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China fuels energy cold
war
By Chietigj Bajpaee
HONG KONG - A notable feature of 2004 was
the volatility in oil prices - New York light
sweet crude prices reached a peak of US$55.67 on
October 25, ending the year up 33.6% at $43.45 per
barrel. While a number of supply-side and
supply-chain factors have contributed to this
situation, the most significant long-term factor
contributing to rising oil prices is an increase
in Asian demand, most notably from China. China's
unprecedented growth not only makes it a driver of
a long-term increase in energy prices, but also
the most vulnerable to rising oil prices.
China, which has been a net oil importer
since 1993, is the world's number two oil consumer
after the US and has accounted for 40% of the
world's crude oil demand growth since 2000.
China's proven oil reserves stand at 18 trillion
barrels, and oil imports account for one-third of
its crude oil consumption.
China has
initiated numerous policies to cope with its
increasing energy needs, including stepping up
exploration activities within its own borders,
diversifying beyond oil to access other energy
resources, such as nuclear power, coal, natural
gas and renewable energy resources, promoting
energy conservation and encouraging investment
into energy-friendly technologies such as
hydrogen-powered fuel cells and coal gasification.
China has also joined the United States
and Japan in developing strategic petroleum
reserves, with the creation of 75 days of
emergency reserves in four locations in Zhejiang,
Shandong and Liaoning provinces.
Nevertheless, in the face of sporadic
power shortages, growing car ownership and air
travel across China and the importance of energy
to strategically important and growing industries
such as agriculture, construction, and steel and
cement manufacturing, pressure is going to mount
on China to access energy resources on the world
stage.
As a result, energy security has
become an area of vital importance to China's
stability and security. China is stepping up
efforts to secure sea lanes and transport routes
that are vital for oil shipments, and diversifying
beyond the volatile Middle East to find energy
resources in other regions, such as Africa, the
Caspian, Russia, the Americas and the East and
South China Sea region.
However, just as
China has for centuries engaged in competition for
leadership of Asia, the developing world and
status on the world stage, so the need for energy
security has now raised the possibility of further
competition and confrontation in the energy
sphere.
This competition has so far been
limited to the economic sphere through state-owned
oil and gas companies such as China Petroleum
& Chemical Corporation (Sinopec), China
National Petroleum Corporation (CNPC), its
subsidiary PetroChina and China National Offshore
Oil Corporation. However, as oil prices rise and
China imports an increasing amount of its energy
needs, the competition is likely to spill over
into the political and military spheres. There are
already indications of this.
China's quest
for energy resources on the world stage is
creating a destabilizing effect on international
and regional security. Fueled by the lack of a
coherent multilateral approach to energy security
in Asia and by China's already tense relations
with neighboring states, the competition for
energy resources may prove to be the spark for
regional and international conflict. In many
cases, China is vying for energy resources in some
of the most unstable parts of the world. Its
involvement in regions with raging conflicts could
potentially draw it into the disputes, escalating
a regional conflict into an international
conflict.
Sino-Japanese energy
competition
While Sino-Japanese trade has
reached unprecedented levels in recent years, the
economic progress could be unraveled by political
and military confrontation, and by energy
competition. China continues to have tense
relations with Japan as a result of a number of
issues. These issues include, but are not limited
to, Chinese opposition to a Japanese permanent
seat on the United Nations Security Council,
former Taiwanese president Lee Teng Hui's visit to
Japan at the end of 2004, and Japanese Prime
Minister Junichiro Koizumi's annual visits to the
Yasukuni Shrine that honors Japan's war dead,
including 14 Class A war criminals.
There
has also been discussion in Japan about cutting
its overseas development assistance to China in
the presence of China's improving standard of
living, high growth levels and confrontational
relations with Japan. These tensions are likely to
be further enflamed by both states' quest for
energy security. Both states are net oil
importers, with Japan importing as much as 80% of
its oil needs.
In an attempt to access
energy resources closer to home and diversifying
beyond the Middle East, Japan and China have been
actively lobbying Moscow for an oil pipeline.
Beijing is pushing for a 2,400 kilometer route
from Angarsk in Siberia to Daqing in China's
northeast Heilongjiang province, while Tokyo
favors a 4,000 kilometer pipeline from Taishet to
the Pacific port of Nakhodka.
