severely affected areas in a national context was 1.0 percent and 1.3 percent. In comparison, when the Kobe earthquake hit Japan in 1995, the population, GDP, agriculture and industrial production share of severely affected areas in a national context was much higher, reaching 4.4 percent, 4.1 percent, 2.1 percent and 4.8 percent, respectively. While the Kobe earthquake cost Japan $200 billion—or 2.5 percent of its GDP at the time—and is still the costliest natural disaster to befall any one country, Japan’s economic activities actually held up better than expected, and indeed rebounded quickly (China Views, May 21). Therefore, though the damage to Sichuan’s agriculture—especially its pork production—and post-quake demand for basic materials and energy commodities will make it difficult for Beijing to retard destabilizing flares of high inflation (China Brief, April 28), the overall economic impact of the Sichuan earthquake can be tempered by China’s decision makers. This seems especially apt given China’s long history of dealing with severe natural disasters such as the 1976 Tangshan Earthquake, the 1998 Yangtze River Floods and the 2008 Snow Storm Disaster.

China’s Ambitious Nuclear Development Plans Put on Hold

The earthquake’s effects on China’s long-term national energy development are expected to be much more profound. First, the Sichuan earthquake has already triggered a rethinking of China’s nuclear development ambitions (China Brief, March 14). To alleviate the daunting energy security challenge, improve the national energy mixture and the associated air quality issue, and stimulate the development of the domestic nuclear industry, China planned to rapidly increase its nuclear power capacity from 6.95 GW in 2005 to 40 GW in 2020 [1]. Most Chinese provinces are in a frenzy regarding nuclear investment; even Sichuan, a hydro-rich region, had planned to invest more than 40 billion Renminbi ($5.8 billion) to build a 4 GW nuclear plant at Pengan County in Nanchong City. After China Guangdong Nuclear Power Holding Co. was selected as the contractor in 2007, the Sichuan provincial government initially planed to start the construction in 2010, with a target to commission the facility in 2014 (West China City Daily, April 9, 2007). However, the danger of having a nuclear plant in the vicinity of an active earthquake region was illustrated by the radioactive water spill incident at a Japanese nuclear reactor as a result of a 6.8-magnitude earthquake that struck the country on July 16, 2007 (Washington Post, July 17, 2007). Not surprisingly, soon after the earthquake, a source within the China Electricity Council said that Beijing would become more conservative in terms of positioning nuclear plants in the future (New Express, May 20).

While China may restrain its nuclear development ambition for a while, the fundamental illness in China’s energy system revealed through the recent earthquake is hard to ignore. Since Deng Xiaoping opened the Communist country to the outside world in 1979, China’s nominal GDP has grown at an astonishing rate of 16 percent annually. The impressive economic success so far, however, has blurred the fundamental fact that China’s current development model is based on the exploitation of poor rural communities and resource-rich hinterland in favor of developed urban centers and coastal regions. While Beijing may have realized the political urgency of lowering the wide income gap between peasants and urban dwellers, China’s current national energy strategy continuously advocates heavy energy subsidies provided by the poor hinterland to the developed coastal regions.

For example, after the construction of the world’s largest hydro-electric station—the 22.4 GW Three Gorges Dam (TGD) project started in 1994 in Hubei province, adjacent to Sichuan (Hubei Daily, December 10, 2004)—both Sichuan and Chongqing had to deal with millions of forced immigrants, upstream flooding and earthquake risks. Since TGD’s first hydro turbine was commissioned in 2003, the cumulative electricity output so far has reached 230.8 TWh. On June 16, the daily output of the 22 operating turbines stabilized at 300 GWh (Xinhua News Agency, June 17). When the whole project is completed in 2009, the annual output of the 32 hydro turbines is expected to be more than 100 TWh. Ironically, Sichuan, Hubei, and Chongqing actually were all hit badly by electricity shortages in recent years. In contrast, a significant portion of TGD’s output is transferred through long distance transmission lines to the coastal regions at reduced rates, and Guangdong alone received nearly a quarter (24.6 percent) of TGD’s electricity sales (Xinhua News Agency, March 19). As a result, Sichuan, Chongqing and Hubei are forced to consider the expensive and environmentally risky nuclear power as the answer for their energy security challenges. A similar situation also exists for coal-rich Henan, thus the aforementioned resource-rich provinces along with Hunan, Jiangxi, Anhui, Gansu and Jilin have competed furiously with each other for the construction permit of China’s first nuclear power station in the hinterland provinces.

