2
Energy Resources

This chapter summarizes the major sources and consumption of energy for the United States and China, as well as corresponding energy forecasts. Both countries’ energy profiles are presently dominated by hydrocarbon resources, and large-scale changes in the system are difficult to implement quickly. Traditional biomass also constitutes an important source of energy and of emissions throughout much of China, but not in the United States—this is not well represented in national inventories and is discussed separately in Chapter 7. This chapter focuses on the current major energy resources for each country. It is not intended to be an authoritative energy review, but the context is useful for comparing the resources that each country possesses, some of the factors at play which influence energy prices and consumption, and the dynamic tensions between a desire for energy security and clean air.

MAJOR ENERGY RESOURCES

The United States and China are no longer energy independent, and in a globalized economy, one country’s energy consumption can have a dramatic impact on the other’s policy, as well as on world prices. As will be explored, both countries possess domestic reserves (most notably coal) but changing demands, dwindling supplies, and concerns over emissions all factor into each country’s distinct energy scenario. Fossil fuels constitute a large majority in both countries and will continue to do so, though renewable sources and cleaner alternatives are poised to contribute a slightly higher percentage of total energy in the next 25 years (EIA, 2006b). Figure 2-1 shows the relative energy consumption in China



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2 Energy Resources This chapter summarizes the major sources and consumption of energy for the United States and China, as well as corresponding energy forecasts. Both countries’ energy profiles are presently dominated by hydrocarbon resources, and large-scale changes in the system are difficult to implement quickly. Traditional biomass also constitutes an important source of energy and of emissions through- out much of China, but not in the United States—this is not well represented in national inventories and is discussed separately in Chapter 7. This chapter focuses on the current major energy resources for each country. It is not intended to be an authoritative energy review, but the context is useful for comparing the resources that each country possesses, some of the factors at play which influence energy prices and consumption, and the dynamic tensions between a desire for energy security and clean air. MAJOR ENERGY RESOURCES The United States and China are no longer energy independent, and in a globalized economy, one country’s energy consumption can have a dramatic impact on the other’s policy, as well as on world prices. As will be explored, both countries possess domestic reserves (most notably coal) but changing demands, dwindling supplies, and concerns over emissions all factor into each country’s distinct energy scenario. Fossil fuels constitute a large majority in both countries and will continue to do so, though renewable sources and cleaner alternatives are poised to contribute a slightly higher percentage of total energy in the next 25 years (EIA, 2006b). Figure 2-1 shows the relative energy consumption in China 

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 ENERGY FUTURES AND URBAN AIR POLLUTION United States China Petroleum 39.7% Petroleum Coal 21.0% Coal 22.8% 68.9% Natural gas 2.9% Renewables & Nuclear Renewables & Natural gas 14.0% Nuclear 23.5% 7.2% FIGURE 2-1 Primary commercial energy consumption by fuel type. NOTE: China’s nuclear power production represents less than 1 percent of total Left and right consumption. SOURCES: EIA, 2006a; NBS, 2005a. 2-1 same as ES-1 and the United States by fuel type. This figure illustrates some discrepancies in the fuel consumption of the two countries: • More than two-thirds of China’s energy consumption is derived from coal, whereas the United States derives less than a quarter of its energy from coal. • The United States relies on natural gas for 24 percent of its energy, whereas China relies on it for only 3 percent of its energy. • Petroleum supplies 39 percent of U.S. energy needs, but only 21 percent of China’s. Energy data on supplies, consumption, and future projections are largely dependent upon official statistics. In addition to their utility in forecasting trends and in making energy policy adjustments, energy data are also critical in developing air pollution mitigation strategies. A projected increase in coal consumption signals a need for action to address potential increases in SO 2 and CO2 emissions. Emissions are generally estimated using statistics from the Inter- national Energy Agency (IEA), or official statistics from a country (Akimoto et al., 2006). Much of the data presented in this chapter come from official national sources (the Energy Information Administration (EIA) for the United States and the China Energy Annual Reie�). It should be noted, however, that China’s National Bureau of Statistics has recently adjusted energy consumption statistics for 2001-2004, and that statistics from 1996-2002 have been called into question and were likely underreported (Sinton and Fridley, 2003; Tu, 2006; Akimoto et

