<body> ____________________________________________________________________________________________
home / Archive

Thursday, April 29, 2004

Oil security top priority for China

Energy security is high on the international agenda. The BioPact thinks that biofuels and bioenergy can come a great way in enhancing the energy security of some nations, amongst them China.

At this year's National People's Congress (NPC) and Chinese People's Political Consultative Conference (CPPCC) sessions, many NPC deputies and CPPCC members called for the early enactment of new legislation to secure reliable oil supplies and the more effective exploitation of the country's oil resources.

"The oil industry is being reformed," says Yang Qing from the Energy Research Institute of the State Development Planning Commission. "The issue of oil security is related to both the market for oil and the stability of oil supplies. Overall, it's a matter of structural reform."

Oil market reform

China's oil industry faces a particularly complex set of circumstances. A lack of effective and flexible mechanisms has held back development. A long-standing monopoly in energy has kept oil and gas prices under state control with rigorous restrictions imposed on access to these markets.

To break the monopoly in the industry, a 1998 restructuring led to the establishment of the China National Petroleum Corporation (CNPC) and the China Petrochemical Corporation (Sinopec Group). These two now operate alongside the original China National Offshore Oil Corp. (CNOOC) and China National Chemicals Import & Export Company (Sinochem Corp.) and provide some measure of competition in the country's oil and petrochemical industries. However, this does not mean that effective competition has already emerged in the domestic market.

Serious shortcomings still remain in the market structure of China's oil industry. The rapidly growing demand for oil has been in sharp conflict with the monopoly enjoyed by the suppliers. With the advent of China's market economy reforms, control over commodity prices has been largely relaxed. Nonetheless, the supply of both crude and refined oil is still subject to CNPC and Sinopec Group monopoly and the price-fixing mechanisms are far from fully reflecting the natural operation of supply and demand in the domestic oil market.

Consequently, moves aimed at stimulating the country's oil industry favor the relaxation of controls on access to the markets for the supply and sale of oil. Against a background of abundant global energy supplies, establishing an open market is an important channel for China to secure stable and cheap oil supplies. The reliability of oil supplies cannot be increased in the absence of a truly effective domestic market capable of attracting international energy resources.

Nevertheless, before opening up its oil market to the outside world, experts suggest the nation should do two things. Firstly set up a macro-adjustment and control system to improve market management while at the same time relaxing control over oil prices. Secondly break the territorial monopoly in the oil market and develop a rational competitive structure. In addition, in order to revitalize the oil market, independent oil sales corporations could be established in the railways, communications, civil aviation, agriculture and forestry sectors. The experts envisage that in addition to engaging in sales these corporations would also enjoy oil import-export rights and that private funds would be encouraged to enter the oil market.

Given the realities of economic globalization, major oil importers must take a market-oriented approach in addressing problems of oil supply. China, the world's most rapidly growing major oil-consumer, has enormous regional differences in oil demand. This is why it is so important to establish a price quotation system and an oil spot and futures market if effective risk management and market macro-control are to be realized. Meanwhile it has been suggested that the scope of the existing futures market should be extended to include oil transactions.

The "go-out" strategy

The latest statistics indicate that the rate of growth in oil and gas production in China continued to slow in 2003. At the same time, domestic consumption and consequent imports of crude oil increased significantly.

In 2003, China produced some 169 million tons of crude oil (up 1.5 percent year-on-year) and 34 billion cubic meters of natural gas (up 6.8 percent).

Meanwhile in that same year, crude oil imports were 91 million tons (up 31.3 percent). Imports accounted for 36.1 percent of national consumption that reached 252 million tons (up 10.2 percent). Total oil consumption was 274 million tons (up 11.5 percent).

Faced with substantial growth in the demand for oil, Chinese firms have not only been tapping more domestic oil sources but have also been energetically pursuing a "go-out" strategy, looking for new and stable sources of oil in the international market.

Tan Zhuzhou -- president of the China Petroleum and Chemistry Industry Association (CPCIA) -- says, "This involves Chinese firms proactively going out to other parts of the world such as Africa and South America and applying their technical expertise and financial resources to the exploitation of oil resources there. This will enable us to secure multiple sources, avoid the risks of over-dependency on any one source and reduce the effects of price fluctuations. In this way, given abundant overseas oil production, the impact of high oil prices on the domestic economy can be offset or buffered to a considerable extent, which will be conducive to the development of the domestic petrochemical industry."