Environmental Consideration

The Sichuan earthquake also cast doubt on China’s ambitious hydro development plan. With an economic exploitable capacity of 401.8 GW, China ranks top in the world in terms of hydro development potential. In 2004, Beijing set an ambitious target of expanding installed hydro capacity to 125 GW in 2010 and 150 GW in 2015 (Xinhua News Agency, September 27, 2004). By the end of 2007, national hydro capacity had already reached 145.26 GW [2]. With its hydro electricity output representing 18 percent of the national total in 2006, Sichuan is one of China’s key hydro development regions. During the project appraisal process of the TGD project, environmental and ecological risks of large hydro dams were deliberately ignored due to political manipulation. Since then, environmental impact assessment has gradually been integrated into the project appraisal of large hydro projects, which is evident in premier Wen Jiabao’s decision to halt the construction of 13 dams on the Nujiang River in 2004 (China Economics News, June 21, 2006).

As dam projects with hydro-electric capacity less than 25 MW only need to obtain permits from local government, a small hydro investment frenzy is going on across the country. Currently, 110 of 181 administrative counties in Sichuan have their own small hydro projects (21st Century Business Herald, May 26). Many small hydro-electric stations that have emerged in recent years are so-called FOUR-NO projects, which means there is no project application, no construction planning, no engineering design, and no regulatory approval. Not surprisingly, many of the ill-designed small hydro dams and some of the large ones which managed to bypass the environmental impact assessments are prone to structural failure, which partly explains why as many as 391 hydro dams in Sichuan have been damaged recently. Therefore, the lessons learned so far should be enough to convince China’s decision makers consider more environmental and ecological consideration when debating hydro development plans in the years to come.

Compared to a business-as-usual scenario—as if there were no Sichuan earthquake—China’s relentless nuclear and hydro development trajectories are expected to be hindered, and the implications for China’s coal industry are quite profound. With limited petroleum resources, coal has long fueled China’s industrialization ambitions. However, China’s heavy reliance on coal has resulted in mounting environmental problems ranging from fresh water contamination to deteriorating air quality. As a result, the ability to substitute significant amounts of dirty coal is one of the strongest arguments in favor of China’s ambitious nuclear and hydro development targets. If nuclear and hydro development are scaled back, most of the shortfall is likely to be compensated by coal-fired power plants as renewables—including wind farms—could only play a relatively marginal role in China’s gigantic energy sector in the foreseeable future. As discussed before, state-owned collieries alone are unable to meet China’s surging demand, and the National Development and Reform Commission (NDRC) under the State Council was recently forced to encourage the resumption of coal production at small Township and Village Enterprises (TVE). While the implied demand spike for coal caused by the earthquake will further strain China’s tight coal supply chain, the chance for China’s decision makers to recognize the importance of a healthy private sector presence in the coal mining industry has increased.

Long-term Oil and Gas Development Impacts

Though Sichuan is not even considered to be a major oil producing province in China, its importance as a key regional petroleum market is undeniable as its annual oil product consumption approached 10 Mt in 2007. In the wake of the earthquake, PetroChina is reconsidering its plan to build a $5.7 billion refinery and petrochemical complex in Pengzhou. PetroChina had planned to complete the complex by 2010, when it would be able to refine 10 Mt/annum of crude and produce 0.8 Mt/annum of ethylene (Reuters, May 15). If PetroChina’s reassessment is purely based on technical considerations, its Sichuan refinery plan is likely to be scrapped as building a petrochemical facility in an active earthquake zone would make the construction costs escalate far beyond its original $5.7 billion budget. Moreover, a Greenfield refinery in Sichuan is not the only viable option to supply oil products to the land-locked province: PetroChina Lanzhou (10.5 Mt/annum), PetroChina Guangxi Greenfield refinery (10 Mt/annum in 2010), Sinopec Jinmen (5.5 Mt/annum) and Sinopec Wuhan (5 Mt/annum) could all be expanded to cover Sichuan’s petroleum consumption growth in the future. Nevertheless, political considerations for conforming to western development methods and pressure from the Sichuan provincial government may eventually influence PetroChina’s decision making process. Moreover, in the wake of the earthquake, the escalating diesel demand for electricity generation—coupled with refinery underutilization due to Beijing’s price regulation on oil products and the stockpiling of oil products before the Olympics—resulted in 2.89 Mt worth of diesel imports during the first five months in 2008 [3]. Not surprisingly, the year-over-year 916.5 percent diesel import growth has further disturbed the sensitive world oil market, contributing to elevated global energy prices (China Oil Web, June 19).

