FEATURES:
China’s Quest for Energy

By Heinrich Kreft

Resource diplomacy in a global market

China’s journey in just 25 years from the periphery to the center of the world economy is truly phenomenal. It took both Britain and the United States far longer to achieve the share of global output and trade that China has today.

China’s huge appetite for energy and resources — it is the world’s No. 1 consumer of coal, steel, and copper and as an oil and electricity consumer is second only to the U.S. — has contributed to the soaring of prices on global oil and commodity markets. At the same time, cheap Chinese goods of high and ever higher quality are flooding world markets and endangering jobs both in industrialized countries in the North and developing countries in the South. China features increasingly often on the agenda of U.S. congressional hearings and is an issue for politicians in European capitals as well as those of many developing countries. The Chinese challenge is of global dimensions. When Japan aspired in the late 1980s to take over from the U.S. as the world’s leading economic player, Washington and Brussels lost no time in responding. The fact is, however, that China’s growing economic and political clout poses a far greater challenge to the international status quo than Japan’s ambitions, which by the early nineties had suffered a severe setback. The rise of China has a global impact in a host of different ways and requires in-depth analysis. The purpose of this article is to examine how China is attempting — notably through an “energy-driven foreign policy” — to secure the fuel supplies it needs and to reflect on the implications this may have for the international community as a whole.

Growing demand for energy

In terms of energy consumption, the People’s Republic of China is now second only to the United States. Its growing appetite for energy is the product of the country’s 25-year-long economic boom, which has seen expanding external trade, rising incomes, a growing popula­tion, and increasing urbanization. Demand for energy has soared across the whole spectrum — coal, oil, gas, electricity, hydropower, and other renewables, as well as nuclear power. Thanks to its own vast reserves, coal is currently China’s No. 1 fuel and supplies two-thirds of its energy needs. The rapid pace of economic growth has led to spiraling demand, how­ever, for oil in particular. Following the government’s decision to expand natural gas produc­tion, gas is likely in future to play a larger role in meeting the country’s energy needs. With dependence on fuel imports clearly set to increase, the government is making strenuous efforts to enhance security of supply. Beijing’s biggest worry at present is the security of oil supplies. Until recently China was self-sufficient in oil and into the early nineties even exported limited quantities. The country first started importing oil in 1993, and since then imports have risen steeply. Since the mid-sixties China has been Asia’s largest oil producer, producing in recent years some 3.5 million barrels per day (bpd). Despite the expansion of production, demand has continually outstripped supply. From 1984 to 1995 demand leaped from 1.7 million to 3.4 million bpd, and by 2005 it had doubled again to 6.8 million bpd. China overtook Japan as the world’s second largest oil consumer in 2003 and is now the third largest oil importer after the United States and Japan. Today China imports over 40 percent of its oil supplies.

In response to this situation, China’s leaders have launched an all-out program of domestic reform as well as a global import security strategy. Their aim is to keep production going on the traditional oilfields in the northeastern part of the country while at the same time expanding pro­duction in western China (a “stabilize-the-East, develop-the-West policy”). High priority is being given to developing offshore oil fields in both the South China and East China Seas, although results so far have been unimpressive. The country’s own oil industry has been repeatedly restructured to make it more competitive and efficient as well as to allow a greater measure of price regulation through the market. As all observers agree, however, these meas­ures are unlikely to result in any significant increase in oil production in the near future, while the rise in demand for oil and oil imports is set to continue unchecked. The International Energy Agency (iea) forecasts a fivefold increase in China’s oil imports, from around 2 million bpd in 2002 to almost 11 million bpd by 2030. This would mean China would have to import some 80 percent of its oil supplies.¹ That its dependence on oil imports is unavoidable and will become even greater over the years ahead is a fact China’s leaders are already having to face.² Like its Asian neighbors, China also relies heavily on oil imports from the Persian Gulf. By 2015 it will be importing some 70 percent of its oil from the Middle East, with the rest being supplied by pipeline, rail or tanker from Russia, Central Asia, Africa, and possibly from Latin America, too, in limited quantities.

