China's Hunger For Oil

China's hunger for oil André Mommen

Paper published in Hungarian translation in Eszmélet, 80, 2008, pp. 111-120.

China’s appetite for imported hydrocarbons has gained a global dimension now that demand for oil is increasing faster than supply. Increasing energy imports are a matter of great concern to both the Chinese government, which seeks to ensure that China has the energy resources it needs to sustain economic growth, and the Western powers worrying about the international political implications of China’s quest for energy security. In this article some aspects and issues of China’s industrialization drive will be discussed in connection with the country’s oil diplomacy as an aspect of its increasing integration into the capitalist globalization process. It must be kept in mind that the China has officially chosen for the capitalist road to socialism. This choice is completely in line with the governmental mission of industrializing China by opening the economy to the world market. In this article some aspects of this capitalist modernization process will be studied, especially how the Chinese rulers are dealing with the energy problem. Especially providing the country with enough oil has become China’s biggest challenge. China’s oil consumption Today, China is the second largest oil consumer, behind the U.S. It competes with the US, Japan, India, and Europe for oil. In recent years, China has been undergoing a process of industrialization and is one of the fastest growing economies in the world. With real gross domestic product growing at a rate of 8-10% a year, China's need for energy is projected to increase by 150 percent by 2020. This makes China extremely vulnerable to any upheaval in the major oil-producing countries in the Near East and Asia. Thus, China’s energy security activities can largely be explained in terms of the Chinese government’s long-standing fear of foreign energy dependency, particularly China’s reliance on energy resources controlled by the United States. At present, China imports 80 million tons of crude oil a year. Its oil consumption rises at average by some 7 percent a year. According to forecasts, by 2020 the country's demand for oil could reach 400 million tons annually. This helps explain recent oil shortages and actual high prices for crude. To sustain its growth China requires increasing amounts of oil. Since it became a net oil importer in 1993, China has traversed the globe in a frantic quest for oil to fuel its booming economy. A part of growing Chinese oil consumption has accelerated mainly because of a large-scale transition toward private automobiles. Hence, its oil consumption grows by 7.5% per year, seven times faster than the U.S. Consequently, by year 2010 China is expected to have 90 times more cars than in 1990. With automobile numbers growing at 19% a year, projections show that China could surpass the total number of cars in the U.S. by 2030. Another contributor to the sharp increase in automobile sales is the very low price of gasoline in China. Chinese gasoline prices now are a third of retail prices in Europe and Japan. China’s ability to provide for its own needs is limited by the fact that its proven oil reserves are small in relation to its consumption. Though during

the 1970s and 1980s China was a net oil exporter, it became a net oil importer in 1993 and is growingly dependent on foreign oil. China currently imports 32% of its oil and is expected to double its need for imported oil between now and 2010. A report by the International Energy Agency predicted that by 2030, Chinese oil imports will equal imports by the U.S. today. China's expectation of growing future dependence on oil imports has brought it to launch an active diplomatic and economic policy in order to acquire interests in exploration and production in countries like Kazakhstan, Russia, Venezuela, Sudan, West Africa, Iran, Saudi Arabia and Canada. Accords with Russia were signed in order to have access to Siberian gas and oil sources and to connect China to the Russian pipeline networks. During a visit in Beijing, Venezuela's president Hugo Chávez signed new agreements allowing Chinese companies to explore for oil and gas and set up refineries in Venezuela. He said his country seeks to reduce its dependence on selling oil to the U.S. and would therefore like to give China greater access to Venezuelan natural resources. But despite all efforts to diversify its sources, China has become increasingly dependent on Middle East oil. Nowadays, 58% of China's oil imports come from this militarily and politically very unstable region. Moreover, by 2015, the share of Middle East oil will stand on 70%. Though historically China has had no long-standing strategic interests in the Middle East, its relationship with the region from where most of its oil comes is becoming increasingly important. Oil diplomacy American interests confronted with Chinese increased economic weight after the latter developing country had joined the World Trade organization. In addition, China has become a major economic player in its region where the existing balance of power is altered. Hence, American imperialism tries to contain or slow down China’s rapid expansion by playing the card of China’s poor human rights records, widely spread corruption, or its polluting industries. The West wants the country to curb its carbon emissions. China-bashing goes hand in hand with protectionism disguised as a very noble fury at “coddling dictators”. In addition, U.S.-China relations are influenced by a wide array of geopolitical issues from Taiwan to Tibet. But undoubtedly access to Middle East oil will become a key issue in the relations between the two powers. But on the other hand, China’s military power is too underdeveloped to have any chance of playing a significant role in Middle Eastern politics. Its oil interests are thus at the mercy of U.S. military force. Therefore, China has to recognize that its energy security is increasingly dependent on cooperation with the U.S., rather than competing with it. But now that China is setting its sights on a new oil domain, the Western Hemisphere, the U.S. government is reacting more aggressively than ever before. Especially China’s pursuit of oil outside of its region has caused considerable irritation in Washington especially due to China's decision to support rogue regimes, such as Iran and Sudan, just because it depends on

