Canada-Asia Commentary 30

Commentary uring the past year, China’s state- induced price fluctuations. The result has been owned oil and gas sector has been a campaign by China’s major energy players Dstriving to secure reliable, long- to conclude contracts with producers term sources of foreign energy capable of overseas and to finance new developments, sustaining strong industrial growth and both for crude oil and natural gas. The most consumer demand. From Australia to significant of these was a June agreement to Kazakhstan, Siberia, Papua, and even the deliver 30 m tons of oil per year from Siberia Sudan, Chinese energy companies are to China’s northeastern industrial heartland by building a network of suppliers that will not 2010, via a yet-to-be-built US$1.7 b pipeline. only have a major impact on the global Another involves an August 2002 agreement petrochemical and gas industry, but reshape to import US$16.6 b of liquefied natural gas the security environment of Asia. This (LNG) from Australia’s North West Shelf initiative is fuelled by the perception by over 25 years beginning in 2005. China, and shared by other Asian governments, that in the wake of the Iraq conflict, dependence on volatile Middle Industry giants like ExxonMobil and Royal East oilfields must be reduced. In China, Dutch/Shell are competing to invest in analysts expect annual GDP growth rates extraction and distribution projects that feed Canada Asia of 7-8% to continue through to the end of the Chinese market. Meanwhile, the clout of Number 30 the decade. A net importer of crude since state firms like the China National Petroleum August 2003 1993, China is already the world’s third- Corporation (CNPC) in the world largest oil consumer (262 m tons in 2002) marketplace is skyrocketing as China after the US and Japan, and second-largest prepares to become the globe’s dominant importer (92 m tons). By 2010, the energy consumer. But the greatest impact of OECD-affiliated International Energy these developments may well be felt in Agency (IEA) estimates that oil imports political-security affairs, as oil and gas traffic will reach 209 m tons, and account for more from Central and Southeast Asia comes to than half of domestic consumption. Without feature more prominently in China’s military diversifying the source and types of energy calculus, and interdependence with rising it consumes, China will be dangerously suppliers like Russia, Indonesia and Australia exposed to supply disruptions and OPEC- reduces the likelihood of regional conflict. China’s Quest for Energy and Northeast Asian Security Asia occupies a uniquely precarious position among the world’s energy Canada Asia Commentary consumers. The region must import 63% of its oil requirements, much of it from politically is published up to 12 times a year and is unstable areas. For instance, of OPEC’s 11 members, who collectively account for one- available by e-mail and third of global oil production, only four (Kuwait, Qatar, Saudi Arabia and the United Arab on the APF Canada Website: Emirates) enjoy relative social and political stability. Asia’s vulnerability was brought to www.asiapacific.ca the fore during the US-led invasion of Iraq in March: the latter’s daily export of 1.7 m ISSN 1481-0433 barrels was interrupted and world crude prices were briefly pushed close to US$40 a barrel. It is difficult to overstate the impact of such price and supply fluctuations on the Launching a strategic reserve Asian economy. Only net energy exporters Indonesia, Malaysia, Brunei One shorter-term means of avoiding and Australia are self-sufficient. All OPEC-induced price shocks that China is others must pay a premium to Middle considering involves establishing a East suppliers for their high degree of strategic oil reserve similar to those in the US and Japan, which can protect against dependence on this source (88% of 90 days of import disruption. The Chinese imports in the case of Japan and 58% for plan – approved in principle in February China). As a result, oil imports account 2003 – would see a 30-day reserve of 59 m for an average of 4% of GDP among barrels established by 2005 (by contrast, Asian countries, with Singapore’s import the US stockpile currently sits at 609 m dependency running as high as 7.6%. It barrels). Unlike its actions during previous is estimated that in South Korea, whose supply threats, Beijing is rumoured to have dependency rate comes in at just under set aside some reserves prior to the conflict in Iraq, but analysts believe it is 5%, every US$1 increase in the price per likely that the government will wait until barrel adds US$750 m a year to prices drop below the current range of production costs and reduces GDP growth US$27-$30 a barrel before completing this by 0.1 percentage points. With the