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 ENERGY RESOURCES al., 2006). Furthermore, traditional biomass, which does not typically reach com- mercial markets, is not accurately captured in national energy statistics. Though it is associated with rural use, it does play a significant role in China in urban use (e.g., wood-burning stoves) and perhaps more significantly, activities such as agricultural burning may often take place at or near the urban periphery and subsequently affect urban air quality. United States Coal U.S. coal resources are immense. They account for over one-quarter of the world’s recoverable coal, more than for Russia and over twice that of China. This compares to the U.S. oil reserves at 2 percent of the world’s total, and natural gas at 3 percent. Coal estimates have not been updated since the 1970s, and a reassessment could reveal an even greater coal resource base. In any case, the Department of Energy’s (DOE’s) estimate of 497.7 billion short tons of coal (over 13,000 EJ) as a demonstrated reserve base (DRB) is a good preliminary estimate for available U.S. coal reserves that will ultimately be recovered. Coal can be delivered by rail, barge, or truck to almost any location in the United States. Coal’s high energy density, ease of transport and storage, wide- spread abundance, and low cost per energy unit make it a potentially important feedstock for producing liquid fuels, in addition to its use as a solid fuel. While there are substantial coal reserves in numerous states, production comes primar- ily from existing production regions such as the Powder River Basin, the Rocky Mountains, the Illinois Basin, Central Appalachia, Northern Appalachia, the Great Plains, and Texas. In 2005 the United States produced 1.13 billion short tons (31 EJ) of coal, second only to China. U.S. coal fields are vast, diverse, and well distributed across the country. DOE reports coal deposits of one or more types or ranks (bituminous, sub-bituminous, lignite, and anthracite) in 33 states. Approximately 21 percent of U.S. coal deposits lie in the Appalachian region, 32 percent in the Interior region,and 47 percent in the Western region. They are found in four major types, also known as “rank.” Anthracite comprises approximately 1.5 percent of the DRB, bituminous 53 percent, sub-bituminous 37 percent, and lignite 8.5 percent. Most of the reserve base (68 percent) is recoverable by underground methods, and the rest with surface mining. Petroleum The United States was endowed with huge reserves of petroleum, which underpinned U.S. economic growth during the 20th century. However, growing U.S. demand resulted in the peaking of U.S. oil production in the lower 48 states

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 ENERGY FUTURES AND URBAN AIR POLLUTION BOX 2-1 Petroleum Refining Capacity in the United States U.S. refineries are currently operating near capacity (93 percent) and this is projected to rise to 95 percent by 2030 (EIA, 2006b). No new refineries have been built in the United States since 1976, although substantial expansions and capac- ity additions have occurred at existing sites. The reasons for this are difficulties in obtaining regulatory permits for expansions and new construction, as well as a lack of investment. This is a critical limitation, since, as demand for refined products grows, the United States will only be able to import as much crude oil as it can refine. Refineries are typically located near crude oil production sites, or alterna- tively, where demand for refined petroleum products is located (e.g., near major metropolitan areas), which is another challenge to building new refineries. Demand for refined products is expected to outpace domestic capacity increases, leading to a rise in refined petroleum product imports, as Eastern Europe and Asia in particular develop their capacity to meet stringent U.S. standards and demand. in the early 1970s and in Alaska during the 1980s. With relatively minor excep- tions, U.S. oil production has been in continuing decline ever since. Because U.S. demand for petroleum products continued to increase, the United States became an oil importer. The United States currently depends on foreign sources for more than 60 percent of its needs, and future U.S. imports are projected to continue to increase (EIA, 2006c). U.S. oil production is currently at a record low and has been steadily declining since 1986 (EIA, 2006a). Petroleum production in the lower 48 states decreased from 9.0 million barrels per day (MM bpd) in 1973 to 7.5 MM bpd in 1978. Only the development of oil in Alaska prevented a steep decline in overall produc- tion. Production from Prudhoe Bay came on line in significant volumes causing Alaskan production to increase from 464,000 bpd in 1978 to 1.6 MM bpd in 1980 and to peak at 2 MM bpd in 1988. Thus, there were modest gains in overall production that extended from 1980 through 1985. The U.S. dependence on foreign oil reached a record high in 2005, follow- ing a slight decline after September 11, 2001. The U.S. dependency on foreign oil has increased steadily since 1986. Major changes in imports are usually related to changes in the U.S. economy and the U.S. oil production. At the time of the October 1973 Oil Embargo, the United States received a little less than 35 percent of its petroleum supply from imports. In response to higher prices, total petroleum demand declined from 15.8 MM bpd in 1973 to 14.9 MM bpd in 1975. Thereafter, the increase in oil consumption resumed, and by 1978 total petroleum consumption averaged 17.1 MM bpd, 8 percent higher than in 1973. Imports as a percentage of petroleum supply increased at a more or less steady

