MIDDLE KINGDOM AND THE MIDDLE EAST: THE ENERGY CONNECTION

It was exactly one decade ago that China became a net oil importer. That makes it one of the late arrivals in the global energy game. Since then, however, its accelerating industrialization has made it increasingly dependent on imported oil. Today, China’s primary energy consumption amounts to a tenth of total global consumption, and it accounts for more than a tenth of the world’s carbon emissions. China has the largest coal reserves on earth; making its energy mix heavily dependent on coal. Oil makes up only twenty per cent of its overall energy consumption. It produces 3.3 million barrels a day (mbd) of oil and consumes 4.7 mbd with imports filling the gap. It currently spends around US$15 billion a year on oil imports, which constitutes 6 percent of its export earnings.

In this last decade, China’s oil consumption has grown 6 percent annually, while the growth in its oil production has been less than 2 per cent. For every percentage-point growth in its economy, China is projected to register an equal percentage growth in oil consumption. Moreover, although China’s industrial and commercial growth is in the east and south of the country, the onshore reserves of coal, oil and hydropower are located in the north and west. Production in its mature oil fields is stagnating, and has not been augmented in recent years by any new discoveries of energy resources. As a result, China faces a likely future oil supply deficit. By the year 2020, it is expected to be importing 8 mbd, which would be four times the projected domestic output in that year. By then, China would have become the second largest consumer of oil in the world–after the United States.

OIL IMPORT DEPENDENCE
A net oil exporter until 1993, Beijing has been importing small amounts of oil regularly since 1950. Aside from the Persian Gulf countries, Indonesia, Malaysia and Singapore have been the traditional providers of energy to China. Beijing has been forced gradually to abandon a policy of energy self-sufficiency as imported energy has fed the country’s economic growth. Once it became a net importer, China was quick to grasp the implications of its energy vulnerability. In May of 1997 then Premier Li Peng advocated Chinese involvement in the exploration and development of foreign energy sources with a view to securing stable, long-term supplies. Since then, China has made energy-related investments in Argentina, Bangladesh, Canada, Columbia, Ecuador, Indonesia, Kazakhstan, Malaysia, Myanmar, Mexico, Mongolia, Nigeria, Pakistan, Papua New Guinea, Peru, Russia, Thailand, Turkmenistan, Venezuela and the United States. And of course, in various countries in the Middle East.

The share of oil imports from China’s traditional suppliers in the Asia-Pacific region has continued to decline as the share of imports from the Middle East has grown steadily. In 1996 the Gulf for the first time accounted for more than half (53.5 percent) of China’s crude oil imports, which stood at 22.6 million tons. By 2010, roughly 95 percent of its imported oil is projected to come from the Middle East.

China’s initial oil deals with Oman and Yemen, and its Hajj missions to Saudi Arabia, bear almost no resemblance to the expanse and depth of its involvement in the region today. Since 1991 it has developed and is producing oil in two oil fields in Sudan. In 1997 it signed a contract for the integrated development of the Sudanese oil industry in partnership with Canada and Malaysia. The United States accuses it of having stationed thousands of ex-servicemen in Sudan.

Kuwait has likewise entrusted China to develop its largest offshore gas field, while the Iraqis have entered into a production-sharing agreement with China in the al-Ahdab oil fields. To be implemented over the next 22 to 26 years, production there is expected to reach 100,000 barrels per day. The Chinese have pledged to invest more than a billion dollars in the project, while also acquiring rights in at least four additional Kuwaiti oil fields. The UN sanctions and the US threat of war against Iraq have thus far prevented any work being initiated in the designated areas, however, and prospects for the future remain uncertain.

In 1999, China and Saudi Arabia entered into an agreement under which China will allow Saudi companies to make downstream refinery investments in China. In return, Chinese companies will be active in upstream oil activities in Saudi Arabia. SINOPEC, the Chinese Petrochemical Corporation, and the ARAMCO Overseas Company have also agreed to construct a petrochemical complex in Quanzhou city (Fujian province). The complex will process eight million tons of Saudi crude oil and produce, among other things, ethylene, polyethylene and polypropylene. The Saudis will provide US$750 million out of the total US$3 billion investment.

In late 1999, the China National Petroleum Company (CNPC) and two other Chinese firms opened negotiations with the National Iranian Oil Company (NIOC) for a north-south oil pipeline across Iran. Like China, the oil geography in Iran is less than optimal. Its oil fields are located in the southwest of the country and along the Gulf coast. The main refining centers, however, are in the north–in Tehran, Arak and Tabriz. The domestic markets, including urban centers and industries, are also in the north. The proposed pipeline will run from Iran’s Caspian port of Neka in the north to the refinery in Tehran. It will be a short-haul route of 400 kilometers and will cost US$360 million. Compared to the grandiose Baku-Ceyhan scheme, which would run some 2000 kilometers and cost billions of dollars, the Neka-Tehran line would be cheaper and less technologically demanding. As envisioned, the pipeline will handle Iranian swap deals with Turkmenistan and Kazakhstan. Once the oil is refined in Tehran, plans call for it to be taken to the port of Bandar Abbas, where it could be shipped to China. Later, the oil from a Chinese concession in Western Kazakhstan could also be routed through the pipeline. In addition, negotiations are ongoing over a possible joint venture to develop the Bilal offshore oil fields in Iran.

PROTECTING THE PRODUCERS AND GUARDING OIL SUPPLIES
Beijing entered the burgeoning arms bazaar of the Middle East in a big way in the 1980s. In March of 1988 it was disclosed that an unspecified number of DF-3 ballistic missiles had been delivered to Saudi Arabia. To date, China is believed to have sold 120 units of the missile, which has a range of 3,500 kilometers and is capable of carrying nuclear, chemical and biological warheads. Iran has also received from China ballistic missiles, anti-ship cruise missiles and missile technology. Beijing, meanwhile, is building five oil tankers for Iran and is constructing Tehran’s underground railway.

China has traditionally been a land power concerned with its land borders. It was only in the late eighteenth century that it gradually started building a navy. To guard its oil well possessions abroad and to guarantee the flow of oil from there, China will of necessity become involved militarily in the Gulf and seek a presence there. The country’s development of a blue-water navy can be seen in this light. Beijing is also helping Pakistan build its Gwadar port, which is not far from the Strait of Hormuz. The twenty-first century may well witness aggressive competition–and also conflicts–over oil between China and the United States.

Dr. Gulshan Dietl was formerly a Professor with the Center for West Asian and African Studies, Jawaharlal Nehru University, New Delhi.