IEA US$1 b-plus task. predicting that 40% of global growth in energy use between now and 2025 will come ! from developing Asian countries, the region’s vulnerability seems sure to increase. China’s energy China is perhaps the most vulnerable. A net importer of crude oil since November 1993, needs are soaring the world’s most-populous country has witnessed a sustained boom in industrial growth and consumer demand over the past decade. Double-digit annual GDP growth rates in southeastern coastal areas have consistently lifted national GDP growth to between 7% and 8%, and these levels are widely expected to last through to 2010 at least. The consequences of this boom for oil consumption – which accounts for 20%, and rising, of China’s total energy needs – are staggering. This year, Chinese energy demand is expected to rise 2.7%, the fastest increase in the world; overall Asian demand, by comparison, will grow only 2.1% and North American demand 1.8%. The US government’s Energy Information Agency (EIA) expects China to surpass Japan as the world’s second-largest oil consumer next year. By decade’s end, analysts predict it will consume the equivalent of the Middle East’s entire annual output of crude. Not surprisingly, domestic sources, including the massive Daqing oilfields of northeastern Heilongjiang province, are unable to keep pace. What newer discoveries have been made, largely offshore in the Bohai Sea and the Pearl River Delta, are proving minor supplements to overall supply. The future, as government policy-makers have long known, appears to lie in domestic energy source diversification and foreign expansion. Oil imports help China’s oil and gas majors, cash-rich from multi-billion-dollar New York and Hong Kong meet demand stock listings in 2000, have responded to this imperative with great zeal. Billions have been funneled into exploration, extraction, pipeline construction, and infrastructure development over the past five years – both at home through gas fields in Xinjiang province and LNG terminals along the southeastern coast, and abroad in drilling projects as far-flung as Australia, Sudan and the Caspian Sea. Already, imports have grown from 27% of total oil consumption in 1999 to 37% in 2002 (see Figure 1). They are projected to hit 45% in 2005. By 2030, the IEA believes China will import somewhere in the neighbourhood of 10 m APF Canada - Canada Asia Commentary #30 2 barrels per day (bpd) – slightly less than what the US imports today – accounting for 84% of total consumption. How will this happen, how are Chinese companies positioning themselves to supply what will be the region’s dominant energy consumer, and what are the security implications of these moves? Reliability of supply As is usually the case with petroleum – particularly in a country whose oil giants are a security concern majority-owned by the state – new large-scale developments and shipping contracts have a significant impact on military planning for the consuming nation, and on political relations with the supplier. While Chinese firms are not obsessed with shipping every last drop of oil they can find back to China, the nature of state control over this sector means that, in the event of some future energy crisis, Beijing could well direct them to do so. The centrality of reliable oil and gas supplies to China’s continued growth and well-being, combined with the government’s well-publicized push to establish itself as a major player on the world stage, make this sector an important pointer to China’s long-term strategic designs in the region. Natural gas stressed There are a handful of projects underway in China aimed at diversifying domestic energy as alternative to coal supplies away from crude oil toward natural gas. In part this is because the development of additional domestic oil supplies has stalled: there is heavy overcapacity at redundant state- owned refineries; upgrades are needed at leading refineries to process heavier grades of Middle East crude; onshore fields in the northeast are maturing and newer offshore fields are small. It is also due to the government’s decision to emphasize the use of natural gas as a substitute for coal, the source of 57.4% of China’s total energy in 2000. Gas burns more cleanly and will help alleviate serious air pollution in major urban centres. With 53.3 trillion cubic feet (tcf) in proven reserves, Beijing wants to more than treble the share of natural gas in the country’s energy mix from 2.5% today to 8% by 2010 – mirroring an EIA assessment that gas will be the fastest-growing share of world energy consumption for years to come, surpassing coal by 2025. Experts are already predicting that China will become the world’s largest natural gas consumer by 2030.

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