In recent years, China’s demand for electricity has soared as well. Its huge coal reserves are the mainstay of its power industry, and the country is the world’s leading coal producer and con­sumer. Coal supplies two-thirds of its total energy needs and fuels 80 percent of its electric power generation. On present estimates, coal consumption is set to double between 2001 and 2025, a trend likely to cause enormous problems for health and the environment and make China responsible for one-quarter of the world’s co₂ gas emissions. Although small amounts of coal are currently being exported, China could — despite its vast reserves — be importing coal by 2015.

Soaring demand for electricity is also fueling ambitious plans to expand the nuclear power industry. Over the next two decades China is aiming to commission two new nuclear power plants each year. New hydropower capacity is to be developed and the use of other renew­ables (primarily solar and wind energy) expanded, although these are not expected to play a major role in meeting the country’s electricity needs. The goal announced at last November’s energy conference in Beijing — to raise the share of renewables in power generation to 10 percent by 2010 and as much as 15 percent by 2015 — is probably too ambitious.

China is largely self-sufficient in gas, although its 3 percent share of the country’s energy mix is extremely modest by international standards. The government is keen to see the share of gas-fueled generation increase at the expense of coal, with gas meeting 8–10 percent of the country’s energy needs by 2020. It is investing heavily in gas exploration as well as new pipelines to bring the gas from the north and west of the country to the cities of the south and along the east coast and to supply private households and industry in these boom regions. Work was recently completed on a 4,000–km pipeline to transport gas from Xinjiang in the west to Shanghai.

While the contribution of gas to meeting China’s energy needs is important, especially from an environmental standpoint, and gas therefore plays a crucial role in national energy policy, this also serves to enhance its dependence on imported fuel. From 2010 onwards domestic gas production will no longer suffice to meet China’s needs. It will begin importing liquefied natural gas (lng) in 2007 as soon as its first lng terminal in Guangdong Province has been completed. A whole series of terminals along the coast is due to follow. By 2025 gas imports are expected to account for 40 percent of China’s total consumption. The bulk of its lng imports are likely to come from within the Asia-Pacific region — Australia, Indonesia, Malaysia, Brunei, and East Timor — but some may also be shipped from Persian Gulf countries such as Qatar, Iran, Oman, and possibly Yemen as well. There is a high probability, too, that China will import natural gas from eastern Siberia, where Russia is planning to build a major pipe­line network.

This all points to one conclusion: Despite China’s systematic efforts to expand domestic fuel production, the trend towards increasing dependence on fuel imports is irreversible. While this dependence is most marked in the case of oil, dependence on gas imports, too, is set to increase steeply over the years ahead. This dependence, coupled with rising demand for elec­tricity, may cause China to make policy choices that have major environmental and security implications and could also compromise nuclear nonproliferation.

China’s growing energy insecurity

China’s economic growth depends to a large extent on how far Beijing succeeds in meeting its expanding energy needs. Its increasing dependence on fuel imports has generated among the nation’s leaders a strong sense of insecurity and concerns that an interruption of fuel supplies or unforeseeable price rises could put the brakes on growth. Any slowdown might lead, they fear, to social unrest, which could in turn undermine their own power as well as Communist Party control. Hence, energy security is seen as closely linked to political and economic sta­bility and as a key factor in maintaining the Party’s leading role and keeping it firmly in control.

In this context, the issue of fuel supplies is right at the top of the national security agenda. Energy security is viewed as far too important to be left to market forces alone, given the growing risks to the nation’s prosperity due to supply bottlenecks in other parts of the world and the unpredictable nature of global energy policy. With energy security now a top priority, Beijing has launched a global drive to secure the country’s fuel supplies.