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 ENERGY RESOURCES rate, from 35 percent in 1973 to approximately 42 percent in 1978, and exceeded 50 percent in several months. Dependence on imports grew faster than consumption. The rapid increase in international oil prices starting in late 1978 led to the only sustained period of declining U.S. dependence on imports in the post-1973 Embargo period. Two factors contributed to the decline: higher U.S. oil production and lower consump- tion caused by substitution, conservation, increased efficiency, and fuel switching. Dependence on imports declined to 27 percent in 1985—the lowest percent in the past four decades. With the oil price collapse in 1986, import dependence once again resumed its upward path to 55 percent in 2001, and to more than 60 percent in 2005, due to falling domestic production and to ever-increasing demand for transportation fuels. Gasoline, diesel, and jet fuel account for most of the increase in petroleum consumption. By 2030, oil imports are forecast to increase to more than 17 MM bpd (EIA, 2006c). Natural Gas Natural gas is a critical source of energy and of raw material, permeating virtually all sectors of the U.S. economy. It supplies nearly 25 percent of U.S. energy, generating about 19 percent of electric power, supplying heat to over 60 million households, and providing over 40 percent of all primary energy for industries. North America is moving to a period in its history in which it will no longer be self-reliant in meeting its growing natural gas needs; production from traditional U.S. and Canadian basins has plateaued. Traditional North American producing areas are expected to provide about 75 percent of long-term U.S. gas needs, but will be unable to meet projected demand. New, large-scale resources such as liquefied natural gas (LNG) and Arctic gas are available and could meet 20-25 percent of demand but are higher-cost, have longer lead times, and face major barriers to development. Given depletion rates in North American fields, the sources of natural gas supply must change significantly to meet demand growth of more than 4.6 Tcf 1 (5.2 EJ) in only two decades. EIA projections indicate that more than 75 percent of all new incremental demand must be met by a 580 percent increase in LNG imports—increasing such imports to 4.1 Tcf (4.6 EJ). To put such a large amount of LNG in perspective: • 4.1 Tcf is greater than the entire 2004 natural gas production of the Gulf of Mexico (4.0 Tcf). • 4.1 Tcf is the Btu equivalent of importing more than 700 million barrels of oil. 1One trillion cubic feet (Tcf) is equivalent to 0.0283 trillion cubic meters (Tcm) natural gas.

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0 ENERGY FUTURES AND URBAN AIR POLLUTION BOX 2-2 Natural Gas and Electricity EIA projects that by 2015 more than 22 percent of U.S. power generation will be natural gas (NG) (EIA, 2007). This focus on NG-fueled power plants to meet incre- mental demand for electricity has had serious implications for the U.S. economy: • Natural gas plants are increasingly part of baseload generation, especially in states such as Texas, California, and Florida, where NG now supplies more than 40 percent of the electricity. • Dramatic NG price increases can be directly attributed to meeting baseload demand with NG. • The domestic competition between various sectors of the economy is e specially serious, due to declining production of NG. • The high cost of NG has resulted in tens of thousands of megawatts of capacity sitting idle because it is too expensive to operate. • Reserve capacity is increasingly based on NG plants, which greatly increases the vulnerability of the electric supply system to outages and supply shortfalls. To utilize idle natural gas combined cycle (NGCC) plants, it may be necessary to convert some of them to coal. However, conversion involves many financial, en- vironmental, performance, and technical issues, and the conversion itself involves the alteration of the combined cycle power equipment to utilize the lower-Btu fuel from coal. Conversion also requires capital investment for the turbine modifications and the gasification plant.a Fuel switching may also require the renegotiation of environmental permits and the reopening of public discussion—and local public and infrastructure impacts from coal transport also may be an issue. For those locations where the NGCC plant was established primarily for environmental rea- sons, the difficulty of obtaining a permit to repower may increase. However, for coal gasification plants, emissions are normally well within the ranges of NG and are within Best Available Control Technology limits—a benchmark in the permitting process.b aIf the gasification facility is financed and constructed as a separate fuel-gas supply e ntity, the overall cost of the produced fuel gas can be as low as 35-40 percent of current NG p rices. bA prime consideration in the conversion decision is the accessibility and availability of coal supply. The site must accommodate the logistics of coal delivery, off-loading, coal preparation, and storage of coal, reagents, by-products, and sulfur, and in some cases new environmental permits will be required.

