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    China Business
     Feb 28, 2007
China aims to diversify oil sources
By Wu Zhong, China Editor

HONG KONG - Diversification is a golden rule of doing business, hence the saying: "Don't put all your eggs in one basket."

In recent years, China has been making aggressive efforts to diversify its sources of oil imports, in an apparent move to reduce the risk of increasing reliance on oil from the Middle East.

But in China 's oil-security strategy, such variegation is not only

to reduce business risks but also for geopolitical reasons.

China was self-sufficient in oil consumption until 1993. Since then, the country has become increasingly reliant on imported oil to fuel its rapid economic expansion. This situation is unlikely to change in the future as proven oil reserves in the country are not nearly enough to meet expected demand.

In 2006, China produced 183.68 million tons of crude oil, up 1.7% from the previous year. Its net oil imports amounted to 162.87 million tons, up 19.6%. The total net imports included 138.84 million tons of crude oil, up 16.9%, and 24.03 million tons of oil products, up 37.9%, according to the Ministry of Commerce.

Thus last year China 's dependence on imported oil rose to 47% of annual demand, or an increase of 4.1% over the previous year.

Industry analysts have predicted that in 2007, China's crude-oil output will grow by less than 2%, while the country's demand for both crude and oil products will rise about 6%. That means its dependency on imported oil will further increase this year.

Taking January for example, China imported 13.69 million tons of crude oil, an increase of 3.5% year on year, and 2.77 million tons of oil products, up 5.7%, according to statistics from the General Administration of Customs.

What has worried Chinese oil-security strategists in recent years is that most of the imported oil comes from the Middle East. Despite China's efforts to diversify sources of imports, it still relies heavily on Middle Eastern oil. In 2005, China's imports of crude oil from the Middle East accounted for 61.1% of its total crude-oil imports, making it the most import link in the country's oil-supply chain.

This amounts to putting most, if not all, the eggs in one basket, which is too fraught with risks for such a big country like China, analysts in Beijing say. If the supply of oil from the Middle East were interrupted, for any reason, the outcome for China would be disastrous beyond imagination.

And the danger of China's Middle Eastern oil supply being interrupted is very real. This could happen when oil reserves in the region are exhausted, although that is a long way off. But the region is well known as a powder keg, and a large-scale war there would seriously affect world oil supply.

Moreover, the Middle East is in the United States' sphere of influence, and many Chinese strategists see Uncle Sam's military occupation of Iraq and its threat to attack Iran as part of its ambition to monopolize oil supply in the region. It is beyond China's capability to contend with the world's sole superpower in the Middle East, analysts say. Nor will China want to contend with the US there under its current diplomatic strategy of "keeping its head down".

However, given its position, the US could easily use Middle Eastern oil as a weapon against China if the two countries were to run into conflict, for example because of the Taiwan issue. The US could easily impose sanctions to blockade oil supply to China.

In 2005, the US Congress successfully blocked the attempted takeover of the US oil company Unocal Corp by CNOOC Ltd, a subsidiary of China National Offshore Oil Corp, one of China's three largest state-owned energy firms, despite CNOOC's offer of a higher price. This has intensified Chinese strategists' suspicion that Washington wants to use oil supply to contain China's development. And it could easily do so if China relied heavily on supply from one region such as the Middle East, analysts say.

Niu Li, a researcher with the State Council's Information Center, put it straightforwardly: "To reduce reliance on the Middle East is mainly out of geopolitical consideration."

However, China is stepping up its efforts to diversify its sources of oil imports. Li Xiangyang, deputy director of the Institute of World Economy and Politics under the Chinese Academy of Social Sciences, said: "China is formulating a plural energy strategy."

China's sources of oil imports have gradually extended to regions other than the Middle East, such as Africa, Central Asia, Russia and Latin America. According to official statistics, in the first half of last year, China's top sources of oil imports were Angola, Saudi Arabia, Iran, Russia, Oman, Equatorial Guinea, Yemen, Libya and Venezuela.

According to customs statistics, in the first half of 2006 China imported 73.33 million tons of crude oil, up 15.6% from a year ago, while its imports from Africa grew 22% to reach 23.4 million tons.

Niu Li said he expected China would increase its oil imports from Russia. The potential of China's cooperation with Russia has yet to be cultivated, he said. Statistics show China's oil imports from Russia and the former Soviet states have steadily increased in recent years. China's oil imports from the former Soviet states accounted for about 10% of the country's total imports in 2004, up sharply from the 3.1% in 2000. Imports from Russia alone accounted for 8.8% of total imports in 2004, up from 2.1% in 2000.

In 2005, China imported 12.78 million tons of oil from Russia, accounting for 10.1% of the country's total oil imports. Vice Minister of Commerce Yu Guangzhou said China's oil imports from Russia in 2006 could reach 15 million tons. There is still huge room for the growth of China's oil imports from Russia, Niu said, citing the fact that it is the world's second-largest oil producer and is in close proximity to China.

Li Xiangyang predicted that China would significantly increase its oil imports from Latin American countries such as Venezuela, in addition to buying more oil from Russia and former Soviet Union states in central Asia.

To turn Africa into China's largest source of oil imports is key to China's new energy strategy. "Our country has already taken Africa into its strategic consideration, regarding the continent as an independent oil source,'' said Xia Yishan, a researcher with China Institute of International Studies, in an interview with the Chinese media.

Xia said Beijing maintains friendly relations with African countries, which are in favor of Chinese investment in the continent to explore and produce oil for China. He expects that in a few years Africa will replace Russia and Central Asia to become China's second-largest source of foreign oil, with African oil accounting for 30% of the country's total oil imports.

However, Li Xiangyang said that despite aggressive diversification efforts, the Middle East would remain dominant in China's oil imports for the foreseeable future. Although Angola replaced Saudi Arabia as China's largest oil supplier in 2002, the Middle East as a whole is still China's largest oil supplier, he said. Diversification would reduce China's reliance on the Middle East, but it does not mean the region no longer dominates China's oil imports.

"It is hard to change the dominance of the Middle East" in China's oil imports, Li Xiangyang said.

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