The 9/11 terrorist attacks on the United States, the predominantly American “war on terror,” and the military interventions in Afghanistan and Iraq have all combined to heighten China’s sense of insecurity and vulnerability. It is particularly concerned about the possibility of terrorist attacks on its energy infrastructure or highly vulnerable sections — the Straits of Hormuz and Malacca, for example — of the sea lanes from the Middle East. In 2003, 15 million bpd was shipped through the Straits of Hormuz in the Persian Gulf, of which 10 million was shipped on through the Straits of Malacca between Indonesia and Malaysia. A further million bpd of African oil also passes through these Straits en route to northeast Asia. This means, therefore, that over 50 percent of Asia’s daily fuel supplies passes through the Malacca Straits every day.³ Beijing is concerned that what it views as a U.S. overreaction to the 9/11 terrorist attacks could further destabilize the already far from stable oil-producing regions of the Middle East and Central Asia.⁴ Given that China sees the U.S. in the long term as a strategic competitor, any expansion of U.S. influence in Central Asia and the Persian Gulf is liable to exacerbate its fears of encirclement. That the Persian Gulf, a region of strategic importance for the world’s oil supplies, is under U.S. sway is a view widely shared outside China as well. The sea lanes through the Indian Ocean to northeast Asia, the main supply route for China’s oil, are under the con­trol of the U.S. navy. It is hardly surprising that Beijing is concerned not only about how this affects its own strategic leverage but also about the implications of this situation for China’s econ­omy as well as the social and political stability ultimately of the whole country.

As a country increasingly dependent on oil, China believes the U.S. and the major Western oil companies wield too much influence over the world oil market and the oil industry. High oil prices and concerns over world oil shortages serve to heighten Beijing’s sense of vulnerability. This is compounded by the fact that it feels excluded from the global institutions created to regulate global energy supplies, notably the iea, although it does participate in the Inter­national Energy Forum, a body which brings together both oil producers and consumers.

China’s energy diplomacy

China is responding to these challenges by pursuing a global energy policy on several fronts. The aim is to enhance the country’s energy security so as to reduce its vulnerability to fuel shortages or price shocks. The end result is a zero-sum energy strategy based on a strongly neomercantilist approach and aimed at acquiring direct control over overseas oil and gas reserves. This is to be achieved first through the purchase of foreign oil and gas fields by the three major Chinese oil companies, cnpc, Sinopec, and cnooc, and second through the conclusion of pipeline agreements with neighboring countries providing for oil and gas to be supplied directly to China. Beijing’s proactive energy diplomacy seeks to forge closer ties with leading oil and gas exporters through an extensive program of two-way visits and finan­cial and economic assistance aimed at expanding trade and intensified military contacts. The main focus of this diplomatic drive is, of course, the Persian Gulf, along with Central Asia, Russia, Africa, and Latin America, as well as, more recently, Canada. As a result of these efforts, the Chinese government has concluded “strategic energy alliances” with at least eight countries over the past five years.

The results of China’s energy diplomacy are being watched with growing unease, especially in Asia but in other parts of the world as well. In many quarters the dramatic increase in oil prices is attributed to China’s huge and growing appetite for fuel. It is certainly true that the 14 percent rise in China’s demand for fuel in 2004 alone contributed to the latest hikes in oil prices. Nevertheless, China accounted for only around 30 percent of last year’s 2.8 million bpd increase in global oil demand, a figure in line with its average contribution to the rise in global oil demand over the past decade. Between 2000 and 2004 demand for oil in China rose by 1.5 million bpd, only slightly above the 1.3 million bpd increase in U.S. demand. This strong growth in world demand for oil is due first and foremost to the economic recovery under way since mid-2003. The main reason for the current high oil price is the lack of new production capacity coupled with continuing refining bottlenecks.

Another aspect of China’s drive for energy security may be of greater significance. One element of Beijing’s neomercantilist oil strategy is its attempt via Chinese oil com­panies to gain direct control of oil production in major oil-exporting countries. The aim is to ensure that the output of oilfields under Beijing’s control is exported directly to China and not sold on the world oil market as the output of most oil multinationals is. If China succeeds in the attempt to meet its energy needs by turning certain countries into its own exclusive suppliers, the capacity of the world oil market to respond flexibly to sudden shortages or increased demand will be significantly reduced. The 1973–74 oil shock taught the Western industrialized countries that playing a zero-sum game in a crisis merely makes matters worse, as the effect is to diminish the market’s scope to respond to oil shortages flexibly and efficiently. It was due to this insight that the iea was established with the aim of preventing a scramble for oil that would pit one country against another and cause only worse shortages and even higher prices. The main focus of Western strategy ever since has been to diversify oil production and ensure that as much as possible reaches the world oil market, where allocation is regulated by market forces.