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 ENERGY RESOURCES • 4.1 Tcf at the 2005 (January-June) average LNG cost of $6.46 per Mcf would cost the United States at least $27 billion per year, in addition to the current cost of more than $200 billion for oil imports. The United States has four operating LNG terminals, and a number of proposals for new terminals have been advanced. However, the construction of new terminals demands state and local approvals, and because of environmental concerns and fear of terrorism at LNG facilities, a number of the proposed ter- minals have been rejected. There are also objections from Mexico, which has been proposed as a host for LNG terminals, to support west coast natural gas demands (Flalka and Gold, 2004). Alternatively, some are considering locating LNG terminals offshore with gas pipelined underwater to land; related costs will be higher, but safety would be enhanced. While hopes of meeting future demand have turned to LNG imports,2 LNG presents the same economic cost and national security problems as imported oil. Efforts to import massive amounts of LNG will take time, cost money, and could result in unforeseen consequences. Thus, while LNG is a promising source of new supply, prudent planning suggests the parallel pursuit of other alternatives, given the large number of unanswered questions that surround LNG. The experience with North American natural gas represents a dramatic exam- ple of the risks of overreliance on geological resource projections. Natural gas sup- plies had been plentiful at real prices of roughly $2/Mcf for almost two decades, and became the fuel of choice for new electric power generation plants. Part of its attractiveness was resource estimates for the United States and Canada that prom- ised growing supply at reasonable prices for the foreseeable future. However, the United States is now experiencing supply constraints and high natural gas prices. Supply difficulties are almost certain for at least the next decade. Nuclear Nuclear energy is the second-largest source of electricity in the United States after coal and is the largest emission-free source of electricity. The United States has more than 100 licensed nuclear plants that have a capacity of more than 97,000 megawatts (MW), and they provide more than 700 billion kilowatt-hours (kWh). At present, almost every U.S. home, business, and industry receives part of its electricity from nuclear power plants through a nationwide, interconnected transmission system. No nuclear power plant has been ordered in the United States since 1978, and the last nuclear power plant to be completed came on line in 1996. In recent years, however, electricity supplies have become increasingly tight and the nuclear power option is currently being re-examined. There is government support for 2The Alaska natural gas pipeline is at least 10 years from operation, maybe longer.

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 ENERGY FUTURES AND URBAN AIR POLLUTION new construction, so that, within a few years, the United States could begin con- structing new plants. A number of utilities have already initiated site planning for new plants. Average nuclear production costs are declining and have been for more than 10 years. Furthermore, the deregulated, competitive electric generating business creates a powerful business incentive to keep a nuclear plant operating beyond its initial 40-year licensing period since, with deregulation, a fully depreciated nuclear plant is a valuable asset that can sell energy at marginal cost. The average capacity factor (a measure of utilization) of U.S. nuclear plants has improved steadily. In 1999, it reached a record high of 86.8 percent, increasing from 67.5 percent as recently as 1990, and has continued to gradually increase since then—it is currently about 90 percent. Nationally, each percentage point increase in capacity factor is roughly equivalent to bringing another 1,000 MW of generating capacity on line. Nevertheless, nuclear energy’s future in the United States is uncertain. An especially difficult problem is the long-term storage of high-level nuclear waste; efforts to site a centralized facility at Yucca Mountain, Nevada, have been stalled for more than a decade. Nuclear power also suffers from problems relating to health and safety issues, potential accidents, and other concerns. Further, many environmentalists and special interest groups are strongly opposed to any expan- sion of nuclear power. Finally, the cost-competitiveness of the proposed new nuclear power plants is not clear. China Coal Coal is much more abundant than other fossil fuels in China (see Figure 2-2). Because of coal’s relative abundance, China’s reliance on fossil fuels, and an emphasis on sustained economic development, coal will continue to be the domi- nant source of energy in China. China has not only recognized the strategic significance of its coal resources, but is acting aggressively to realize the full potential of this multi-use fuel and feedstock. Coal is a primary fuel source for the production of electricity and steel, and China has also taken the lead with regard to coal-to-liquids and coal gasification initiatives. Based on the reports of the Ministry of Land and Resources (MLR), coal reserves at depths < 2000 m are estimated at over 5.5 trillion tons (168,000 EJ). This includes predicted recoverable reserves of over 4.5 trillion tons (138,000 EJ), with proven recoverable reserves of 204 billion tons (6200 EJ). But because there is not enough recent exploration of the coal reserves, at present the proven reserves total just 18 percent nationwide, and only 4 percent in western China. The existing proven reserves cannot meet the demand of large-scale coal development. Coal resources are mainly concentrated in the north and northwest of China. The

