Energy Sector Organization

The energy industry in China to a significant degree exemplifies the post-1978 development of “socialism with Chinese characteristics,” including extensive privatization and ascendancy of the profit motive.¹⁵
The socialist market economic system is defined as “socialist public ownership as the mainstay [of the economic system with] diversified systems of economic ownership developing” simultaneously. The process is still ongoing, with remaining problems in the growing population, poor workforce quality, deteriorating ecology, and shortage of natural resources.¹⁶ The implications of applying essentially free market ownership to the energy sector will almost certainly make development of that sector more dynamic and less susceptible to central planning.
An extensive restructuring of the energy industry in 1993–1994, when the domestic oil market was allowed to adopt a more regulatory than tightly, centrally controlled posture, was an early but unsuccessful attempt to resolve these problems. Beijing is still moving down a quarter-century path of privatization and deregulation of the energy sector, albeit at a measured pace.¹⁷
A more extensive reorganization was implemented in 1998, when the government restructured state-owned assets into two vertically integrated firms; this plan recognizes market mechanisms while retaining at the “commanding heights” of the energy sector at least nominally state-owned enterprises. The reorganization provided for a transfer of assets between the two firms, transforming them into regional entities. The China National Petroleum Corporation (CNPC) was assigned responsibilities mostly in China’s north and west and the China Petroleum and Chemical Corporation (Sinopec) in the south. Sinopec transferred four northern refineries to CNPC, which transferred eight southern oilfields to Sinopec. CNPC still has more than two-thirds of China’s crude oil production capacity, while Sinopec controls more than half of China’s refining capacity.
Furthermore, Sinopec is the primary importing company for crude oil, importing approximately 80 percent of the national total in 2001.¹⁸ The firms have spun off or eliminated several ancillary activities that were unprofitable; many of these, such as housing units and hospitals, have obvious social implications, since their loss to workers and former workers no doubt exacerbated the labor unrest that has been a feature of Beijing’s campaign to privatize and restructure state-owned enterprises (SOEs).
Other major state-sector firms in China include the China National Offshore Oil Corporation (CNOOC), which handles offshore exploration and production and accounts for roughly 10 percent of China’s domestic crude production, and China National Star Petroleum (CNSP), created in 1997. CNOOC had planned an initial public offering (IPO) on the New York Stock Exchange in late 1999, but it was cancelled after the company failed to agree with its underwriters on an opening share price.
The three largest concerns, Sinopec, CNPC, and CNOOC, have all made IPOs of stock, attracting billions of dollars of foreign capital. Two unusual features marked these stock offerings. First, they all involved significant, albeit minority, holdings in the companies by foreign concerns. Second, although foreign holdings in important Chinese companies are not uncommon, such holdings in the vital energy sector may allow foreign investors a significant voice in company decisionmaking.¹⁹
The 1998 reorganization aimed to increase efficiency and profit, but also to strengthen state control over the domestic oil sector. In late 1999, CNPC set up a holding company, PetroChina, for the purpose of raising money on international capital markets. PetroChina includes most CNPC productive assets but excludes its network of employee-support functions and some controversial projects such as its holdings in Sudan.²⁰ An IPO of a minority stake in PetroChina on the New York and Hong Kong stock exchanges took place April 7, 2000, though the size of the offering had to be scaled back due to a lack of interest on the part of institutional investors.
Three types of organizations currently govern China’s energy sector (figure 3). Ministry-level corporations run the highly centralized petroleum and nuclear industries (reporting to the State Council, headed by the nation’s premier, with a vice premier for energy issues), while energy subministries and affiliated national corporations run the less centralized electric power and coal industries.

• The State Planning Commission has ultimate authority for energy project approval, budget allocations, and financing arrangements.
• The State Science and Technology Commission and the State Economic and Trade Commission are also involved with energy industry development.
• The China National Energy Investment Corporation oversees major investment loans for the energy sector.
• The China National Petroleum Corporation is responsible for all onshore upstream oil and gas operations, including shallow-water areas. In the past few years, CNPC has begun transformation into a multinational integrated oil company, establishing subsidiaries and acquiring overseas acreage and refineries in pursuit of export markets.
• The China National Offshore Oil Corporation was established in 1982 to explore China’s offshore petroleum resources. The corporation has four regional subsidiaries (Bohai, East China Sea, Nanhai East, and Nanhai West) and several specialized subsidiaries.
• China established a third state oil company, the China National Star Petroleum, in January 1997. The company has been authorized by the central government to launch several exploration ventures with foreign companies.
• The China Petroleum and Chemical Corporation (Sinopec) is responsible for petroleum processing and product distribution; it controls production facilities for 90 percent of China’s refined oil products and over 75 percent of its petrochemicals.
• The China National Chemicals Import and Export Corporation (Sinochem) is primarily involved in imports and exports of crude oil, petroleum products, and natural gas.
• The Ministry of Coal Industry allocates national coal production and coordinates production activities by central-government-controlled mines (about 45 percent of nationwide production) and local mines (collective or privately owned mines as well as state-owned mines operated at the provincial, prefectural, or county level).
• The Ministry of Electric Power regulates power production.
• The State Power Corporation was established in 1997 to handle business aspects of the industry, with generation and transmission the responsibility of regional subsidiaries.
• The Ministry of Water Resources is concerned with China’s hydropower production.
• The China National Nuclear Corporation is a conglomerate of more than 200 enterprises and institutions concerned with China’s nuclear power production and waste disposal facilities.