There is a danger that China’s neomercantilist strategy to bolster energy security by gaining direct control both of oil and gas fields and supply routes could result in escalating tensions in an already volatile region that lacks regional institutions for conflict resolution and is in the midst of a difficult transition process, which is due in fact to the rise of China. Competition for energy is exacerbating existing rivalries between China and a number of its neighbors. For some time now, China and Japan have been engaged in intense diplomatic efforts to secure their own preferred routes for a new Russian pipeline to bring oil from eastern Siberia to the Pacific coast. They are also embroiled in a dispute over a small offshore gas field in the East China Sea to which both have laid claim. These issues have heightened existing tensions between Tokyo and Beijing and caused a further deterioration in their relations. To view this scramble for energy as a purely Chinese phe­nomenon would be mistaken, however. There is abundant evidence for the spread of a virulent form of “energy nationalism” right across Asia, which is fueling long-standing rivalries. To enhance the security of fuel imports and supply routes, all of Asia’s major economic players — alongside China Japan, India, and South Korea and, increasingly, a number of Southeast Asian countries as well — have opted for neomercantilist and/or nationalistic policies that hinder the emergence of cooperative and market-oriented approaches aimed at developing joint responses to the energy security problem, which for all of them poses a similar challenge.

China’s increasing reliance on foreign oil imported from unstable regions over huge dis­tances via sea lanes that are difficult to control has had a notable impact on its military planning. According to some Western experts, Beijing is intent on expanding its naval capacity well beyond what is required to protect its coasts and the Straits of Taiwan. In support of this view they point to the sizable submarine fleet Beijing has built up as well as its efforts to conclude agreements on the use of port facilities along the tanker routes in the South China Sea and in Myanmar, Bangladesh, and Pakistan. Such moves could cause friction if China fails to seek cooperation with other Asian countries with similar con­cerns and above all the United States, on which, at least until the second half of the century, the security of the world’s sea lanes will depend.

Through its active energy diplomacy, China has in recent years become a major actor in a large number of commodity- and energy-rich countries and regions. It has concluded energy alliances with and in many cases invested heavily in a whole series of international pariahs, including Sudan, Iran, Myanmar, Venezuela, and Uzbekistan. China’s largest investments in the outside oil sector are in Sudan. Beijing has been accused of undermining the un sanctions imposed on Khartoum in response to massive human rights violations in Darfur and opposing moves to increase their severity and scope. In Myanmar China is continuing to expand its activities; with Uzbekistan it recently concluded a deal on substantial investments in the country’s energy industry; and with Venezuela’s populist and anti-American President Chavez it has signed a strategic energy alliance. Looking beyond oil to commodities in general, it is striking to see what efforts China is also putting into intensifying relations with Robert Mugabe’s Zimbabwe, another international pariah. This clearly runs counter to everything the international community is doing to promote respect for human rights and good governance.

In the medium term, China’s efforts to enhance its energy security are likely to increase its influence in the Middle East. This will pose a challenge to U.S. dominance of this part of the world and further complicate the already difficult relations the U.S. has with a number of countries in the region, notably Iran, as the current dispute over Iran’s nuclear ambitions — also viewed in Europe as a threat — has amply demonstrated. Even today almost two-thirds of Middle East oil is destined for Asia, a trend likely in future to become still more marked. A number of Gulf countries, including Saudi Arabia, are following Iran’s example and actively expanding their relations with China in order to reduce their one-sided reliance on the United States.

Another important focus of China’s energy diplomacy is Russia and Central Asia. The new Sino-Russian rapprochement of recent years has been driven partly by China’s interest in Russian armaments but mainly by its insatiable appetite for energy. From Moscow’s point of view, the current Sino-Japanese competition for Russian oil (and gas) greatly enhances its prospects for an Asian comeback. Given its concerns over China’s new stature and growing economic and political clout as well as the pressures exerted on Siberia and throughout the Far East by China’s expanding population, Moscow is deter­mined to employ its energy trump card as effectively as possible. That is the real motive for Moscow’s decision to pipe its oil to the Pacific coast through its own territory, a decision that caused visible frustration in Beijing even though Moscow has now agreed to build a branch pipeline to China. China meanwhile, keenly aware of the vast energy reserves of Central Asia and mindful of the stability of the five Central Asian countries and the importance of securing its fuel imports from the region, has been steadily expanding the Shanghai Cooperation Organization. It has invested heavily in the Khazakh energy sector and recently outbid an Indian company for the Canadian-based PetroKazakhstan. Together with Kazakhstan, Beijing is in the process of building a large pipeline to western China.