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 ENERGY RESOURCES Petroleum 5.9% Coal 92.7% Natural gas 1.4% FIGURE 2-2 Recoverable fossil fuel resources by fuel type (in terms of EJ). SOURCE: Liu, 2002. proportion of coal resources in northwest China is 47 percent, but the verified rate 2-2 is 30 percent, and the exploitable rate is less than 15 percent. The coal resources in northern China rank second with 39 percent and a verified rate of 58 percent. Transporting this coal presents additional challenges (Box 2-3). Coal mining operations will likely shift west in the future. Coal demand is secure, as it provides 75 percent of electric power, 60 percent of chemical indus- trial fuel, and 80 percent of industrial fuel overall. After a slight decrease of the production and consumption of coal in the 1990s, the production and consumption of coal began to increase in recent years, because of the development of China’s economy. The production of coal was 2.19 billion tons (66 EJ) in China in 2005 (see Figure 2-3). The Chinese coal market has undergone major changes in recent years. Government-led reform and reorganization of the coal industry has promoted the establishment of large coal mining companies. Large coal mining enterprises have taken over and upgraded small and medium-sized coal mines. In other cases small mines (mostly operated by a township as opposed to the state) were closed. As a result of this restructuring, the number of small coal mines decreased from 85,000 in 1996 to 24,000 as of 2006. The general trend has been one of consoli- dation, in order to expand the scale and scope of coal mining operations. In the process, mechanization rates and safety levels have been gradually enhanced. The mine rates of state-owned key coal mines, state-owned local coal mines, and town coal mines were, proportionally, 39:16:45 in 1996. By 2005 this proportion had shifted to 48:15:37.

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 ENERGY FUTURES AND URBAN AIR POLLUTION BOX 2-3 Coal Transport Transportation and coal quality are significant issues which impact cost, t hermal efficiency, and emissions. Lignite, for example, is not suitable for trans- porting, as its high moisture content adds excess weight, making transporting it economically impractical. (Moisture content also decreases its energy intensity and thus its heating value.) In China, 90 percent of the coal resources are in the sparsely populated northern and western regions, practically opposite of the heavily populated and economically active regions of the south and east. This, of course, necessitates a great deal of coal transportation and, at present, about 45 percent of railway capacity is used to transport coal. In 2003, the coal trans- portation load was 1 billion tons; primary railway lines are basically saturated or super-saturated. Transportation by waterway has been insufficient as well. Coal transportation difficulties have created a bottleneck in China’s economic devel- opment. Furthermore, the increasing cost of transporting energy resources has driven up their prices. In 2004, the price of coal in the Shanxi Coal Mine was 140 RMB/ton, with railway freight charges of 0.15 RMB/t-km and highway freight charges of 0.45 RMB/t-km. So, when transported to the East, 1,000 km away, the price of the coal would be 320 RMB/ton—more than two times the original price. Accounting for other transport-related expenditures, the price of coal could reach 400 RMB/ton for Guangzhou and Fujian provinces; in other words, higher than the international market price. 2.5 2.2 2.0 2.0 Billion metric tons 1.6 1.5 1.4 1.4 1.4 1.4 1.5 1.3 1.3 1.3 1.1 0.9 1.0 0.6 0.5 0.0 80 85 90 95 96 97 98 99 00 01 02 03 04 05 19 19 19 19 19 19 19 19 20 20 20 20 20 20 FIGURE 2-3 Coal production in China. SOURCE: China Statistical Yearbooks (1981-2006). 2-3

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 ENERGY RESOURCES Still, the prevalence of small and sporadic coal mines presents a serious challenge for China. In 2004 the top five coal companies (Shenhua, Shanxi Jiaomei, Datong, Zhongmei, and Yunkuang companies) had a market share of only 16 percent. Production from small town and village coal mines continues to increase rapidly, which has several disadvantages for the coal industry. In general, the small mines suffer from • Production inefficiencies, • Market price fluctuations, • Lack of regulations, • Increased rate of mining accidents, and • Increased environmental degradation. From 2001 to 2004 China’s coal exports totaled approximately 80 million tons annually (see Figure 2-4), though this number decreased in 2005 to 71 mil- lion tons. The main market for Chinese coal exports is Asia, which imports about 94 percent of the total. At the same time, as a result of rising prices in the mining industry, coupled with railroad restrictions on coal transportation, China’s coal imports totaled 26 million tons (0.79 EJ) in 2005. China is expected to continue exporting some coal in the future, even as it increases imports to meet its own demand. Coking coal demand in particular is estimated to require more than 100 90 80 70 60 50 Mt 40 30 20 10 0 1990 1995 2000 2001 2002 2003 2004 2005 Export Import FIGURE 2-4 Coal imports and exports. SOURCE: NBS, 2006b. 2-4