This infrastructure recently has been augmented by a national plan to design a strategy of sustainable energy development, which will include establishing forums for experts, training government officials, and conducting surveys and investigations aimed toward further energy supply discoveries.²¹ The effort is being supervised by the State Development Planning Commission and the China International Center for Economic and Technological Exchange. It also has gained the endorsement of the United Nations Development Program (UNDP), which has allocated $300,000 for the project. Tibet is included in this plan, with developmental emphasis in that province placed on hydropower and solar power resources.
This strategy is a subset of a Beijing plan for nationwide development of the industrial sector and embodies the privatization believed necessary for China’s economic ambitions. An important goal of the plan is to “improve the investment environment for the power industry and upgrade power facilities” to satisfy demand estimated to grow at an annual rate of at least 4 percent through 2005. The plan aims to include natural gas, hydropower, and nuclear power projects, in addition to increasing the efficiency of the national power-generating grid, with particular attention to linking power availability in the western and eastern parts of the country. Four targets of development are described: installed capacity goals, power grids linked and “more rational,” increased environmental protection, and power supply available to all Chinese villages.²²
Much of this effort is aimed at alternative—that is, non-hydrocarbon—energy source development. Current Chinese planning also emphasizes foreign investment, especially in the riskier plans, such as those involving solar, wind-electric, marine energy, terrestrial heat, and biological energy production. The Asian Development Bank has extended loans for developing biological and solar energy as part of “59 international cooperation projects involving new and renewable energy development.” The World Bank has approved its largest-ever renewable energy loan and its first renewable energy loan for China, $100 million plus a $35 million grant from the Global Environment Facility. Funds are to be used to develop wind power in Inner Mongolia, Hebei, Fujian, and Shanghai and to develop solar power in isolated rural areas in the northwest of the country.²³

Endnotes

 ¹⁵“Organization,” in “China: An Energy Sector Overview,” DOE-EIA, December 1999. [BACK]

 ¹⁶Zheng Bijian, “Fundamental Trend of Socialism with Chinese Characteristics in the New Century,” Renmin Ribao (Beijing edition unless otherwise indicated), November 21, 2002, in FBIS-CPP20021121000023.
[BACK]

 ¹⁷Manning, 107–109. [BACK]

 ¹⁸Jing Ji, “Sinopec’s Move Stirs Controversy,” China Daily, November 5, 2002, in FBIS-CPP20021105000045. [BACK]

 ¹⁹“Country Analysis: China,” DOE-EIA (June 2002), in Alexander’s 7, no. 13 (June 27, 2002). [BACK]

 ²⁰“Sudanese Energy Minister Meets Chairman of Chinese National Oil Company,” Suna News Agency, August 15, 2002, in FBIS-AFP20020816000160, indicates that current cooperation is minimal. [BACK]

 ²¹“China Launches Energy Development Project,” Xinhua, August 25, 2001, in FBIS-CPP20010825000066. [BACK]

 ²²“China Maps Out Plan for Overall Development of Industrial Sector,” in Alexander’s6, no. 16 (August 28, 2001). Also see “New Energy Sources Highlighted in China’s Strategy for Next Five Years,” Xinhua, August 10, 2001, in FBIS-CPP20010810000131, for the report that “more foreign capital will be used and foreign cooperation will be expanded” in the effort to draw on “new [and renewable] energy resources.” The four goals are discussed in Asia Pulse (August 2001) and “China Releases Development Plan for Power Industry,” in Alexander’s 6, no. 15 (August 14, 2001). [BACK]

²³23“China Will Boldly Go Into International Energy Exploration,” China Electrical News, in Alexander’s6, no. 15 (August 14, 2001). Also see “Hydroelectricity and Other Renewable Sources,” DOE-EIA Report 0484 (2000), accessed at <www.ei.doe.gov/oiaf/archive/ieo00/hydro.html>, for the World Bank report. [BACK]