their oil. Although China is banking on oil development projects outside the Middle East, Beijing most likely will insist on nurturing its relations with the main oil-producing states in that region as an insurance policy. On the other hand, China would like to maintain good relations with some oilproducing and exporting countries having not the sympathy of American imperialism. Among them are Iran, Venezuela and Sudan where the rulers are defending their national interests against foreign capitalist domination. A report by the U.S.-China Security Review Commission, a group created by Congress, warned that China's increasing need for imported energy has given it an incentive to become closer to countries supporting terrorism like Iran, Iraq and Sudan: This inclination is inspired by the feeling that the U.S. seeks to dominate the Persian Gulf. Especially troubling for Washington are China's arms sales to the region, its support of state sponsors of terrorism and its proliferation of dual use technology. The war in Afghanistan and Iraq may illustrate why Chinese diplomacy was outpaced by Western military initiatives. China’s economic penetration was hampered by both wars serving the economic and military interests of the U.S. Nowadays China is fearing that the same could occur with Iran. In the meantime China remains the number one oil and gas importer from Iran. The two countries are bound by energy deals reaching a total value of US$120 billion and growing. While the U.S. and EU were forging a diplomatic strategy to halt Iran’s nuclear program, China signed in October 2004 its largest energy deal with Iran ever and promised to block any American attempt to refer Iran’s nuclear program to the UN Security Council. This may indicate not only that China is interested in a militarily strong, even nuclear Iran that dominates the Gulf but also that for China, energy security considerations trump international cooperation on critical global security issues. In addition to its special relations with Iran, China is also known to be a provider of WMD technologies to “rouge states” including North Korea, Syria, Libya and Sudan. China also provides conventional weapons that could threaten U.S. military forces securing the Persian Gulf. Of particular concern are China's sales to Iran of anti-ship cruise missiles, which pose a threat to oil tanker traffic and American naval vessels operating there. This arms trafficking presents an increasing threat to U.S. global security interests, particularly in the Middle East and Asia. A key component of China's strategy to guarantee access to Persian Gulf oil is the special relations it has cultivated with Saudi Arabia. The ties with Riyadh go back to the mid-1980s when China sold Saudi Arabia intermediate range ballistic missiles. Since then, the relations have grown closer. High-level visits of Chinese leaders to Saudi Arabia culminated in 1999 with President Jiang Zemin's state visit in which he pronounced a "strategic oil partnership" between the two countries. China has offered to sell the Saudis intercontinental ballistic missiles. The Saudis have so far preferred to turn down many of the proposals and limit their procurement from China in order to maintain their special relations with the U.S. But continuous deterioration in Saudi-American relations or, in the longer run, a regime change in the oil kingdom, could drive the Saudis to end their reliance on the U.S. as the sole guarantor of their regime's security and offer