To date, China's overseas oil and gas cooperation has extended to Russia, Azerbaijan and Kazakhstan in Central Asia; Indonesia and Myanmar in Southeast Asia; Iran and Oman in the Middle East; Venezuela in Central/South America; and Libya and Sudan in Africa. In its overseas oil cooperation projects, China will normally secure a share of the annual oil output by virtue of becoming a direct investor or shareholder. As a result of this practice, oil imports will not be significantly affected by price fluctuations. It has been commonly held that going out to tap oil is better than going out to buy oil.

CNPC is China's biggest player in crude oil and refineries and has been active in opening overseas markets. Benefiting from the "go-out" strategy, the company has produced a total of 60 million tons of crude oil from overseas with investment projects spreading across Asia, Africa, North America and South America. CNPC has set up three investment centers covering: the Middle East and North Africa; Central Asia and Russia; and South America. Its overseas business extends to oil and gas exploitation, pipeline construction, oil refining, sales of petrochemical products and so on.

In 2003, CNPC completed the colossal Muglad oilfield project in Sudan. This involved the construction of a huge oilfield with an annual production capacity of over 10 million tons, a refinery processing 2.5 million tons of oil a year and a 1,506 km pipeline. Based on the experience of this overseas operation, the largest of its kind, CNPC moved on to open North African and Middle Eastern markets in Libya, Algeria, Oman, Syria and Iran.

On January 30, 2004, CNOOC Muturi Limited, CNOOC's wholly-owned subsidiary, signed a Sale and Purchase Agreement (SPA) with the BG Group to acquire an additional 20.77 percent interest in the Muturi Production Sharing Contract (PSC) for a consideration of US$98.1 million. This purchase increased CNOOC's interest in Muturi PSC from 44.00 to 64.77 percent and brought a corresponding increase in its interest in the Tangguh LNG Project from 12.50 to 16.96 percent.

The refinery-heavy Sinopec Group has been active in searching for overseas oil reserves to feed its refineries. The company's crude oil imports account for nearly 80 percent of the country's total and more than half of these come from the Middle East. In recent years Sinopec has increased its investment in the Middle East. In January, 2004, Sinopec signed a contract with the Saudi Arabian Ministry of Petroleum and Mineral Resources for the exploration and production of natural gas in a 38,800 sq km area in the vast Rub al-Khali, the desert known as the "Empty Quarter". Initial investment in the project is planned to reach US$300 million. Currently, Sinopec is bidding for rights to exploit 16 Iranian oil fields, despite obstacles created by the United States.

Answering the "go-out" call, Sinochem Corp. that is playing a key role in China's oil security strategy also embarked on overseas exploitation for oil and gas. Liu Deshu, Sinochem's president, suggests that the country should adopt a series of measures to encourage domestic firms to support the "go-out" strategy. In particular he advocates the use of preferential tax policies to support Chinese firms' overseas oil and gas development activities. What's more, he says that the legislative work relating to oil and gas development, including the enactment of the "oil law", should be carried out as soon as possible.

Building up strategic oil reserves

Along with oil market reform and the implementation of the "go-out" strategy, China's project to create a strategic oil reserve is now getting into gear.

Last year, in order to set up an oil reserve system, an oil reserve office was established within the State Development Planning Commission (SDPC). On Dec. 6, 2003 the SDPC announced that China was to build four strategic oil reserve facilities on the coast. So far, work has started on the first-phase capable of holding an oil reserve of 10 million cubic meters.

CNPC, the Sinopec Group and Sinochem Corp. have all participated in developing the country's strategic oil reserve blueprint. Given commercial consideration, since the oil reserve plan will have some adverse financial effect on these companies, experts have suggested that they should be compensated accordingly.

At a global level, the existence of oil reserves has become an important factor in stabilizing supply and demand. After experiencing global oil crises in 1973-1974 and again in 1979-1980, one after another the developed countries established their own strategic oil reserves.

In 1975 Congress empowered the government of the United States to build an enormous contingency oil reserve. By 1991, a total of US$19 billion had been allocated to secure strategic oil reserves. This supplied the market with 1.12 million barrels of crude oil per day during the 1991 Gulf War, stabilizing oil prices. By 1997, the US's actual physical strategic oil reserves reached 564 million barrels, equivalent to 67 days' imports.