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0 ENERGY FUTURES AND URBAN AIR POLLUTION TABLE 2-1 Comparison on Forecasts of China’s Primary Commercial Energy Demand in 2020 Demand in 2010 (Mtce) Demand in 2020 (Mtce) Base Forecasting Agency Year Year Method Total Coal Oil NG Total Coal Oil NG IEA 2002 2000 Sectoral 1860 1220 480 81 2438 1512 650 146 analysis APERC 2002 1999 Reference 2059 1090 469 99 2781 1414 710 196 scenario ERI, 2003 2000 Reference 2068 1365 524 108 2896 1788 795 193 NDRC scenario SOURCES: IEA, 2002; APEC, 2002; ERI, 2002. 35 30 Energy Research Institute APEC IEA Actual 25 100Mtce 20 15 10 5 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Year FIGURE 2-20 Forecast of commercial energy consumption in China. SOURCE:Values before 2004: “China Statistical Year Book”; all others are projections by the respective agencies. 2-20

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 ENERGY RESOURCES BOX 2-5 The Challenges of Energy Forecasting There are many limitations in developing long-term forecasts of energy supply and demand. For example, as illustrated in the figure below, natural gas supply can be difficult to project and can shift dramatically from year to year. The Depart- ment of Energy’s Energy Information Administration (EIA) analyzes various issues that impact U.S. energy markets, such as energy prices, technological advances, changes in public policy, and economic growth (EIA, 2007). Improvements in technology impact energy supply and demand forecasts. Us- ing advanced technologies reduces production costs and decreases the amount of natural resources being consumed. Energy prices also have the ability to impact supply and demand forecasting by increasing or decreasing the energy resources that are available to consumers. Additionally, policy decisions made by govern- ments and regulating organizations can affect the oil supply, changing energy projections. Long-term energy projections do not consider the impact of these trends. These forecasts are of limited value if outside factors are not examined as part of future trends in energy supply. In China, these forecasts are made even more difficult by the fact that sepa- rate agencies make independent projections. While the National Development and Reform Commission’s Energy Research Institute (ERI) makes overall energy consumption projections, the more detailed forecasts on supply and demand are carried out by agencies such as the China Coal Association, or the China Petro- leum Sector. This obviously leads to difficulties in cross-referencing information. Energy forecasters also tend to underestimate the impact of unmodeled “sur- prises,” a key example in the United States being the response to the 1973 oil embargo and the resultant gains in energy efficiency (Craig et al., 2002). While forecasters attempt to capture social trends (e.g., increasing concern over global warming), predicting technological breakthroughs or events which bring about behavioral change is not an easy task. Given all of these challenges, long-term energy forecasts are nonetheless useful tools for energy planners, and additionally, they are illustrative examples of prevailing perceptions and trends. 3 4.0 2002 Forecast 33.0 2003 32.0 31.0 30.0 29.0 28.0 Tcf / Year 2004 27.0 26.0 25.0 2005 24.0 23.0 22.0 2006 Forecast 21.0 20.0 2002 2010 2020 2030 FIGURE Box 2-5 U.S. natural gas supply forecast, 2002-2006. SOURCE: EIA. Figure for Box 2-7

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 ENERGY FUTURES AND URBAN AIR POLLUTION China’s Energy Research Institute and the NDRC. The figure in Box 2-5 depicts these various projections over time, and also illustrates the difficulty and potential inaccuracies with energy forecasts. Coal Coal consumption has been increasing rapidly, as Figure 2-21 indicates. In 2000, 1.32 billion tons (40 EJ) of coal were consumed; this number increased to 2.17 billion tons (65.6 EJ) by 2005. Figure 2-22 shows the forecast for coal consumption through 2020. The general trends forecast are as follows: • Industrial coal consumption will continue its rapid rise (particularly for the electric power industry). • Residential consumption will remain relatively constant. • Proportions are projected to decline gradually (particularly in urban areas). • As mentioned earlier, imports are projected to increase, and China could soon be a net importer of coal. In 2005, industry accounted for 93.5 percent of coal consumption (though this includes electric power generation as an industry). Residential coal consumption totaled 4 percent, ranking second (see Figure 2-23). As has been noted, much of the coal consumed by industry is used to gener- ate electricity. In 2003, the coal used to generate power or heat supply totaled 876 million tons (26.5 EJ), or 53.5 percent of total consumption. Steel-making, 2500 2166 1936 2000 1692 1500 1377 1320 Mt 1055 1000 500 0 1990 1995 2000 2003 2004 2005 FIGURE 2-21 Coal consumption in recent years. SOURCE: NBS, 2006b. 2-21