China

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Outside of the Middle East, China’s pursuit of oil could undercut U.S. security interests on multiple fronts: In the South China Sea, China is involved in territorial disputes with Malaysia, the Philippines, Taiwan, Vietnam and Brunei over access to energy in the Spratly and Paracel Islands. In the East China Sea, where rich oil and gas reserves are believed to exist, rivalry is developing between China and Japan over access to energy resources. China has already begun the exploring process for gas reserves on its side of the East China Sea. The Japanese government claims that some of the reserves are actually on its side of the demarcation line and has accused China of attempting to extract hydrocarbons from its water. It also allowed its own oil firms to drill in the disputed territories—a move considered a provocation by China. Another source of tension is access to Russian oil. For many months, China and Japan have been involved in a bidding war over a major pipeline deal to deliver Russian oil from Eastern Siberia. China’s plan calls for a pipeline running to the Manchurian city of Daqing, while Japan is insisting on a pipeline that would run to Nakhodka, the Russian coastal area opposite to Japan. This tense atmosphere is feeding popular and political animosity, which have already resulted in a wave of violent anti-Japanese demonstrations in April 2005, and are likely to deepen over time. In Africa Chinese oil companies turn a blind eye to the way petrodollars are used by the local governments. One place where such indifference impacts America’s effort to fight against corruption and human rights abuse is Sudan. The Chinese have invested more than US$8 billion in joint exploration contracts in this country, including the building of a 900-mile pipeline to the Red Sea, deployed thousands of military personnel disguised as oil workers and provided arms to the Sudanese government to support it in the country's 20year civil war. In September 2004, the United Nations Security Council passed resolution 1564, threatening Sudan with oil sanctions unless it curbed its support for belligerent militia groups in Darfur. To protect its oil interests in Sudan, which supplies seven percent of China’s oil imports, Beijing stated very clearly that it would veto any bid to impose such sanctions. In the meantime, China’s continuing penetration into the Western Hemisphere could have profound economic and political implications for the U.S. Considering the fact that both U.S.’ and Mexico’s domestic crude production are falling, the U.S. cannot afford to lose chunks of the crude produced by the two countries that together supply a third of its oil imports. With less oil available to the American market the U.S. will be forced to seek this oil elsewhere, primarily in the Middle East, hence becoming more dependent on this tumultuous region. In the Western Hemisphere China concluded oil and gas deals with Argentina, Brazil, Peru, and Ecuador. But its main country of interest is Venezuela, U.S.'s fourth largest oil supplier. A series of oil agreements signed in early 2005 allow Chinese companies to explore for oil and gas and set up refineries in Venezuela. Chinese stateowned oil companies have also begun seeking ambitious oil deals in Canada, - the top petroleum supplier to the U.S. - including the acquisition

of Canadian energy companies. Sinopec, one of China's largest state-owned energy companies, is interested in buying stakes in the vast reserves of the Alberta oilsands. The Canadian giant Enbridge is pushing ahead with a plan to build a US$2.5-billion pipeline to transport oil from Alberta to the coast of British Colombia from where it will be shipped across the Pacific to China. Though it is not clear which of these deals will come to fruition, the possibility of Chinese acquisition of portions of Canada's energy industry which could lead to a loss of up to a third of Canada's potential exports to the U.S. - should be a source of concern in Washington. Modernizing China’s oil industry Meanwhile, China has modernized and restructured its domestic oil and gas sector. In 1998, the Chinese government reorganized most state-owned oil and gas assets into two vertically integrated firms -- the China National Petroleum Corporation (CNPC) and the China Petrochemical Corporation (Sinopec). This reorganization created two regionally focused firms -CNPC in the north and west -- and Sinopec in the south, though CNPC is still tilted toward crude oil production and Sinopec toward refining. The two enterprises shed millions of unneeded workers, scrapped some of their least profitable operations, and hired Western banks to help dress up subsidiaries for listing on exchanges in Hong Kong and New York. 1 Before the restructuring, CNPC had been engaged mainly in oil and gas exploration and production, while Sinopec had been engaged in refining and distribution. The other major state sector firm in China is China National Offshore Oil Corporation (CNOOC), which handles offshore exploration and production and accounts for more than 10 percent of China's domestic crude oil production. Regulatory oversight of the industry now is the responsibility of the State Energy Administration (SEA) which was created in early 2003. The intention of the restructuring was to make these state firms more like vertically integrated corporate entities elsewhere. In connection with this process, the firms have been spinning off or eliminating many unprofitable ancillary activities such as running housing units, hospitals, and other services near company facilities. Massive layoffs also have been undertaken, as like many other Chinese state-owned enterprises, they were severely overstaffed. Because China has chosen for the capitalist road to socialism, it has brought large assets of its oil and gas industry to the stock market. Over the last decade China's petroleum industry has undergone major changes. In 1998, the Chinese government reorganized most state-owned oil and gas assets into two vertically integrated firms -- the China National Petroleum Corporation (CNPC) and the China Petrochemical Corporation (Sinopec). This reorganization created two regionally focused firms -- CNPC in the north and west -- and Sinopec in the south, though CNPC is still tilted toward crude oil production and Sinopec toward refining. The two enterprises shed millions of unneeded workers, scrapped some of their least profitable operations, and hired Western banks to help dress up subsidiaries 1