What is to be done?

China’s rising demand for oil and Beijing’s drive for energy security are a political challenge of global dimensions. Failure to persuade China of the need for a cooperative approach in this area could have disastrous consequences not only for the environment, and especially the world climate (global warming), but also for the vitality of the world economy, stability and peace in Asia and elsewhere, and indeed the international order as a whole. China clearly needs assistance if it is to improve energy efficiency and make greater use of renewables, for that is the only way to check the soaring rise in energy consumption, the main cause of the prevailing sense of insecurity about the nation’s fuel supplies.

Seen in this light, it would be important to explore ways of encouraging China to have greater confidence in the world oil market and view it as a cooperative alternative to its neomercan­tilist energy diplomacy, for the danger of its current strategy is that the efficient functioning of the market could be undermined in the medium term to the detriment of all concerned. Thought should likewise be given to how best to integrate China into global arrangements for collective oil stocks and reserves management, in which the iea plays a pivotal role. At key locations along its eastern coast, China is planning to build four new oil depots, which will be used to store part of its strategic reserve. It would surely make sense for China to coordinate these efforts and its contingency plans with the iea so as to ensure that these reserves are put to the best possible use in the event of a crisis.

One way to address the security implications associated with the trend toward “energy national­ism” in Asia might be to develop regional energy institutions to promote multilateral energy projects and regional cooperation. Various existing institutions — apec, arf, and asem — could provide a platform for a really useful dialogue on energy and offer the further advantage that their membership includes players from outside the region, such as the U.S. and the eu, which have a stake in the region’s stability. A whole series of initiatives are under way aimed at involving China in international cooperation in the energy sector (g8, notably Glen­eagles and follow-up; eu, notably the eu-China summit; a host of bilateral activities, also by Germany, on renewables; the International Energy Forum under iea auspices). These efforts must be taken forward with all possible speed, for the challenge posed by China’s appetite for energy is a challenge of global dimensions.

If energy issues are not dealt with by constructive cooperation, or if cooperation fails, the risk is high that they will become a source of competition, misperceptions, mistrust, and excuses for obstructing one another’s interests. If Beijing believes that the U.S. and others are trying to use energy politics as a means to contain China, then it should not be surprising that it will be trying to use its growing energy influence to undermine Western foreign and security policies. This could include increasing “hoarding” of oil and gas fields and supplies, even closer ties to and ever more investments in pariah states, the promotion of security cooperation with anti-Western governments, and possibly a politization of global energy markets.

Such an environment could very well increase the influence of hard-liners within the Chinese leadership who perceive the U.S. as a threat to China’s rise and want to increase military strength — and in particular develop blue water capabilities in order to challenge the U.S. control of the sea lanes of communications through which China’s growing imports of oil (and lng) are flowing — and generally decrease American influence in the region. Such a move would greatly concern other Asian powers from Japan and South Korea in Northeast Asia, over the asean countries in the Southeast, to India in South Asia. Not only an arms race, but a wide range of negative outcomes could be imagined. Therefore, it is in the best interests of all — China, the U.S., European and Asian countries — to try to understand each other’s energy insecurities and develop new ways for cooperation.

¹ International Energy Agency, World Energy Outlook, 2004, oecd, Paris.

² Inside China this is the subject of a surprisingly broad and lively debate. See, for example, Erica S. Downs, “The Chinese Energy Security Debate,” China Quarterly 177 (March 2004).

³ “World Oil Transit Chokepoints,” Energy Information Administration, U.S. Department of Energy (April 2004).

⁴ This fear was repeatedly expressed by all Chinese speakers at a conference on energy security organized by the German Konrad Adenauer Foundation and three Chinese institutions in April 2006 in Beijing.