Sichuan has long been the leading natural gas producer in China—the infrastructure damage during the earthquake is unlikely to hold back both PetroChina and Sinopec’s investment enthusiasm. Nevertheless, as part of the decrease in demand from local industry will be permanent, the rapid output growth witnessed in the past may be slowed unless PetroChina and Sinopec could quickly find new markets for their lost gas capacity. After PetroChina’s Zhongxian-Wuhan gas pipeline (design capacity – 1.5 bcm/annum) went into operation in December 2004, the lack of gas storage capacity was a constant headache for pipeline operators [4]. In the wake of the Sichuan earthquake, the importance of strategic gas storage for end users to alleviate the risk of supply disruption became self evident. As a result, the planning of China’s long awaited strategic gas storage is likely to be accelerated. Similarly, the earthquake, coupled with the financial success of China’s first four strategic reserve bases at Zhenhai (Ningbo), Daishan (Zhoushan), Xingang (Dalian) and Huangdao (Qingdao), will add momentum for China to speed up the second and third phases of its strategic oil reserve development. Finally, lifting subsidies over gas prices may be sped up if Beijing considers price deregulation a necessary step for the economical recovery of the earthquake-hit regions.

Window of Opportunity for Rethinking the Party’s Economic Development Philosophy

Much of the aforementioned impact is related to the energy supply side; nevertheless, if the endemic illness of the Party’s economic development philosophy at the local level revealed by the earthquake is fully recognized by the Chinese government, the potential influence on the country’s energy demand would be very significant. With a population of 81.7 million, Sichuan is China’s major source of migrant workers. Sichuan is also one of China’s top tourism destinations, with five UNESCO World Heritage Sites. While Sichuan is surrounded by the Himalayas to the west, Qinling Range to the north, and the mountainous areas of Yunnan and Hubei to the south and east, environmental contaminants such as air pollutants are difficult to dissipate out of the basin. As a result, local economic development should focus on the labor-intensive agriculture, the service industry including tourism, and the less-polluting light industry. However, similar to most of China’s hinterland provinces, heavy industry is a key component of the Sichuan provincial government’s economic development portfolio. To name a few examples, petrochemical plants, fertilizer industry, cement manufacturing, metal smelters, and iron and steel facilities in Sichuan have all been analyzed by Chinese financial analysts recently [5]. If most Chinese provinces continuously stick with the current GDP-first development philosophy without due consideration to their unique circumstances, China’s economic gains are expected to come together with increasingly higher environmental costs. Moreover, if none of China’s provincial governments is willing to follow a soft development path, Beijing’s ambitious energy conservation goal of lowering national energy intensity by 20 percent between 2005 and 2010 will be extremely difficult to meet.

In sum, the damages on energy infrastructure during the recent earthquake were substantial on the regional level. Nevertheless, given Sichuan’s relatively small share in the national total and China’s long history of dealing with severe natural disasters, the impact so far has been controlled well by both government officials at various levels and state energy companies. As a result, the overall effect of the earthquake on national energy supply and demand is modest. However, the long-term impact on China’s energy development will be more substantial. While Beijing’s ambitious nuclear and hydro development plans are likely to be more conservative, the extra strain on China’s tight coal supply chain has created a unique opportunity for the township village enterprise (TVE) mines; hopefully, the importance of a healthy private sector in the coal mining industry will eventually be recognized by Chinese decision makers. Moreover, in the wake of the earthquake, the development of the long awaited strategic gas storage and the second and third phases of China’s national strategic oil reserve are expected to be accelerated. Finally, while both the exploitation of resource-rich hinterlands to subsidize developed coastal regions and relentless heavy industry development across the country have become increasingly unacceptable, it would require both bottom-up complaints from the hinterland provinces and top-down retrofication of China’s promotion standards for government officials to fix the endemic illness embedded in China’s energy and economic systems.

Notes

1. NDRC, 2007, Mid- to Long-term Nuclear Power Development Plan: 2005-2020.

2. China Electricity Council, January 11, 2008, Latest Statistical Report on China’s Electricity Industry in 2007.

3. China Customs.

4. PetroChina Central China Gas Marketing Company, January 15, 2007, available at https://www.cnpc.com.cn.

5. Ge Jun, the Impacts on the Metal Smelting Industry by the Sichuan Earthquake Are Relatively Modest, ChangJiang Securities, May 12, 2008. Cui Jingyi and Jiangqiu, Post Earthquake Construction will Stimulate Demand for Iron and Steel, Guotai Junan Sicurities, May 14, 2008. Qiu Yamei, Impact on the Cement Industry by the Wenchuan Earthquake in Sichuan, Donghai Securities, May 13, 2008. Yang Yue, Sichuan Earthquake’s Impacts on China’s Economy: the Confidence in the Petrochemical Industry Was Hurted, Finance, Issue 212, May 26, 2008.