Subsidiaries of PetroChina and Sinopec fetched US$7.5 billion in offerings to foreign investors. One of them is Warren Buffett, who took in 2004 a 13 percent stake in PetroChina.

for listing on exchanges in Hong Kong and New York. 2 Before the restructuring, CNPC had been engaged mainly in oil and gas exploration and production, while Sinopec had been engaged in refining and distribution. The other major state sector firm in China is China National Offshore Oil Corporation (CNOOC), which handles offshore exploration and production and accounts for more than 10 percent of China's domestic crude oil production. Regulatory oversight of the industry now is the responsibility of the in early 2003 created State Energy Administration (SEA). The intention of the restructuring was to make these state firms more like vertically integrated corporate entities elsewhere. In connection with this process, the firms have been spinning off or eliminating many unprofitable ancillary activities such as running housing units, hospitals, and other services near company facilities. Massive layoffs also have been undertaken. The oil sector of Mainland China was opened to foreign capital in order to facilitate the import of Western technology and adequate management skills. Some aspects of these stock offerings were atypical. First, they all involved only minority stakes. Second, they did not give the foreign investors a major voice in corporate governance. The Chinese government still holds majority stakes in all three firms, and the foreign investors have not received seats on their boards of directors. Analysts have generally seen these investments as attempts by the supermajors to gain a foothold in China, which will necessarily involve partnerships with the Chinese majors. Even with the opening to foreign investment envisioned in China's commitments for membership in the WTO, it is still likely that almost all major oil and gas projects in China will involve one of the Chinese majors. Because of WTO concessions granting some rights, all three of the global supermajors (BP, ExxonMobil, Shell) are entering the Chinese retail market in partnership with CNPC, Sinopec, or both. After a period of consolidation in the Chinese refining industry, in which dozens of small refineries were shut down, the major Chinese oil companies are again seeking to add capacity. A major issue for the Chinese downstream sector is the lack of adequate refining capacity suitable for heavier Middle Eastern crude oil, which will become a necessity as Chinese import demand rises in the mid-term future. Several existing refineries are being upgraded to handle heavier and more sour grades of crude oil. In addition, China has embarked on a major expansion of its gas infrastructure. Until the 1990s, natural gas was used largely as a feedstock for fertilizer plants, with little use for electricity generation. Natural gas currently accounts for only around 3 percent of total energy consumption in China. One major hurdle for natural gas projects in China is the lack of a unified regulatory system. Currently, natural gas prices are governed by a patchwork of local regulations. The Chinese government is in the process of drafting a new legal framework for the natural gas sector. The country's largest reserves of natural gas are located in western and north-central China, necessitating a significant further investment in pipeline 2

Subsidiaries of PetroChina and Sinopec fetched US$7.5 billion in offerings to foreign investors. One of them is Warren Buffett, who took in 2004 a 13 percent stake in PetroChina.