The
Japanese-backed proposal was announced the winner
at the end of 2004. However, with the sometimes
tense relations between Japan and Russia, as seen
most recently over Koizumi's sail around the
disputed Northern Territories/ Southern Kurils on
September 2, and Japan and Russia not having
signed a formal peace treaty ending the
hostilities of World War II, the construction of
the pipeline may still experience several delays.
Furthermore, China is not yet out of the picture
as there are still discussions to build a branch
from the Japanese pipeline to China by 2020.
Closer to home, a territorial dispute
between China and Japan in the East China Sea,
which both sides claim as their exclusive economic
zone (EEZ), is being further fueled by reports of
vast supplies of oil and gas in the region. The
disputed territory includes the Diaoyu or Senkaku
islands and the Chunxiao gas field northeast of
Taiwan, which, according to a 1999 Japanese
survey, holds 200 billion cubic meters of gas.
Japan regards the median line as its border, while
China claims jurisdiction over the entire
continental shelf. In 2003, China began drilling
in the area after the Japanese rejected a Chinese
proposal to develop the field jointly. Although
the Chunxiao gas field is on the Chinese side of
the median line, Japan claims that China may be
siphoning energy resources on the Japanese side.
The competition recently took the form of
a military confrontation following the incursion
of a Chinese nuclear-powered submarine into
Japanese waters off the Okinawa islands on
November 10 last year. The intrusion was followed
by a two-day chase across the East China Sea.
While China offered a swift apology for the
incursion, this was soon followed by the intrusion
of a Chinese research vessel into Japanese waters
near the island of Okinotori. The vessel is
believed to have been surveying the seabed for oil
and gas drilling purposes. This was the 34th
maritime research exercise by Chinese vessels
within Japan's EEZ in 2004, up from eight in 2003,
with China not giving prior notification in 21 of
the 34 cases.
Adding to these tensions is
Japan's shift from its post-war pacifist and
defensive posture toward a more active military
role in the region, as seen with the current
deployment of its Self Defense Forces to Iraq.
Furthermore, Japan has for the first time
identified China as a potential security threat in
its National Defense Program Outline released in
December 2004. Three issues have been identified
that could spark a conflict between China and
Japan: natural resources in the disputed East
China Sea, the disputed status of the Senkaku or
Diaoyu islands and Japanese support for the US in
a conflict with China over Taiwan. Mistrust and
animosities rooted in Japanese atrocities during
World War II combined with a confrontation over
tangible issues, such as territory and energy
resources, and a more active role by both states
on the world stage create a recipe for a volatile
situation.
Securing sea lanes
To China's south, another long-standing
maritime territorial dispute in the South China
Sea over the Spratly and Paracel islands threatens
to be further enflamed by China's quest for energy
security. The 130 islands making up the Paracel
islands, which have been occupied by China since
1974, are also claimed by Vietnam and Taiwan. The
400 islands of the Spratly islands are claimed
partially by the Philippines, Brunei and
Indonesia, and are fully claimed by Vietnam,
Taiwan and China.
Relations between China
and the Association of Southeast Asian Nations
(ASEAN) have improved with China signing up to
ASEAN's Treaty of Amity of Friendship and
Cooperation in 2003 and all sides signing the
Declaration of the Conduct of Parties in the South
China Sea in 2002. Nevertheless, tensions remain.
In violation of the 2002 agreement, five states
have permanent military garrisons on the atolls in
addition to surveillance facilities under the
guise of "bird watching" towers, weather huts and
tourist facilities. The fact that Taiwan is not a
signatory to any of these agreements is also a
cause for concern.
A particular source of
tension derives from the sometimes volatile
relations between China and Vietnam. Most
recently, China has commenced joint
pre-exploration studies with the Philippines in
the South China Sea, which has been openly opposed
by Vietnam. China, meanwhile, has protested to
PetroVietnam welcoming international bids for
drilling and exploration activities in the
disputed waters and Vietnam starting commercial
flights and tours of the disputed territory.
Both states have engaged in sporadic
clashes on at least four occasions, the most
violent of which took place in 1988 in which the
Chinese sank three Vietnamese naval vessels,
killing 76 sailors. Sino-Vietnamese tensions have
recently taken a back seat to the burgeoning trade
relationship between both states, with China now
becoming Vietnam's third-largest trading partner.
A hotline was also established between both states
in August 2004 as part of a commitment to resolve
land and sea border disputes by peaceful means.
