[A-List] China: oil worries

["Michael Keaney" <michael.keaney@xxxxxx>]

Oil needs drive China west
By Phar Kim Beng
Asia Times, November 20 2002

As an emerging global actor, China has been surprisingly quiet in West Asia.
In contrast, during the Cultural Revolution, when China's geopolitical
presence was at its weakest, Beijing took to supporting Palestinian factions
and Persian Gulf militants, in what has been called "the radicalism of
impotence".

China can no longer remain on the sidelines, however. In due course, it has
to be concerned with the political maneuverings in West Asia. This is
because China's emphasis on modernization has required extensive financing
and increasing access to oil in West Asia, especially Saudi Arabia, Kuwait,
Iraq and Iran. Since November 1993, China has been a net importer of oil,
while double-digit growth in its energy-deficient southern provinces has
steadily swelled China's shortfall, despite repeated efforts to reduce it.

By 2000, for instance, out of a total consumption of 200 million tons, China
imported 70 million tons of crude oil, of which up to 50 million tons came
from West Asia. According to Chinese projections, imports will surpass 100
million tons by 2005, which will then account for 45 percent of the
country's total oil requirements.

Some Western analysts have predicted that by 2020 China will be importing as
much as 75 percent of its oil, although estimates offered by the Asian
Development Bank conservatively peg the figure at 38 percent. Regardless of
which figure one may use, China remains vulnerable.

Although China imports mainly from West Asia, due to the region's political
volatility it has also tried to diversify by reaching out to Russia, a
rising oil exporter. On September 8, 2001, three days before the fateful
attacks on the Pentagon and World Trade Center, China and Russia signed a
US$ 1.7 billion feasibility study for a proposed 2,400-kilometer pipeline
that by 2010 would deliver 30 million tons of Russian oil to Chinese
refineries each year.

The strategy to import from Russia is, however, not entirely risk free. The
one factor that constricts the ability of Russia to increase exports is
infrastructure - namely, inadequate pipelines and port facilities. Since
American firms possess the technological wherewithal and capital funding to
assist Russia, the latter's export and piping routes will likely mirror the
preferences of the United States. This puts China in an acute position as
the two combined could potentially compromise its national interest.

China has tried to adopt three strategies to buttress its position as its
energy needs deepen. Plans are now afoot to build a strategic reserve of 6
million tons of imported oil that will guarantee up to one month's supply by
2005.

Although the inspiration is the US Strategic Petroleum Reserve (SPR), which
protects against any shortage, China is now contemplating the Japanese mode
of oil reserve construction, which is composed of government oil reserves
and enterprise oil reserves. Japan's government oil reserves mainly handle
crude oil imports, while those of enterprises deal with both crude oil and
finished oil products. China's target is not as ambitious as the SPR or
Japan's strategic reserve however, as the latter can hold reserves
equivalent to 90 days of imports.

Building China's stockpile to the equivalent of one month's imports may take
three years because of current high prices. At US$30 a barrel, a 25-day
reserve for China could cost up to US$1.5 billion. Thus China has to wait
until the price comes to less than US$15 a barrel to make the plan viable.
Such a wait could set China's strategic plan back by five years at least.

Another strategy is to develop China's own indigenous sources. One plan is
to build a 4,000 kilometer pipeline to carry oil from western China's
sparsely populated Xinjiang region eastward to the prosperous coast. But the
pipeline will cost nearly US$5 billion to build, and construction of the
associated infrastructure is expected to cost as much as US$13 billion more.
So far, China has succeed in raising the first US$5 billion through
partnership with Australian energy firms, with US$500 million thrown in by
British Petroleum.

Since the plan will not be fully operational at least for another decade,
China has tried to maintain positive links with West Asia, which has become
China's fourth largest trading partner. Yet, while China wants to exploit
and expand such links, it does not want to antagonize the United States or
incur costs in other, more important, policy areas.

The principal area of Chinese profit, advantage and risk is arms sales, and
Iran is the number one customer. But the United States considers Iran a
leading sponsor of terrorism, part of what the Bush administration calls the
"axis of evil". Washington DC also strongly opposes China's arms sales to
Iran and acts to discourage them. US officials repeatedly warn that Chinese
arms supplies are a major concern and a threat to US allies and forces in
the Gulf.

Being a late arrival in the highly competitive oil market, China must pursue
more risky and marginal sources neglected by others - including Iran, Iraq
and Sudan - which inadvertently raise international political problems for
China. More conventionally, China has made a $1.5 billion deal for a huge
Sino-Saudi oil refinery in China and 10 million tons of Saudi oil annually
for a 50-year period.

Although East Asian and domestic issues remain more important for China than
any West Asian considerations, China cannot afford not to be more sensitive
to events in the region in future. China's position as a serious economic
and political player on the world stage requires that it has a regular
supply of oil, without which it could be easily held hostage.

Indeed, China is aware of the need to look beyond West Asia too. As early as
June 1997, the China National Petroleum Corporation (CNPC) out-bid US and
other companies to win a major share in two of Kazakhstan's largest
oilfields and a contract to build a 3,000-kilometer pipeline from Kazakhstan
to China that would also supply Iranian refineries. Former Chinese Premier
Li Peng lobbied hard to close this $4.4 billion deal.