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 ENERGY RESOURCES China Coal Association Energy Research Institute IEA APEC 25 Actual 20 15 100Mtce 10 5 0 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 Year FIGURE 2-22 Forecast of coal consumption in China. SOURCE: Values before 2004: “China Statistical Year Book,” all others are projections by the respective agencies. 2-22 Construction 0.3% Transportation 0.4% Residential Industry 4.0% 93.5% Commercial and others 0.8% Agriculture 1.1% FIGURE 2-23 Coal consumption by sector, 2005. SOURCE: NBS, 2006b. 2-23

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 ENERGY FUTURES AND URBAN AIR POLLUTION building materials, and the chemical industry were the next largest consumers, proportionally consuming 11 percent, 11 percent, and 5 percent, respectively. China was a net exporter of coal in 2006, exporting more than 60 Mt (1.8 EJ), while importing slightly more than 30 Mt (0.9 EJ). While detailed projec- tions are not currently available, it is expected that coal imports will surpass exports by 2020 at the latest, though most demand will still be met by domestic production. Petroleum Petroleum consumption has increased rapidly, from 224 Mt (10 EJ) in 2000, to 325 Mt (14.6 EJ) in 2005, as shown in Figure 2-24. Petroleum consumption by sector is illustrated in Figure 2-25. Consumption of gasoline, kerosene, and diesel fuel has been increasing. These petroleum products are mainly used in transportation, industry, and com- merce. About 45.7 percent of gasoline produced is used in transportation, 41.5 percent in industry and commerce. Diesel fuel is mainly used in transportation (41.5 percent) and industry (21.8 percent). Kerosene is mainly used in civilian shipping and transportation, which consumes two-thirds of the total produced. In recent years the quantity of residual fuel oil consumption has increased slightly. In 2003, about 77 percent of residual fuel oil was used in industry, and 22 percent was used in transportation. Much of this increased demand and consumption for petroleum-based fuels is coming from the transportation sector, which correlates to the similarly steep rise in automobiles in China (see Figure 2-26). In 2003, there were 23.8 million automobiles in China, an increase of nearly 300 percent 3.25 3.5 3.17 2.71 3 2.49 2.29 2.24 2.5 2.11 2 100Mt 1.61 1.5 1.15 1 0.5 0 1990 1995 1999 2000 2001 2002 2003 2004 2005 FIGURE 2-24 Petroleum consumption in recent years. SOURCES: NBS, 2005b, 2006b. 2-24

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 ENERGY RESOURCES 160 140 120 100 Mt 80 60 40 20 0 1990 1995 2000 2003 2004 2005 Year Agriculture Industry Construction Transportation Commercial and others Residential FIGURE 2-25 Petroleum consumption by sector. SOURCE: NBS, 2006b. 700 600 2-25 500 10000 400 300 200 100 0 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 Production of automobiles Sales volume of automobiles FIGURE 2-26 Energy demand from automobiles. SOURCE: CATARC, 2005. 2-26

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 ENERGY FUTURES AND URBAN AIR POLLUTION from 1991. If China continues at this pace, it could have a passenger car fleet the size of the U.S. fleet by 2030 (Wang et al., 2005). As China’s level of development continues to rise, its consumption of petro- leum is also projected to rise (see Figure 2-27), thus widening the gap between domestic production and demand. In order to address the issue of energy security, the Chinese government established a petroleum reserve system, as well as oil and gas support bases overseas. Additionally, in 2005, the government increased research for petroleum substitution strategies. Based on the preliminary results of this research, the government has decided to emphasize substituting CTL and biofuels for petroleum-based fuels. At pres- ent, the NDRC is coordinating research between related government departments and research institutions on a petroleum substitution strategy. Construction began in August 2004 on a demonstration factory to produce CTL in Inner Mongolia province. The Shenhua direct coal liquefaction project is scheduled to be com- pleted in 2007, with commercial demonstration planned to begin in 2008. The demonstration scale is planned to be one million tons/yr (about 20,000 bpd), and the eventual full production scale is planned to be 5 million tons/yr (about 100,000 bpd). In early 2006, Shanxi province began constructing a demonstration factory to produce 160,000 tons annually through indirect coal liquefaction. In 2006 construction also began on a larger (1 million tons annually) indirect coal liquefaction plant using domestically-developed technology; it is being built in 9.00 Energy Research Institute 8.00 APEC China Petroleum Sector 7.00 IEA 6.00 Actual 100Mtce 5.00 4.00 3.00 2.00 1.00 0.00 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 Year FIGURE 2-27 Forecast of petroleum consumption in China. SOURCE: Values before 2004: “China Statistical Year Book.” Values after 2004: predic- tion results. 2-27