However, as China expands its naval power
projection capabilities and becomes increasingly
desperate to access potential energy resources in
the region, conflict may once again overtake
cooperation.
These regional territorial
disputes also have the potential to escalate into
international conflicts, given the importance of
the waterways to international trade and the
number of bilateral security commitments between
regional states and major world powers, such as
between the US and the Philippines, Singapore and
Thailand, and between numerous Western powers and
their former colonies (eg the British to Malaysia
and Singapore, the French to Vietnam). For
example, following the Chinese occupation in
February 1995 of the Mischief Reef, which is 135
miles west of the Philippine islands of Palawan,
the US conducted naval exercises with the
Philippines close to the disputed territory. The
joint exercises may be regarded as a warning to
China's increasingly aggressive posturing in the
region.
Also in Southeast Asia, China is
pushing to secure the narrow Malacca Strait, which
experiences 40% of the world's piracy. As much as
80% of China's oil imports flow through the 630
mile-long strait, which is just 1.5 miles wide at
its narrowest point. Like Japan and the US, China
is pushing to acquire a national fleet of very
large crude carriers, or VLCCs, that could be
employed in the case of supply disruptions brought
on by an accident or terrorist attack along the
Malacca Strait or a US-led blockade during a
conflict over Taiwan. Currently, only 10% of
China's crude oil imports come aboard Chinese
vessels. China's growing anxiety over the security
of its oil imports was demonstrated in June 2004,
when China conducted its first anti-terror
exercise simulating an attack on an oil tanker.
China is also looking into bypassing the
straits with discussions for a pipeline to
Myanmar, as well as possibly Bangladesh, Pakistan
or Thailand. Pakistan looks like an unlikely
candidate given the threat of terrorist attacks on
pipelines traversing its territory. A pipeline
through Bangladesh would have to cross the
territory of strategic competitor India.
Increasing sectarian violence in southern Thailand
coupled with the country's close relationship with
the US make a pipeline through Thailand unlikely
as well. This leaves Myanmar as the most likely
option, with a 1,250 kilometer pipeline from the
deepwater port of Sittwe on the Bay of Bengal to
Kunming in Yunnan province. Coupled with India's
desire to access energy resources within Myanmar
and Myanmar's proximity to India's troubled
northeast insurgencies, Myanmar has become a
potential stage for Sino-Indian energy
competition.
Central Asia: The new
great game
On its western borders, China
has been an active player in the new great game.
As part of its "Go West" development policy,
China's longest pipeline, the 4,200 kilometer
Tarim Basin to Shanghai gas pipeline, came online
in August 2004. China's west-to-east pipeline
could potentially be extended to Kazakhstan and
Turkmenistan and even further to Iran and the
Caspian Sea. In October 2004, construction began
on a 988 kilometer pipeline from Atasu in
northwestern Kazakhstan to Alataw Pass in China's
Xinjiang province, which will carry 10 million
tons of oil a year once it is completed in 2005.
The Chinese are also helping to develop oil fields
in Uzbekistan and hydroelectric power projects in
Kyrgyzstan and Tajikistan.
China's growing
engagement with Central Asia has been motivated by
a number of strategic interests. China led the
creation of the Shanghai Cooperation Organization
(SCO), which began as the Shanghai Five in 1996.
This body was formed in the presence of a civil
war in Tajikistan, Taliban rule in Afghanistan, a
series of terrorist attacks in Xinjiang, and
Islamist revivalism in Uzbekistan under the
Islamic Movement of Uzbekistan/Turkestan (IMU/IMT)
and more recently by Hizb-ut Tahrir.
SCO
has moved from resolving border disputes to
fighting the "three evils" of extremism, terrorism
and fundamentalism and promoting greater economic
integration and development in Central Asia and
China's west. The Central Asian states have agreed
to China's "Five Principles of Peaceful
Coexistence", as well as subscribing to China's
viewpoint on numerous regional and international
issues, including Taiwan, Tibet, Xinjiang and the
need for a multipolar world. Under the aegis of
the SCO, China has also expanded its military
presence in Central Asia, establishing an
anti-terror center in Tashkent and engaging in its
first joint military exercises with a foreign army
in Kyrgyzstan in 2002.