Maintaining oil reserves has also become a fundamental matter of national policy for Japan. So far, Japan has built 10 oil reserve facilities and invested a total of 2 trillion yen in establishing its national oil reserves. By 1997 Japan's strategic oil reserves were enough for 154 days' supply. Taken together with the country's commercial oil reserves this would allow for domestic demand to be met for half a year or so if oil imports were to be totally suspended.

Experts have pointed out that due to the high costs involved, the underlying rationale for maintaining strategic oil reserves is not based on their ability to stabilize oil prices but on the need to ensure continuity of oil supplies in the event of war or natural disaster. Thus the aim of China's strategic oil reserves should be to ensure uninterrupted oil supplies and ultimately the security of the national economy.


Full article

Thursday, April 22, 2004

Iogen's first commercial shipment of cellulose ethanol

Iogen, a Canadian biotech company, released its first commercial shipment of bioethanol . Unlike conventional ethanol which is made from grain, bioethanol is made from cellulose-rich biomass such as wheat straw, sugar-cane bagasse, and corn stovers and stalks left over after harvesting.

Critics say conventional grain-based ethanol requires as much energy to produce as it releases when burnt, once inputs like tractor gas and pesticides have been accounted for. The net energy benefit from cellulose ethanol is not in dispute.

Iogen’s breakthrough was the successful use of recombinant DNA-produced enzymes to break apart cellulose to produce the sugars that are used to make the ethanol. This technology could refine the more than 500 million dry tons of biomass annually represented by wood-product manufacturing residues, municipal solid waste and garden waste into more than 50 billion gallons of ethanol, according to the Biotechnology Industry Organization .

Ethanol currently is used in a variety of ways -- most commonly as an additive to increase octane and improve the emissions quality of gasoline. (California has replaced MTBE with Ethanol in its specifications for gas.) In some areas of the United States, ethanol is blended with gasoline to form an E10 blend (10% ethanol and 90% gasoline), but it can be used in higher concentrations such as E85 or E95. Original equipment manufacturers produce flexible-fuel vehicles that can run on E85 or any other combination of ethanol and gasoline. -- US DOE Alternative Fuels Data Center

(As an aside, the first E85 pumping station within the Washington, DC, Beltway just opened.)

The catch so far is that ethanol costs more to produce than does gasoline. Critics say it would not reach the market without subsidies. The Canadian Petroleum Products Institute has opposed the use of government subsidies to support bioethanol.

Those economics may change sooner than originally projected.

Yahoo Press Release.

Full article

Wednesday, April 14, 2004

Rising oil prices mean higher farming costs

As oil prices rise, farming becomes more expensive. This is not only due to higher transportation costs, but because many of the chemicals used in farming (fertilizers, pesticides) are of petrochemical origin. Agrinews explains which cost factors of farming are likely going to be affected:

It's going to cost more to put in the crop this year.

Anhydrous prices have risen to 28 cents per pound from 12 to 15 cents a pound in the mid- to late-1990s.

Retail diesel prices averaged $1.64 a gallon in Minnesota and Iowa last week, according to AAA. Prices a year ago averaged $1.57. The highest price ever was reported in March 2003, when diesel prices hit $1.76.

Mike Duffy, an Iowa State University Extension farm management economist, said fuel cost is a relatively small portion of the money spent to put in a crop, but when the products that are derived from petroleum are considered the impact is much larger.

Many chemicals and fertilizers are petroleum-based. Tires and transportation consume petroleum.

Annual production, transport and primary processing of Minnesota's agricultural output consumes 241 million gallons of diesel, 24 million gallons of gasoline, 123 million gallons of LP gas, 23 billion cubic feet of natural gas and 2.27 billion kilowatt hours of electricity, according to research done by Barry Ryan and Douglas Tiffany of the University of Minnesota.

Yet agriculture in the United States uses half the amount of energy per unit of output than it did in 1978, said Tiffany, a research fellow in the U of M applied economics department. Gains have been made from larger, more efficient equipment and processors are more efficient at making fertilizer.

But prices that have doubled in some cases have farmers thinking about ways to reduce cost.

Gyles Randall, a soil scientist at the Southern Research and Outreach Center in Waseca, has received questions about how much nitrogen needs to be applied.

For corn yields up to 175 bushels per acre, 120 pounds of nitrogen is plenty for corn following soybeans, Randall said. In southeastern Minnesota, 90 to 100 pounds of nitrogen is plenty for corn following soybeans.

Duffy said farmers need to use realistic yield goals in establishing the amount of nitrogen they need.