infrastructure to carry it to eastern cities. Recently, CNPC completed construction of its main natural gas backbone, the "West-to-East Pipeline". Most Chinese oil production capacity, close to 85 percent, is located onshore. Offshore oil development is a high-priority project China is carrying out with the technical and financial help of foreign companies. The country’s determination to minimize dependence on oil from the Middle East will tempt Beijing into an alliance with Russia and Kazakhstan and to overspend on grandiose pipeline projects. By 2000, China became interested in tapping oil in Siberian fields. The Russian ally With the arrival of President Vladimir Putin Sino-Russian relations could gain a good momentum of growth. By 2001, Putin started advocating a rapprochement with China for economic reasons. Keywords used by Chinese officials were “mutual political trust deepening” and “improving economic cooperation”. Significant efforts were made to strengthen bilateral ties, including the ratification of an additional agreement on the eastern part of Sino-Russian border by respective parliaments, the launching of a consultation mechanism on national security and the reaching of an agreement on further boosting cooperation in energy and investment between the two countries. In 2001 the Sino-Russian Good-neighbourly Treaty of Friendship and Cooperation was signed. In May 2003, in a joint statement both countries declared that a new era of development in the China-Russia “strategic partnership of cooperation” had begun. Meanwhile, China has done little to encourage the economic ties that might have bound the new Russia closer. Obviously, China was only interested in Russia’s oil and gas fields in Siberia. Today, China is Russia's largest customer for arms, a business likely to continue for the moment because of US success at preventing the lifting of the EU arms embargo and also containing Israeli military dealings with Beijing. As Chinese and Russian leaders have pointed out, bilateral relations are now at their best in history. As major powers in the world and permanent members of the United Nations Security Council, China and Russia share the same or similar positions. Both heads of state hold annual talks, meet each other at least three times a year, including on such occasions as the Economic Leaders' Meeting of the Asia-Pacific Economic Cooperation (APEC) forum and the Shanghai Cooperation Organization (SCO) summit. China no longer feels threatened by the political model of post-Communist Russia. On the contrary, Chinese Communists can point to Russia in the 1990s as a lesson in the costs and dangers of rushing towards democracy. A number of bilateral cooperation documents on finance, energy electricity and other fields were signed and the two sides decided to hold a "Russia Year" in China and a "China Year" in Russia, respectively in 2006 and 2007. The two sides decided to further carry out the cooperative projects in the fields of oil and gas including the construction of crude oil pipelines and joint exploration of oil and gas fields in both countries. The amount of crude oil shipped from Russia to China should increase to not 15 million tons in the coming years.

Since Putin’s arrival, investment and energy issues have always topped the agenda of the bilateral summits in Moscow. After a record US$21.2 billion in 2004, trade between Russia and China was expected to grow by more than 25 per cent a year. Russia indicated that China could invest up to US$12 billion in Russia by 2020. Both countries have long eyed bilateral projects in energy infrastructure. Both want to revive a project to build a 2,600 km power transmission line from the Irkutsk region in Siberia to China. China's hopes of winning a share of the oil pipeline running from western Siberia to the port of Nakhodka was not fulfilled. All the same, Russia pledged to increase its total oil deliveries to China by rail. Because of strong demand from Europe and Japan Moscow is apparently reluctant to promise Beijing exclusive access to its Siberian oil and gas riches. Meanwhile, in terms of international diplomacy, Russia seems keen to develop broad discussions on energy issues not only with China, but with other major Asian players as well. These main players are situated in Central Asia, in Russia’s sphere of influence. Central Asian states such as Azerbaijan, Kazakhstan, Turkmenistan, Kyrgyzstan and Uzbekistan have according to estimates 200 billion barrels of crude reserves (a quarter of the world’s total). Nonetheless, China’s influence in the region is growing. Kazakhstan, because of its size and oil-richness, has become one of China’s main strategic partners in Central Asia. Kazakhstan’s oil output has grown annually at about 15 percent and accounts for roughly 25 percent of GDP. By actively joining the Kazakh oil race, China is pursuing two goals. The first is to supply its economy with hydrocarbons. The second is to diversify China’s oil supply sources. In order to increase their production capacity, CNPC and Sinopec are acquiring stakes in other firms operating on the Kazakh market. Meanwhile, Chinese companies are preparing for future pipeline deliveries to China. CNPC’s annual oil production in Kazakhstan is approximately 6 million tons. By 2010 CNPC’s total output in Kazakhstan is expected to grow to 14 million tons. Sinopec will have begun large-scale development of its blocks by that time. Conclusion Summing up, we can see how China is responding to the challenge of its dependency on imported oil from the Middle East. Yet failing to obtain reliable access and control, China’s only avenue of escaping excessive dependence upon any one producer or region is to diversify its sources of global access to energy. Its responses are threefold. First, China is determined to minimize dependence on oil from the Middle East and, therefore, the Chinese rulers are aggressively purchasing hydrocarbon assets at high prices all around the world. Second, the rulers in Beijing are vigorously modernizing and rationalizing their energy sector by investing in pipeline networks and offshore drilling. Third, after having formed joint ventures with foreign oil companies, China is increasing its drilling and crude oil refining capacity. These three responses are intertwined with geopolitical options concerning Central Asia, Latin America and Africa. Friendly relations were established with Russia after the advent of Putin in

2000. In addition, China’s hunger for hydrocarbons incited the Chinese government to penetrate into the Central Asian oilfields.