However, China's
increasing presence in Central Asia has been
accompanied by a Russian reengagement with the
region, an increasing US presence following
September 11 as well as an increasing role by
India (using its historical links), Saudi Arabia
and Pakistan (using their religious links), Turkey
and Iran (using their cultural links) and South
Korea and Japan (that are relying on economic
links to the region).
Numerous overlapping
power blocs are emerging in the region, which
spill over into the energy arena. For example,
improving Sino-Indian relations have manifested in
the energy sphere, with the chairman of Xinjiang
autonomous region, Ismail Tiliwandi, making a trip
to India in October 2004 to discuss transport
links and a Sino-Indian natural gas pipeline
project. With a growing military presence in the
region and increasing desperation to access the
region's energy resources, it is conceivable that
Central Asia could re-emerge as the stage for
future great power conflicts.
China
expands in the Middle East
China has also
attempted to improve relations with its
already-established oil suppliers, such as Saudi
Arabia and Iran, by selling them military
technology, investing in their industries and
energy infrastructure and looking the other way
with respect to their human-rights records.
Currently, China derives 13.6% of its oil
imports from Iran. In March 2004, China signed a
$100 million deal with Iran to import 10 million
tons of liquefied natural gas over a 25-year
period in exchange for Chinese investment in
Iran's oil and gas exploration, petrochemical and
pipeline infrastructure.
Growing
Sino-Iranian relations are undermining US
sanctions against Iran. The Bush administration
has sanctioned Chinese companies 62 times for
violating US or international controls on the
transfer of weapons technology to Iran and other
states.
The US Central Intelligence Agency
has submitted a report to US Congress stating that
Chinese companies have "helped Iran move toward
its goal of becoming self-sufficient in the
production of ballistic missiles". In the ongoing
controversy over Iran's uranium enrichment
program, China has also opposed bringing the issue
before the UN Security Council, and has even
threatened to veto any resolution that is brought
against Iran.
As Saudi-US relations have
soured in the post-September 11 world, the
Saudi-US strategic partnership may be supplanted
by a Sino-Saudi partnership. Saudi oil shipments
to the US declined in 2004, while they increased
to China. Sinopec has won the right to explore for
natural gas in Saudi Arabia's al-Khali Basin and
Saudi Arabia has agreed to build a refinery for
natural gas in Fujian in exchange for Chinese
investment in Saudi Arabia's bauxite and phosphate
industry. Cooperation in the economic and energy
spheres complements an already burgeoning
relationship in the military sphere, as seen with
China selling Saudi Arabia Silkworm missiles
during the Iran-Iraq War in the 1980s, and both
states having strong relations with Pakistan.
Russia: Revival of the strategic
triangle
Russia is China's fifth-largest
crude oil supplier, with LuKoil now replacing
Yukos as China's main supplier of Russian oil.
China is expected to import at least 10 million
tons of oil from Russia in 2005 and 15 million in
2006, while Russian rail shipment capacity is
expected to increase from 20 million tons in 2004
to 60 million tons by 2006.
The
controversy over the sale of Yugansk, which
produces 60% of Yukos' oil output and pumps 11% of
Russia's oil, has also highlighted the increasing
presence of Chinese energy companies in Russia.
While the mysterious buyer, Baikal Finance Group,
ended up selling its stake in Yugansk to Rosneft
in December, which may be acquired by Russian
state-owned Gazprom, this does not preclude the
possibility of Yukos' assets being acquired by
China. China's CNPC has allegedly been offered a
20% percent stake in Yukos and provided a $6
billion loan to Rosneft to purchase Yugansk.
China's support for Russia's accession
into the World Trade Organization and growing
Sino-Russian trade and cooperation in the fight
against terrorism is further cementing
Sino-Russian relations. Sino-Russian energy
relations appear to be mirroring political and
military relations. Just as China increasingly
relies on Russian energy resources, so it also
constitutes Russia's biggest buyer of Russian
military hardware. Russia and China are also to
engage in their largest joint military exercises
later this year.
In fact, growing
Sino-Russian energy cooperation resurrects former
Russian prime minister Yevgeny Primakov's idea for
a strategic triangle between Russia, India and
China. These states are bound together by their
shared interests in the fight against terrorism,
the push for a multipolar world and respect for
the principles of state sovereignty and
non-intervention with regards to their respective
"separatist" movements in Chechnya, Kashmir and
Taiwan.