Many factors farmers are considering in terms of fuel economy are practices educators have been trying to get farmers to do from an environmental aspect. Cost saving is an important factor in convincing people to look at alternative types of tillage, he said.

In the short run farmers should be sure their equipment is properly tuned and that implements are clean so they pull easier. In the long run they should evaluate how many trips they make across the field.

"Farming is a lot of tradition � there's a certain pride of ownership, people do things to maintain clean fields that are not economical," Duffy said. "I think what we try to do is present sound scientific based information on the costs and the returns.

"I heard a friend say farmers are all in favor of progress -- it's change they hate."

The U.S. agricultural production system is fairly fossil-fuel intensive, he said, adding that the whole energy arena is going to continue to take on more importance in the future.

"I think that we should prepare ourselves for this wild fluctuation to be the norm, not to be the exception," Duffy said. In 20 to 25 years higher energy prices could change the way U.S. farmers farm.

Producers spent $10.22 per acre on fuel and oil, not including drying fuel, in 2003. The total direct cost on that acre was $288.50. That makes fuel 3.5 percent of total direct cash expense for an acre of corn.

For soybeans, farmers spent $8.20 for fuel. The direct costs were $194.25 or 4.2 percent of the total cost.

By Janet Kubat Willette

Agri News staff writer
Source: South Central Minnesota Farm Business Management Program

Full article

Thursday, April 08, 2004

New book says farming is biggest global environmental threat

Inefficient farming practices are helping to drive deforestation, pollution, ocean degradation and species loss, and constitute the most serious environmental threat in the world today, according to a new global survey by Dr. Jason Clay, head of the Center for Conservation Innovation at World Wildlife Fund (WWF) and noted expert on the economics of agriculture.

Agriculture is the world's largest industry, employing some 1.3 billion people and producing about $1.3 trillion worth of goods annually. But in World Agriculture and the Environment, Clay also finds that agriculture contributes to serious environmental, social and economic problems, particularly in developing countries.

Offering detailed analysis of the issues and practices of some of the world's biggest crops, from coffee and orange juice to cocoa and tobacco, Clay finds that agriculture uses more than 50 percent of the habitable area of the planet, including land that should not be farmed, and destroys some 100,000 square miles of forests and other critical species habitat annually.

Among the findings in Clay's book: Agriculture wastes 60 per cent, or 1,500 trillion liters, of the 2.5 trillion liters of water that it uses each year. Water resources are already being used close to or beyond their limit, particularly in the Americas, North Africa, the Arabian Peninsula, China, and India. The impacts of global warming are likely to further disrupt water supplies.

"Agriculture has had a larger environmental impact than any other human activity and today it threatens the very systems we need to meet our food and fiber needs," said Clay. "New kinds of agriculture can produce the food needed to feed an increasing population and still accommodate all other life forms on the planet."

The book warns that government subsidies encourage intensive monoculture farming practices that use chemicals and heavy machinery that harm the environment. "U.S. farmers are on a treadmill: the more subsidies they receive, the more they need them to remain competitive globally," said Clay.

The book recommends that governments - especially those of major consuming countries like the U.S., China, Japan and the EU -- redirect funding from subsidies and market barriers that promote unfair competition towards the adoption of better management practices. These include government payments for environmental services that farmers provide, such as watershed protection, erosion prevention, clean water, and carbon sequestration.

Clay analyzes aquaculture as well, the fastest growing food production system in the world. He says that without great care, it will repeat many of the same mistakes as agriculture. "At the very least, our goal should be to avoid repeating old mistakes."

The seafood that Americans consume is mostly produced by aquaculture. Much of this industry has huge environmental impacts. "When you consider that most species are over-fished, the trend of concern in aquaculture is the growth of open ocean systems producing carnivorous fish," said Clay. These fish require three to five pounds of wild fish to produce one pound of farmed fish. It's not a good trade-off. It's inefficient."

The book recommends that governments work with farmers and the food industry to develop better management practices in order to increase efficiency and reduce damage to the environment. WWF and the International Finance Corporation, the World Bank's private sector financing arm for developing countries, are exploring financial incentives that encourage farmers and investors to adopt better management practices, for example ecolabels promoting environmentally-friendly products and offering a reduction in financial risks.

The book highlights palm oil as the agricultural commodity with the biggest threat to the widest range of endangered large mammals. Asian elephant, Sumatran rhinoceros, orangutan, and tiger populations are all declining because palm oil plantations are destroying their habitats.

US Newswire.

Full article