A power shift in China

China announced the leadership of its National Energy Commission (NEC) January 27, with Premier Wen Jiabao as the commission chief and Vice Premier Li Keqiang as his deputy. The NEC is meant to serve as the highest authority on domestic and international energy strategy and policy. As such, it is a crucial component of China's ongoing recentralisation of energy policy.

The creation of the NEC is part of a process that began years back when President Hu Jintao envisioned an energy 'superministry' to create a higher degree of central control and planning, so as to secure China's energy supplies and create a more stable domestic environment. Beijing needed a way to coordinate among the various players in China's bureaucracy and state-owned corporate sector involved in energy matters, to limit corporations from acting independently and reduce bureaucratic congestion and contradictory regulations.

The proposal for a superministry met with institutional recalcitrance. The existing energy bureau would have to be supplanted, but it existed under the National Development and Reform Commission (NDRC), a ministerial-level economic planning body that fought against having its powers reduced. Moreover, energy corporations feared the reforms – coal companies feared being consolidated, and major oil and gas companies did not want to be subject to more extensive central control.

A compromise appeared in March 2008 when the National People's Congress approved a law calling for the creation of two new government bodies. The first was the National Energy Administration, which was to be controlled by the NDRC and had the responsibility of managing the day-to-day administration of a number of agencies and sub-groupings. The second was the NEC, which was to be in charge of overarching energy strategy and which would receive its authority from the State Council.

A shift in priorities

Little was known about how the NEC was expected to operate, and almost nothing was said about it in the following year and a half. This is because in mid-2008, China's priorities suddenly shifted. Previously, with high global energy prices, the impetus for reform was strong, even though the various parties could not agree on how to go about it. When the financial crisis erupted in the United States and the credit crunch brought international trade to a halt, energy prices plummeted, and energy reform was the least of China's worries. The question was not how to manage high energy demand and high prices but rather how to save the economy from sinking into recession. China switched gears by launching the aggressive fiscal and monetary stimulus that enabled it to barrel through the worst parts of the recession and emerge from 2009 boasting 8.7 per cent growth.

Now, with the worst of the slowdown likely behind it, Beijing has refocused on energy reform. The need for greater energy security remains in place. Foreign oil accounted for more than half of China's overall oil demand for the first time in 2009, at 51 per cent. The United States is pushing for tough sanctions against Iran, heightening the risk to Persian Gulf oil exports. China also must continue to manage its oil companies' behaviour in relation to domestic price controls in order to avoid shortages during times of high international energy prices.

Meanwhile, China is attempting to modernise its coal industry as well as diversify its domestic energy mix as much as possible by promoting natural gas and alternative energy sources, such as wind and nuclear. It also is attempting to overhaul its domestic infrastructure to increase energy efficiency, reduce demand for foreign energy and mitigate pollution. All the while, it is encouraging its major energy companies to maintain their enthusiastic acquisition of foreign resources, purchasing stakes in natural resource deposits and upstream extractive companies and projects. Beijing hopes to throw its weight behind its companies, which have been rebuffed in some of their excursions abroad. Beijing is also expanding the role of its navy farther afield so as to move towards a greater defensive capability for its critical international supply lines. All of these issues will fall under the purview of the NEC.

Powerful personnel

The personnel for the National Energy Commission, including Wen and Li, shows that Beijing is taking the reform seriously. The leadership also includes NDRC director Zhang Ping, NDRC deputy chairman and nuclear energy specialist Zhang Guobao, central bank governor Zhou Xiaochuan, and a host of ministers and committee chairmen.

This is not to say that the NEC will function as a cohesive and effective unit from the beginning. China's history with bureaucratic reform suggests that the changes will take a long time and may even make things worse. In order to get consensus for the NEC, the principal figures were drawn from different ministries and commissions. But this means that the rivalries likely will continue unabated from before these officials were put under the same roof — resulting in infighting, extensive bargaining and potentially incoherent results while they are attempting to institutionalise the NEC. Wen and Li will have their work cut out for them to contain other NEC members, who have their own support groups, entrenched interests and agendas, and to ensure that coherent policy is made.

There will also be staunch resistance from those bureaucrats and businessmen who were excluded from the commission but have the most to lose from the formation of a higher authority. The national oil companies in particular are not easily controlled. What the commission's membership implies is that whoever opposes the NEC's decisions will be up against some of the most powerful people in China.

In other words, Beijing has signalled that it intends to craft national energy strategy at the central level and coordinate the diverse domestic interests involved — a move that is necessary to safeguard China's economic future. Few details are known beyond this, but STRATFOR will be watching to see when the NEC will begin operating, what will be the content of its first drafts for a new national strategy and where the resistance will be strongest.

Stratfor provides intelligence services for individuals, global corporations, and divisions of the US and foreign governments around the world.