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 ENERGY RESOURCES Shanxi province and will be finished in 2010. The overall Chinese goal is to be producing 50 million tons/yr (2.25 EJ) of CTL by 2020. According to the Chinese, this is a key part of their long-term strategy of limiting oil imports to no more than 50 percent of their total requirements. Additionally, nine provinces have launched demonstrations of biofuel use, both in the commercial and transporta- tion sectors. Similarly, research is under way on substituting dimethyl ether for liquefied petroleum gasoline and for developing and utilizing biodiesel. Natural Gas Natural gas consumption has increased from 24.5 billion m3 (0.98 EJ) in 2000 to 47.9 billion m3 (1.9 EJ) in 2005 (NBS, 2006a). About 74 percent of natural gas was used in industry (including power generation, heat supply, and chemical production), while 16.6 percent was used in the residential sector. Figure 2-28 predicts that natural gas consumption will continue to increase, and although the total consumption may increase four-fold by 2020, its relative contribution to total energy consumption will not be substantial. Most of the increased consump- tion will result from residential use, in switching from coal to natural gas-based heating systems. 2.00 Energy Research Institute 1.80 APEC 1.60 Chinese Petroleum Sector 1.40 100Mm3 IEA 1.20 Actual 1.00 0.80 0.60 0.40 0.20 0.00 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 Year FIGURE 2-28 Forecast of natural gas consumption in China. SOURCE: Values before 2004: “China Statistical Year Book.” Values after 2004: predic- tion results. 2-28

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 ENERGY FUTURES AND URBAN AIR POLLUTION Energy Consumption by Sector Electricity consumption has increased rapidly over the past 10 years, as shown in Figure 2-29. Industry has been the main consumer of electric power, consuming about 74 percent of total electric power generated. Residential use was the second largest sector, at a distant 11 percent of the total. China’s rapid economic development, particularly the trend of heavy industry development, has caused electricity supply shortages. As per capita GDP has increased, so too has residential consumption, a trend which will continue into the future. Industrial consumption of electricity will also increase, but by closing older, inefficient facilities and by upgrading technologies and techniques, industry’s share of total consumption will decrease. Figure 2-30 shows projections for electricity con- sumption through 2020. According to the NDRC, overall energy consumption per 10,000 RMB gross domestic product has been decreasing at a rate of 4 percent per year from 1991 to 2002, saving 70 Mtce (2.12 EJ) of energy overall. For that period, coal consump- tion per unit power production decreased by 11.2 percent, steel consumption per ton decreased by 29.6 percent, and cement consumption per ton decreased by 21.9 percent; and, as a result, the gap with the advanced countries has been narrowed (NDRC, 2005). However, energy consumption per GDP remains rather high in comparison to developed countries. Finally, Figure 2-31 shows energy consumption by sector for 2005. It illus- trates that industry is by far the dominant sector in terms of consumption. Residen- 25000 20000 10 8kWh 15000 10000 5000 0 1995 1999 2000 2001 2002 2003 2004 2005 Year Industry Agriculture Construction Commercial and others Transportation Residential FIGURE 2-29 Electricity consumption by sector. SOURCE: NBS, 2006a. 2-29

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 ENERGY RESOURCES 6 5 4 Forecast Actual kWh 3 12 10 2 1 0 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 Year FIGURE 2-30 Forecast of electricity consumption in China. SOURCE: Values before 2005: “China Statistical Year Book.” Values after 2005: predic- tion results. Transportation 7.5% 2-30 Agriculture 3.6% Residential Industry 10.5% 70.8% Commercial 6.2% Construction 1.5% FIGURE 2-31 Energy consumption by sector for 2005. SOURCE: NBS, 2005a. 2-31 tial consumption accounts for just over 11 percent, followed by the transportation sector at 7.5 percent. The transportation sector is the most likely sector to gain in same as share of total consumption over the next 20-30 years. This has obvious ramifica- tions for China’s energy policy, security, as well as concern over emissions. ES-3

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