Now the energy sector can be added
to this list of shared interests. India and China
are already collaborating in the energy sphere,
with India holding a 20% stake and China a 50%
stake in the development of the Yahavaran oil
field in Iran. China Gas Holdings has also
established an alliance with India's largest
energy conglomerate, Gail. With India and China
vying for assets in Yukos, Sino-Indian-Russian
collaboration in the energy sphere could be
further cemented.
Stepping on US toes
in Africa and the Americas
As China has
made limited progress in accessing energy
resources on its doorsteps due to poor relations
with neighboring states, it has shown growing
interest in accessing energy resources further
afield.
For example, a consortium 40%
owned by China's CNPC pumps over 300,000 barrels
per day in Sudan. China is also a major supplier
of arms to the Sudanese government, which has just
concluded a peace agreement with the main rebel
group in the south, the Sudan People's Liberation
Movement (SPLM), ending 20 years of conflict
sparked over the allocation of oil revenues. The
Sudanese government is still engaged in a conflict
in the Darfur region of western Sudan using proxy
militias. China is also vying for energy resources
in Angola and other energy-rich African states by
offering arms and aid for oil.
China is
also acquiring energy resources in the Americas.
While attending the annual Asia-Pacific Economic
Cooperation summit in Chile in November 2004,
Chinese President Hu Jintao announced an energy
deal with Brazil worth $10 billion, supplementing
a $1.3 billion deal between Sinopec and Petrobras
for a 2000 kilometer natural gas pipeline.
China is also acquiring oil assets in
Ecuador, as well as investing in offshore
petroleum projects in Argentina. During Venezuelan
President Hugo Chavez's visit to Beijing last
December and Chinese Vice President Zeng
Qinghong's visit to Venezuela in January, China
also committed to develop Venezuela's energy
infrastructure by investing $350 million in 15 oil
fields and $60 million in a gas project in
Venezuela.
On January 20, during Canadian
Prime Minister Paul Martin's visit to Beijing,
China and Canada also signed a joint statement on
energy cooperation which included accessing
Canada's oil sands and uranium resources. China's
growing energy interests in the Americas have been
accompanied by a growing involvement in the
region's security.
In October, China sent
a UN peacekeeping contingent to Haiti in its first
military deployment to Latin America. Ironically,
Haiti is one of only 25 states that recognize
Taiwan rather than China. The US is looking on
with caution as China encroaches on a region that
has traditionally been under its sphere of
influence and a major supplier of energy
resources. Venezuela and Canada together provide
the US with a quarter of its energy imports.
Conclusion
Friction between
China and the West has so far focused on the
question of China's undervalued exchange rate, its
human-rights record and relations with "rogue"
states. However, competition over energy resources
is now becoming an additional area of contention.
China's growing presence on the
international energy stage could ultimately bring
it into confrontation with the world's largest
energy consumer, the US. While China and the US
have launched the US-China Energy Policy Dialogue,
both states are also engaged in a competition for
energy resources in Russia, the Caspian, the
Middle East, the Americas and Africa. This
competition could potentially combine with other
areas of friction. For example, in the event of
China engaging in a conflict with Taiwan, Japan or
India or internal repression such as a repeat of
the Tiananmen Square massacre of 1989, the US
could censure China's actions by an oil embargo or
by blocking vital sea lanes in the Malacca Strait,
thus sparking a wider conflict.
It is not
by coincidence that China has made progress in
resolving its border disputes with India and
Russia, while failing to make progress on
territorial disputes with Japan in the East China
Sea and in the South China Sea, given that the
latter involve access to potential oil and gas
resources. In this context, China's claim to
pursuing a "peaceful ascendancy" policy and
putting aside areas of disagreement in favor of
creating a stable environment for economic
development is limited to areas where China's
vital strategic interests are not threatened.
Chietigj Bajpaee is a researcher
for Civic Exchange, a Hong Kong-based political
think-tank. He has been a researcher for the
London-based International Institute for Strategic
Studies and a Risk Analyst for a New York-based
risk management company. He has a graduate degree
in international relations from the London School
of Economics and an undergraduate degree in
economics and government from Wesleyan and Oxford
Universities.
Published with
permission of the Power and Interest News
Report, an analysis-based
publication that seeks to provide insight into
various conflicts, regions and points of interest
around the globe. All comments should be directed
to content@pinr.com |
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